FINE 2000 Study Guide - Quiz Guide: Operating Cash Flow, Cash Flow, Net Present Value
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X-treme Vitamin Company is considering two investments, both of which cost $20,000. The firm's cost of capital is 15 percent. The cash flows are as follows:
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What is the payback period for each project? Which project would you accept based on the payback period? . (2 marks)
What is the discounted payback for each project? Which project would you accept based on the discounted payback criterion? (3 marks)
Calculate the NPV of each project? Which project would you choose based on the NPV criterion? (5 marks)
Based on the IRR criteria which project would you choose if they were mutually exclusive
(5 marks)
Capital budgeting criteria
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
0 | 1 | 2 | 3 | 4 | 5 |
Project M | -$6,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 |
Project N | -$18,000 | $5,600 | $5,600 | $5,600 | $5,600 | $5,600 |
Calculate NPV for each project. Round your answers to the nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate MIRR for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M %
Project N %
Calculate payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Calculate discounted payback for each project. Round your answers to two decimal places. Do not round your intermediate calculations.
Project M years
Project N years
Assuming the projects are independent, which one(s) would you recommend?
-Select-Both projects would be accepted since both of their NPV's are positive.Only Project M would be accepted because IRR(M) > IRR(N).Both projects would be rejected since both of their NPV's are negative.Only Project M would be accepted because NPV(M) > NPV(N).Only Project N would be accepted because NPV(N) > NPV(M).Item 11
If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project N.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project M.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project M.Item 12
Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR occurs due to the difference in the size of the projects.The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.