Question 1

Table 11.12
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-The NPVs of projects A and B are ________. (See Table 11.12)

Accepted Answer

The answer of Table 11.12
Yong Importers, an Asian import company,...

Question 2

The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).

Accepted Answer

The annualized net present value approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms). This approach takes into account the time value of money and the unequal timing of cash flows. It provides a useful way to compare projects with different lifespans and determine which project is the most profitable on an annual basis. The other options listed (internal rate of return, investment opportunities schedule, and risk-adjusted discount rate) do not specifically address the conversion of net present value of unequal-lived projects into an equivalent annual amount.

Question 3

In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

Accepted Answer

The length of the projects' lives is critical in selecting the best group of unequal-lived projects if they are mutually exclusive. This is because the longer-lived project may have a higher net present value (NPV), but may not be the best choice if it prevents the opportunity to invest in other shorter-lived projects with a higher overall NPV. Therefore, the selection of projects should consider their duration and how they fit into the overall portfolio of projects.

Question 4

Table 11.12
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-The Annualized NPV of project A is ________. (See Table 11.12)

Accepted Answer

The correct choice is $22,673, which is the annualized net present value calculated based on the cash flows and discount rate provided in Table 11.12.

Question 5

Table 11.10
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. 
-Evaluate the projects using risk-adjusted discount rates. (See Table 11.10)

Accepted Answer

The answer of Table 11.10
Johnson Farm Implement is faced with...

Question 6

When unequal-lived projects are independent, the length of the projects' lives is not critical.

Accepted Answer

The cash flows from the unequal-lived projects are not affected by each other, and therefore, the length of the projects' lives do not impact their independence.

Question 7

Table 11.9
Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40. 
-Which of the following statements is most correct?

Accepted Answer

The statement that firms generally are not rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock prices is the most correct. While diversification can reduce firm-specific risk, it does not necessarily lead to higher stock values. In fact, investors are often able to diversify their own portfolios and are not willing to pay a premium for a firm's diversification efforts. Additionally, the beta of each project is relevant in this scenario because it helps determine the required rate of return for each project based on its level of risk.

Question 8

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between projects X and Y (See Table 12.5).

Accepted Answer

The answer of Table 11.11
Nico Manufacturing is considering investment in...

Question 9

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Nico select using this method? (See Table 11.11)

Accepted Answer

The answer of Table 11.11
Nico Manufacturing is considering investment in...

Question 10

Table 11.10
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. 
-Which project do you recommend? (See Table 11.10)

Accepted Answer

The answer of Table 11.10
Johnson Farm Implement is faced with...

Question 11

The risk-adjusted discount rate approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

Accepted Answer

The risk-adjusted discount rate approach adjusts for risk by altering the discount rate used in NPV calculations, but it does not convert NPV into an equivalent annual amount. The equivalent annual annuity (EAA) method is used for that purpose.

Question 12

In case of unequal-lived, mutually exclusive projects, the use of net present value to select the better project could result in an incorrect decision.

Accepted Answer

If the projects have unequal lives, the net present value may not give a clear indication of which project is better. The profitability index or internal rate of return may be more appropriate measures in this case.

Question 13

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

Accepted Answer

The answer of When unequal-lived projects are independent, the impact...

Question 14

The annualized net present value approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

Accepted Answer

This statement is true. The annualized net present value approach is used to compare unequal-lived projects by converting their net present values into an equivalent annual amount, thus allowing for a more accurate comparison of their value over time.

Question 15

In selecting the best group of unequal-lived projects, if the projects are independent, the length of the projects lives is not critical.

Accepted Answer

If the projects are independent, the length of their lives is not critical because they do not have any impact on each other. The selection criterion is based on the net present value (NPV) of each project, which takes into account the time value of money. Therefore, the duration of the project is not relevant as long as the NPV is positive.

Question 16

Table 11.12
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-Which project should be chosen using the Annualized NPV approach? (See Table 11.12)

Accepted Answer

Using the annualized NPV approach, we calculate the present value of each project, and then convert each project's net present value to an annualized value over its life. The project with the higher annualized NPV is the better choice.

For Project A, the present value of cash flows is -$22,316.48, and the annualized NPV is $2,890.52.

For Project B, the present value of cash flows is -$22,928.48, and the annualized NPV is -$2,765.05.

Therefore, the better choice is Project A.

Question 17

Table 11.12
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-Which project should be chosen on the basis of the normal NPV approach? (See Table 11.12)

Accepted Answer

Calculating the NPV for each project using a 10% discount rate:
NPV (Project A) = -$1,500 + ($600/1.10) + ($800/1.10^2) + ($1,200/1.10^3) + ($500/1.10^4) = $173.47
NPV (Project B) = -$4,000 + ($1,500/1.10) + ($1,600/1.10^2) + ($1,800/1.10^3) + ($1,000/1.10^4) = $155.66
Therefore, Project B has a higher NPV and should be chosen on the basis of the normal NPV approach.

Question 18

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-Calculate the risk-adjusted discount rates for project X and project Y. (See Table 11.11)

Accepted Answer

The answer of Table 11.11
Nico Manufacturing is considering investment in...

Question 19

Table 11.12
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-The Annualized NPV of project B is ________. (See Table 11.12)

Accepted Answer

The answer of Table 11.12
Yong Importers, an Asian import company,...

Question 20

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. 
-Calculate the NPV of projects X and Y assuming that the firm did not employ the RADR method and instead used the firm's overall cost of capital to evaluate projects X and Y. (See Table 11.11)

Accepted Answer

The answer of Table 11.11
Nico Manufacturing is considering investment in...

Quiz 11: Capital Budgeting Cash Flows and Risk Refinements

The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms) .

In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

Table 11.10 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Evaluate the projects using risk-adjusted discount rates. (See Table 11.10)

When unequal-lived projects are independent, the length of the projects' lives is not critical.

Table 11.10 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Which project do you recommend? (See Table 11.10)

The risk-adjusted discount rate approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

In case of unequal-lived, mutually exclusive projects, the use of net present value to select the better project could result in an incorrect decision.

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

The annualized net present value approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

In selecting the best group of unequal-lived projects, if the projects are independent, the length of the projects lives is not critical.