Question 1

The initial outlay or cost for a four-year project is $1,000,000.The respective cash inflows for years 1,2,3 and 4 are: $500,000,$300,000,$300,000 and $300,000.What is the discounted payback period if the discount rate is 10%?

Accepted Answer

To find the discounted payback period, we need to calculate the present value of each cash inflow using the discount rate of 10% and then add them up until the sum is equal to or greater than the initial outlay.

Year 1: $500,000 / (1 + 0.10)^1 = $454,545.45
Year 2: $300,000 / (1 + 0.10)^2 = $247,933.88
Year 3: $300,000 / (1 + 0.10)^3 = $202,627.16
Year 4: $300,000 / (1 + 0.10)^4 = $166,393.70

Cumulative cash flow:
Year 1: $454,545.45
Year 2: $702,479.33
Year 3: $905,106.49
Year 4: $1,071,500.19

The payback period occurs between year 3 and year 4 since the cumulative cash flow before year 4 is less than the initial outlay of $1,000,000 and the cumulative cash flow after year 3 is greater than $1,000,000. To find the exact point of payback, we need to use interpolation:

Year 3: $905,106.49
Year 4: $1,071,500.19
Payback year = 3 + [(1,000,000 - 905,106.49) / (1,071,500.19 - 905,106.49)] = 3.35 years

Therefore, the discounted payback period is about 3.35 years, which is option B.

Question 2

Consider the following four-year project.The initial outlay or cost is $180,000.The respective cash inflows for years 1,2,3 and 4 are: $100,000,$80,000,$80,000 and $20,000.What is the discounted payback period if the discount rate is 11%?

Accepted Answer

The discounted payback period is the time it takes for the present value of cash inflows to cover the initial investment. By discounting each cash inflow at 11% and summing them, the cumulative present value reaches the initial outlay of $180,000 at approximately 2.427 years.

Question 3

Capital budgeting decisions are typically long-term decisions.

Accepted Answer

Capital budgeting decisions involve investing large amounts of money to purchase long-term assets such as equipment, land, or buildings. These decisions can have a significant impact on the company's future profitability and growth and are therefore considered long-term decisions.

Question 4

We can separate short-term and long-term decisions into three dimensions.Which of the below is NOT one of these?

Accepted Answer

The three dimensions are the degree of information gathering prior to the decision, cost, and length of impact. The personality of the CEO is not one of these dimensions.

Question 5

Consider the following four-year project.The initial after-tax outlay or after-tax cost is $1,000,000.The future after-tax cash inflows for years 1,2,3 and 4 are: $400,000,$300,000,$200,000 and $200,000,respectively.What is the payback period without discounting cash flows?

Accepted Answer

The answer of Consider the following four-year project.The initial after-tax...

Question 6

The initial outlay or cost is $1,000,000 for a four-year project.The respective future cash inflows for years 1,2,3 and 4 are: $500,000,$300,000,$300,000 and $300,000.What is the payback period without discounting cash flows?

Accepted Answer

To calculate the payback period, we need to add up the cash inflows until they equal the initial outlay.

Year 1: $500,000
Year 2: $800,000 ($500,000 + $300,000)
Year 3: $1,100,000 ($800,000 + $300,000)
Year 4: $1,400,000 ($1,100,000 + $300,000)

The payback period is the point at which the cumulative cash inflows equal the initial outlay. In this case, that happens at the end of Year 2.

So the payback period is: 
Year 1 + Year 2 = 2 years 
And since there are no partial years, the answer is: About 2.67 years.

Question 7

By switching to monthly cash flows,we cannot get a more accurate estimate of the discounted payback period.

Accepted Answer

Switching to monthly cash flows can provide a more accurate estimate of the discounted payback period as it takes into account the time value of money more frequently.

Question 8

The ________ model answers one basic question: How soon will I recover my initial investment?

Accepted Answer

The payback period model calculates the time required for a project to recover its initial investment. It is a simple model and can be easily understood by non-financial personnel.

Question 9

Consider the following ten-year project.The initial after-tax outlay or after-tax cost is $1,000,000.The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year.What is the payback period without discounting cash flows?

Accepted Answer

The payback period is the time it takes for the initial investment to be recovered from the cash inflows. Here, $1,000,000 / $200,000 per year = 5 years.

Question 10

The ________ model is usually considered the best of the capital budgeting decision-making models.

Accepted Answer

Net present value (NPV) is considered as the best of the capital budgeting decision-making models as it takes into account the time value of money and provides a clear indication of whether an investment will add value to the company. It is calculated by subtracting the initial investment from the present value of net cash flows generated by the investment over its lifetime. The higher the NPV, the better the investment opportunity.

Question 11

________ is at the heart of corporate finance,because it is concerned with making the best choices about project selection.

