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Multiple Choice - Capital Budgeting

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4. As a financial analyst, you've been assigned to evaluate a project for your firm that requires an initial investment of \$200,000, is expected to last for 10 years, and which is expected to produce aftertax cash flows of \$44,503 per year. If your firm's cost of capital is 14%, will you recommend the project be accepted or rejected?

a. Accept; the project has a positive NPV

b. Reject; the project has a negative NPV

c. Can't tell without further information

5. What is the Internal Rate of Return (IRR) for your firm that requires an initial investment of \$200,000, is expected to last for 10 years, and which is expected to produce after-tax cash flows of \$44,503 per year if your firm's cost of capital is 14%?

a. 8%

b. 12%

c. 14%

d. 18%

e. 5%

6. The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of \$30,000 per year in Years 1 through 4, \$35,000 per year in Years 5 through 9, and \$40,000 in Year 10. This investment will cost the firm \$150,000 today, and the firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day.

What is the payback period for this investment?

a. 5.23 years

b. 4.86 years

c. 4.00 years

d. 6.12 years

e. 4.35 years

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4 - a
Accept; the project has a positive NPV ( NPV is \$ ...

Solution Summary

This short solution answers 3 multiple choice related to capital budgeting with clear, concise calculations or worded explanation where necessary.

\$2.19

The Payback method is widely used in capital budgeting because it is simple and does a good job of determining the correct accept/reject decision.

1. The Payback method is widely used in capital budgeting because it is simple and does a good job of determining the correct accept/reject decision.
a. True

b. False

2. When using the Internal Rate of Return (IRR) method to evaluate investments, those with an IRR greater than zero should be selected, and those with an IRR less than zero should be rejected.
a. True

b. False

3.When the Cost of Capital (that is, the Discount Rate) increases, the Net Present Value of investments under consideration increases also.

a. True

b. False

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