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Capital Budgeting

Please show works where applicable.
Use the table for the question(s) below.

Consider a project with the following cash flows:

Year Cash Flow
0 -10,000
1 4,000
2 4,000
3 4,000
4 4,000

1) Assume the appropriate discount rate for this project is 15%. The payback period for this project is closest to:

A) 3
B) 2.5
C) 2
D) 4

2) Assume the appropriate discount rate for this project is 15%. The IRR for this project is closest to:
A) 21%
B) 22%
C) 15%
D) 60%

Use the information for the question(s) below.

Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is 10% per year.

3) The IRR for Larry's three movie deal offer is closest to:
A) 3.5%
B) 1.6%
C) -3.5%
D) -1.6%

4) Larry should:
A) Reject the offer because the NPV < 0
B) Accept the offer even though the IRR < 10%, because the NPV > 0
C) Reject the offer because the IRR < 10%
D) Accept the offer because the IRR > 0%

5) You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is:
A) NPV
B) Profitability index
C) IRR
D) Incremental IRR

Use the table for the question(s) below.

Consider the following two projects:

Project Year 0
Cash Flow Year 1
Cash Flow Year 2
Cash Flow Year 3
Cash Flow Year 4
Cash Flow Discount Rate
A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15

6) Assume that projects A and B are mutually exclusive. The correct investment decision and the best rational for that decision is to?

A) Invest in project A since NPVB < NPVA
B) Invest in project B since IRRB > IRRA
C) Invest in project B since NPVB > NPVA
D) Invest in project A since NPVA > 0

Use the table for the question(s) below.

Consider a project with the following cash flows:

Year Cash Flow
0 -10,000
1 4,000
2 4,000
3 4,000
4 4,000

7) Assume the appropriate discount rate for this project is 15%. The profitability index for this project is closest to:
A) .14
B) .22
C) .60
D) .15

8) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?
A) Profitability Index
B) Incremental IRR
C) NPV
D) IRR

9)
A Small Case Study
You are the Project Manager for a team of 9 employees. Your duty is to manage the deployment of a new tool. The team is made up of:
? 4 software engineers (developers of the tool) work 40 hour weeks can put in over time:
&#61656; 2 junior level (earn $50.00 an hour)
&#61656; 2 senior level (earn $67.00 an hour)
? 2 trainers (train users how to use the tool), Currently training is a 6 hour course and can accommodate 20 - 25 people. Training is offered 2 or 3 times a week:
&#61656; 1 full time trainer ( with 10 years of experience training and has been with the team for the past three years ( earns a salary of $100,000.00 per year)
&#61656; 1 part-time trainer can train only on Mondays and Wednesdays works 8 hours on those days (has 15 years experience training earns $67.60 per hour)

? 3 help desk personnel to answers questions concerning the tool and assist users after they have completed training. Work 40 hours a week on a 9 to 5 shift
&#61656; 2 full time held desk personnel both with 4 yr degrees and have minimum experience on a help desk earns $25.00 per hour
&#61656; 1 full time help desk personnel with 10 years experience on a help desk no degree and earns $25.00 per hour ( has the experience to train the tool if needed)

The tool has been in existence for 3 years and has some issues. The software development team is constantly fixing the tool to keep it up and running. Currently the software engineers are in maintenance mode and that takes all of their work hours to do just that.

Your boss has announced an upgrade to the tool to be deployed in two months. It is not a complete overhaul the interface will remain the same just a couple of new buttons and functionality. With this deployment 2000 new users must be trained to use this tool within the next 18 months (this includes the two months). In addition to your budget for your current staff, your boss has given you an additional budget of $500,000 to make it happen.

A. Can you make it happen and have it look seamless to the existing users?
B. Will you need to have new training for the people that have already been trained?
C. Will you need to add any additional personnel (software engineers, trainers or help desk)? If so, how many and how many hours?
D. What do you estimate the hours for the software engineers to update the tool?
E. The part-time trainer just announced that she is leaving in two weeks, What do you do?
F. Do you have a budget to give your boss?
G. Do you have time to hire additional personnel

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Solution Summary

The solution explains some questions relating to capital budgeting

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