1. Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?
A) $5,434
B) $5,441
C) $5,107
D) $5,216

2. Jet, Inc., has net sales of $712,478 and accounts receivables of $167,435. What are the firm's accounts receivables turnover and days' sales outstanding?
A) 0.24 times; 78.5 days
B) 4.26 times; 85.7 days
C) 5.2 times; 61.3 days
D) None of the above

3. If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called
A) a perpetuity.
B) an ordinary annuity.
C) an annuity due.
D) none of the above.

4. If your investment pays the same amount at the end of each year forever, the cash flow stream is called
A) a perpetuity.
B) an ordinary annuity.
C) an annuity due.
D) none of the above.

5. Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called
A) an annuity due.
B) a growing perpetuity.
C) an ordinary annuity.
D) a growing annuity.

6. Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent.

- What is the net present value of this project? (Round to the nearest million dollars.)
A) $10 million
B) $12 million
C) $14 million
D) $16 million

- What is the internal rate of return that Turnbull can earn on this project? (Round to the nearest percent.)
A) 41%
B) 42%
C) 43%
D) 44%

Solution Preview

Please refer attached file for better clarity of formulas.

1.
Present Value=PV=($5,000)
Interest rate=RATE=4.25%/4=1.0625% per quarter
Number of periods=NPER=2*4=8 quarters
Type=0
Periodic Payment=PMT=0

In essence, capital budgeting is the process of:
a. Deciding what to do with the firmâ??s money
b. Deciding how much capital the firm needs
c. Deciding where to get the money for capital investment projects
d. Deciding when to invest in a new project
Which of the following cash flows is an â??incre

Why is the payback period not a preferred method in the capital budgeting decision-making process? Which decision-making criteria is the best to use for capital budgeting decisions? Why?
What is a sensitivity analysis? How is it determined? How can risk be addressed in the capital budgeting process?
What is an example of a

Capital budgeting projects include all of the following with the exception of
the purchase of a six-month treasury bill.
the expansion of a plant.
the development of a new product.
the replacement of a piece of equipment.

Please explain how the TimeValue of Money (TVM) is used in Capital Budgeting and how TVM concepts assist a company in making capital budgeting decisions. Should the company use the same discount rate for all projects? If not, what factors would determine the differences in the discount rates used?

Capital budgeting is needed to properly allocate the large dollar amounts for major expansion and equipment purchases. The process is often perceived by employees as being very political. What procedures should an organization use to eliminate that perception and to provide for a good, consistent evaluation of capital projects?

14. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $45,000. The annual cash flows have the following projections:
Year Cash Flow
1 . . . . . . . . . . $15,000
2 . . . . . . . . . . 20,000
3 . . . . . . . . .

Which of the following is a shortcoming of the payback period as a capital budgeting criterion?
It's easy to calculate
It doesn't use free cash flows
It ignores the timevalue of money
It uses accounting profits
It's easy to understand

In general, the value of land currently owned by a firm is irrelevant to a capital budgeting decision because the cost of the property is a sunk cost?
a. True.
b. False.