(a) Identify each of the following cash flow to indicate whether it is a benefit, a disbenefit, or a cost. (i) (ii) A project manager is constructing a large water dam but incurs a budget shortage. Hence he purchases less expensive turbines with a shorter maintenance cycle. The end result is less project cost, but higher operating cost. The project manager purchased less expensive turbines with a shorter maintenance cycle

(a) Identify each of the following cash flow to indicate whether it is a benefit, a disbenefit, or a cost. (i) (ii) A project manager is constructing a large water dam but incurs a budget shortage. Hence he purchases less expensive turbines with a shorter maintenance cycle. The end result is less project cost, but higher operating cost. The project manager purchased less expensive turbines with a shorter maintenance cycle

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 3Q

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Which of the statements below is TRUE regarding capital budgeting? O A. Capital budgeting deals with how much to apportion spending on current assets. O B. Projects with NPVS greater than the IRR should be accepted. OC. We can find a project's NPV by simply taking the product of all of the project's undiscounted cash flows. O D. Ceteris paribus, a lower cost of capital would increase a project's NPV.
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality, the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: United Fried Cheese Co. is analyzing a project that requires an initial investment of $2,750,000. The project's expected cash flows are: Year Year 1 Cash Flow $375,000 Year 2 -$125,000 Year 3 Year 4 $400,000 $475,000 United Fried Cheese Co.'s WACC is 10%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR). ○ -16.10% -19.32% -15.29% ○ -14.49% If United Fried Cheese Co.'s managers select projects based on the MIRR criterion, they should this independent project.
In calculating Net Present Value (NPV), which one of the following is not an example of a relevant cashflow: A Incremental Operating Costs B Initial investment (including installation costs) C Depreciation D Increased working capital (current assets (cash, receivable and inventories less current liabilities) Question 2 Which of the following best describes a ‘basic standard’ with respect to costs in a budgeting exercise? A A standard which assumes an efficient level of operation, but which includes allowances for factors such as normal loss, waste and machine downtime B A standard which is kept unchanged over a period of time C A standard which is based on current price levels D A standard set at an ideal level, which makes no allowance for normal losses, waste and machine downtime Question 3 Which of the following statements about budgets and standards are true? A Standards can only be achieved under ideal conditions B Budgets can be used in situation where output cannot…
QUANTITATIVE. Fill in the following statements based on the below project financial analysis. a. The Net Present Value is b. The Return on Investment is c. The project will break even (make back its costs) in Year d. This project Created by: Praju Manageski Note: Change the inputs, such as discount rate, number of years, costs, and benefits. Be sure to Discount rate Costs Discount factor Discounted costs Benefits Discount factor Discounted benefits profitable because the ROI and NPV are both Financial Analysis for Project GGU Assume the project is completed in Year 0 Discounted benefits -costs Cumulative benefits - costs ROI 5% 10,000 1.00 10,000 0 1.00 0 (10,000) (10,000) 16% 0 0.95 2,000 0.95 1,905 Year 0 0.91 5000 0.91 4,535 1,905 4,535 (8,095) (3,560) 0 0.86 . 6000 0.86 5,183 5,183 1,623 10,000 11,623 1,623 NPV
Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 –125,000 Year 3 450,000 Year 4 450,000 Green Caterpillar Garden Supplies Inc.’s WACC is 7%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): -12.63% 26.46% 30.64% 29.24% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion,…
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,000,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Celestial Crane Cosmetics's WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): O-20.94% O 17.35% Cash Flow $275,000 -125,000 400,000 450,000 O 19.00% O 15.69%
If a project has a positive net present value, then which of the following statements are correct? I. The present value of all cash inflows must equal the costs of the project. The IRR is equal to the required rate of return. II. A increase in the project's initial cost will cause the project to have a higher positive NPV. III. Any delay in receiving the projected cash inflows will cause the project to have a higher positive NPV. IV. IRR must equal zero. Only II Only III All None of them
You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? A. The discount rate increases. B. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. C. The discount rate decreases. D. Answers B and C above. E. Answers A and B above.
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 Year 2 Year 3 Year 4 Grey Fox Aviation Company's WACC is 8%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 16.25% 13.69% $325,000 -150,000 450,000 475,000 14.54% -20.05% If Grey Fox Aviation Company's managers select projects based on the MIRR criterion, they should Which of the following statements about the relationship between the IRR and the MIRR is…
For a typical project evaluation with initial investment at time=0 and positive cash flows afterwards, each statement in the following shows possible answers in parenthesis. Choose the answer that shows correct answers for all statements. Statement 1: When NPV = 0, investors earn (negative/zero/positive) return. Statement 2: Accept the project when valuation is (higher/the same/lower) than the cost. Statement 3: When IRR> cost of capital, NPV is (negative/zero/positive). Statement 4: Cost of capital is determined by the (company/investors) considering the (business risk/systematic) risk) a. negative, higher, positive, investors and systematic b. positive, lower, positive, investors and business c. positive, higher, zero, company and systematic d. positive, higher, positive, investors and systematic
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. O A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC. A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost. O If a project's IRR is smaller than the WACC, then its NPV will be positive. O A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting the TV to find the IRR.
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Grey Fox Aviation Company is analyzing a project that requires an initial investment of $450,000. The project’s expected cash flows are: Year Cash Flow Year 1 $300,000 Year 2 –175,000 Year 3 475,000 Year 4 450,000 Grey Fox Aviation Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 26.73% 27.89% 20.92% 23.24% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they shouldreject this independent…