Payback and NPV methods, no income taxes. (CMA, adapted) Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst at Andrews, is preparing an analysis of the three projects under consideration by Corey Andrews, the company's owner. Home Insert Page Layout Formulas Data Review View Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $1,500,000 $4,000,000 5 Projected cash inflows: 6 Year 1 7 Year 2 8 Year 3 Year 4 $1,000,000 1,000,000 1,000,000 1,000,000 $ 400,000 900,000 800,000 $2,000,000 2,000,000 200,000 100,000 9. 10 11 Required rate of return 10% 10% 10%

Payback and NPV methods, no income taxes. (CMA, adapted) Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst at Andrews, is preparing an analysis of the three projects under consideration by Corey Andrews, the company's owner. Home Insert Page Layout Formulas Data Review View Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $1,500,000 $4,000,000 5 Projected cash inflows: 6 Year 1 7 Year 2 8 Year 3 Year 4 $1,000,000 1,000,000 1,000,000 1,000,000 $ 400,000 900,000 800,000 $2,000,000 2,000,000 200,000 100,000 9. 10 11 Required rate of return 10% 10% 10%

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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QUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the project
8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategic goals. Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. is the single best method to use when making capital budgeting decisions.
Why should the company consider Capital Investment Decision and why there's capital budgeting on it?
How can I explain these?
In a few sentences, answer the following question as completely as you can. Compare discounted cash flow (DCF) and non-discounted cash flow capital budgeting techniques. If you were to evaluate a project, which one of these techniques would you use?
5. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product. 6. Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?
What is the connection between capital budgeting decisions and the enterprise’s cost of capital? Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?
Suppose a firm uses the WACC as the single hurdle rate in determining the value of capital budgeting projects rather than using risk adjusted hurdle rates. Choose the statement that actually completes the sentence describing the possible outcomes for the firm: the firm will tend to Accept profitable, low risk projects and reject unprofitable, high risk projects Accept profitable, low risk projects and accept unprofitable, high risk projects Reject profitable, low risk projects and reject unprofitable high risk projects Become less risky overtime Reject profitable, low risk projects and accept unprofitable, high risk projects