Question 1

Table 11.11
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 11.11)

Accepted Answer

The answer of Table 11.11
Yong Importers,an Asian import company,is evaluating...

Question 2

Table 11.11
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 11.11)

Accepted Answer

To calculate the annualized NPV for each project, we need to use the formula: PVIFA = (1 - (1 / (1+r)^n)) / r

For Project A, the PV of cash inflows is $40,000, and the PV of cash outflows is $26,614. Therefore, the initial investment is $26,614 - $40,000 = -$13,386.

Next, we need to calculate the number of years for the project, which is 4.

Using the formula above, we can calculate the PVIFA as follows:

PVIFA = (1 - (1 / (1+0.1)^4)) / 0.1 = 2.7753

Finally, we can calculate the annualized NPV for Project A as follows:

Annualized NPV = -$13,386 * 2.7753 + $40,000 = $22,674

Therefore, the best choice is to choose Project A as it has a higher annualized NPV compared to Project B.

Question 3

Table 11.11
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 11.11)

Accepted Answer

Using the normal NPV approach, we calculate the NPV of project A and B as:
NPV_A = -$20,000 + ($5,000/1.1) + ($6,000/1.1^2) + ($7,000/1.1^3) + ($8,000/1.1^4) = $1,812.53
NPV_B = -$30,000 + ($10,000/1.1) + ($15,000/1.1^2) + ($20,000/1.1^3) = $3,360.98
Therefore, project B should be chosen because it has a higher NPV.

Question 4

A firm is evaluating two mutually exclusive projects that have unequal lives.The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select.The firm's cost of capital has been determined to be 18 percent,and the projects have the following initial investments and cash flows:

Accepted Answer

The answer of A firm is evaluating two mutually exclusive...

Question 5

Table 11.11
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 11.11)

Accepted Answer

The answer of Table 11.11
Yong Importers,an Asian import company,is evaluating...

Question 6

A firm with unlimited funds must evaluate five projects.Projects 1 and 2 are independent and Projects 3,4,and 5 are mutually exclusive.The projects are listed with their returns.  A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be ________.

Accepted Answer

The answer of A firm with unlimited funds must evaluate...

Question 7

Table 11.11
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 11.11)

Accepted Answer

The Annualized NPV approach converts the NPV of projects with different lifespans into an equivalent annual amount. The project with the higher annualized NPV should be chosen, which is Project A in this case.

Question 8

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 9

A(n)________ allows management to avoid or minimize losses on projects that turn bad.

Accepted Answer

An abandonment option allows management to abandon or terminate a project before completion, which helps to avoid or minimize losses on projects that turn bad. Growth options refer to opportunities for expanding or developing a project where the potential benefits outweigh the costs. Timing options refer to the flexibility to delay starting a project until a more favorable time. Put options are financial instruments used in investing, where investors can sell an asset at a fixed price within a specific timeframe. However, none of these options specifically address the need to avoid or minimize losses on projects that turn bad.

Question 10

The option to develop follow-on projects,expand markets,expand or retool plants,and so on that would not be possible without implementation of the project that is being evaluated is called a ________.

Accepted Answer

The option to develop follow-on projects, expand markets, retool or expand plants, etc. are all related to the growth potential of the company. These options become available only if the evaluated project is successful. Therefore, the best choice in this case is a growth option.

Question 11

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

Accepted Answer

The statement is true. The equivalent annual amount is calculated by dividing the net present value of the project by the present value annuity factor of the project. This allows for easy comparison between projects with different lifetimes.

Question 12

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Accepted Answer

The objective of capital rationing is to select the group of projects that provides the highest overall net present value (NPV) within the budget constraint, not necessarily the quickest payback.

Question 13

Real options are opportunities that are embedded in capital budgeting projects that enable managers to alter their cash flows and risks in a way that affects project acceptability.

Accepted Answer

Real options refer to the flexibility of a project to change its cash flows and risks in response to changing market conditions or management decisions, which can impact the project's acceptability. Therefore, the statement is true.

Question 14

Which of the following proposed projects should be accepted for the upcoming year since only $6 million is available for the next year's capital budget.What is the total NPV of the projects that should be accepted?

Accepted Answer

Among the given options, option B is the best choice. It includes projects with the highest total NPV of $1.72 million, which is slightly higher than the other options. Also, the total cost of the projects is exactly $6 million, which is the available budget. Therefore, accepting projects F, B, and D would be the best choice.

Question 15

The objective of capital rationing is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

Accepted Answer

This statement accurately reflects the objective of capital rationing, which is to allocate limited funds to the combination of projects that will generate the greatest return on investment within the available budget constraint.

Question 16

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

Accepted Answer

A firm with limited funds for investment in capital assets cannot invest in all available projects, so it must prioritize and select projects that will yield the greatest return and increase shareholder value.

Question 17

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

If the projects are mutually exclusive, the length of the project lives becomes critical because it affects the overall profitability of the project. Shorter-lived projects may have higher returns on investment, but if the longer-lived projects produce a higher net present value over their entire lifespan, they should be prioritized over the shorter-lived projects. Therefore, the length of project lives is important to consider while selecting the best group of unequal-lived projects, even if they are mutually exclusive.

Question 18

A firm is evaluating two mutually exclusive projects that have unequal lives.The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select.The firm's cost of capital has been determined to be 14 percent,and the projects have the following initial investments and cash flows:

Accepted Answer

The answer of A firm is evaluating two mutually exclusive...

Question 19

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 method is useful in comparing projects with varying lifespans and cash flows, as it standardizes all projects to an equivalent annual amount.

Question 20

Annualized net present value approach is the most efficient technique for dealing with projects of unequal lives.

Accepted Answer

The annualized net present value approach converts all cash flows into annual equivalents, regardless of project lives, making it easier to compare projects with different durations. This approach is considered the most efficient technique for dealing with projects of unequal lives.

Quiz 11: Capital Budgeting Cash Flows and Risk Refinements