Accepted Answer

Capital Budgeting is the process of evaluating and selecting long-term investments that will benefit a company over time. This involves assessing the potential profitability of projects and comparing them to determine the most beneficial use of company resources. It is considered the heart of corporate finance because it involves crucial decision-making that can impact a company's financial health for years to come.

Question 12

Acme,Inc.is considering a four-year project that has an initial outlay or cost of $100,000.The respective future cash inflows from its project for years 1,2,3 and 4 are: $50,000,$40,000,$30,000 and $20,000.Will it accept the project if it's payback period is 31 months?

Accepted Answer

The project pays back in 28 months, as the cumulative cash inflows reach $100,000 by the end of the 28th month.

Question 13

Acme,Inc.is considering a four-year project that has initial outlay or cost of $100,000.The respective cash inflows for years 1,2,3 and 4 are: $50,000,$40,000,$30,000 and $20,000.Acme uses the discounted payback period method,and has a discount rate of 11.50%.Will Acme accept the project if it's payback period is 37 months?

Accepted Answer

The discounted cash flows need to be calculated for each year using the 11.50% discount rate. The cumulative discounted cash flows do not recover the initial investment within 37 months, indicating the payback period is longer than 37 months.

Question 14

The ________ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.

Accepted Answer

The payback period model determines at what point in time cash outflow is recovered by the corresponding future cash inflow. NPV also takes into account the time value of money, but it does not specifically determine the payback period. Buyback refers to the repurchase of shares by a company.

Question 15

A company usually establishes a short,arbitrary cutoff date for handling the initial screening of many small-dollar opportunities.

Accepted Answer

This is true. Companies often establish a short, arbitrary cutoff date for handling the initial screening of many small-dollar opportunities to efficiently manage their resources and prioritize larger opportunities.

Question 16

Which of the statements below is TRUE of the payback period method?

Accepted Answer

The payback period method only considers the time it takes for the initial investment to be recovered, ignoring any cash flows beyond that point. It does not incorporate time-value-of-money principles, as it treats all cash flows equally. Additionally, it is not biased against projects with early-term payouts.

Question 17

Because money is often limited,companies must be careful to choose projects that are feasible and profitable.

Accepted Answer

This statement is true. Companies must consider the financial feasibility and potential profitability of a project before investing resources into it.

Question 18

Which of the statements below is FALSE?

Accepted Answer

The statement that firms rarely use the payback period for small-dollar decisions is false. In reality, many companies prefer using the payback period for small-dollar decisions because it simplifies the analysis and reduces the need for detailed long-term cash flow forecasts.

Question 19

Which of the statements below is FALSE?

Accepted Answer

The Discounted Payback Period method is the time it takes to recover the initial investment in present dollars, not future dollars.

Question 20

Which of the statements below is FALSE?

Accepted Answer

The Payback Period method calculates the time it takes to recover the initial investment, not the dollar amount.

Quiz 9: Capital Budgeting Decision Models

The initial outlay or cost for a four-year project is $1,000,000.The respective cash inflows for years 1,2,3 and 4 are: $500,000,$300,000,$300,000 and $300,000.What is the discounted payback period if the discount rate is 10%?

Consider the following four-year project.The initial outlay or cost is $180,000.The respective cash inflows for years 1,2,3 and 4 are: $100,000,$80,000,$80,000 and $20,000.What is the discounted payback period if the discount rate is 11%?

Capital budgeting decisions are typically long-term decisions.

We can separate short-term and long-term decisions into three dimensions.Which of the below is NOT one of these?

Consider the following four-year project.The initial after-tax outlay or after-tax cost is $1,000,000.The future after-tax cash inflows for years 1,2,3 and 4 are: $400,000,$300,000,$200,000 and $200,000,respectively.What is the payback period without discounting cash flows?

The initial outlay or cost is $1,000,000 for a four-year project.The respective future cash inflows for years 1,2,3 and 4 are: $500,000,$300,000,$300,000 and $300,000.What is the payback period without discounting cash flows?

By switching to monthly cash flows,we cannot get a more accurate estimate of the discounted payback period.

The ________ model answers one basic question: How soon will I recover my initial investment?

Consider the following ten-year project.The initial after-tax outlay or after-tax cost is $1,000,000.The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year.What is the payback period without discounting cash flows?

The ________ model is usually considered the best of the capital budgeting decision-making models.

________ is at the heart of corporate finance,because it is concerned with making the best choices about project selection.

Acme,Inc.is considering a four-year project that has an initial outlay or cost of $100,000.The respective future cash inflows from its project for years 1,2,3 and 4 are: $50,000,$40,000,$30,000 and $20,000.Will it accept the project if it's payback period is 31 months?

The ________ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.

A company usually establishes a short,arbitrary cutoff date for handling the initial screening of many small-dollar opportunities.

Which of the statements below is TRUE of the payback period method?

Because money is often limited,companies must be careful to choose projects that are feasible and profitable.

Which of the statements below is FALSE?

Which of the statements below is FALSE?

Which of the statements below is FALSE?