CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project. Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available. Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available. The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project. Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available. Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available. The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project.
- Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available.
- Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available.
The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
Transcribed Image Text:**Capital Budgeting**
**4. Financing Preference and Investment Evaluation**
The DEF Company prefers to finance investments internally when possible. It follows specific policies unless qualitative considerations justify a variance for a particular project:
a. Investments must earn a minimum of 11.1% after taxes on a discounted cash flow (DCF) basis, even if excess funds are available, to be accepted.
b. Investments are not rejected if they yield 25% or more after taxes on a DCF basis, even if internal funds are unavailable.
**Investment Evaluation Table**
| Investment | Cash Flows | Classification |
|------------|----------------------------------------|----------------|
| D | -100, 50, 50, 50 | |
| E | -100, 200 | |
| F | -100, 80, 50 | |
| G | -100, 30 | |
| H | -100, 10, 40, 70 | |
*Classification: A = Must Accept; R = Must Reject; U = Uncertain.*
**Bibliography**
Bacon, P. W., “The Evaluation of Mutually Exclusive Investments,” *Financial Management*, Summer 1977, pp. 55–8.
Peavey, W., and R., Quantifying Investments and Discount Rules Under Capital Rationing: A Programming Approach, *Economic Journal*, June 1985, pp. 217–31.
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