Chapter 8:Capital budgeting process and techniques

Internal rate of return assumes that the intermediate cash inflows will be reinvested at:
1. the required rate of return.
2. the internal rate of return.
3. the risk-free rate of return.
4. none of the above.
AcquaPorker Springs can purchase a new swimming pig (their old one died) for €5,000. The new pig will encourage greater park attendance and therefore increase cash inflow by €2,000 for years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the profitability index for the project?
1. 1.87
2. 1.67
3. 1.47
4. 1.27
Mitch's Rent a Wreck has the opportunity to purchase a new wreck that will cost €600. The wreck will help generate additional cash flow of €300 at the end of the next 3 years. If the cost of capital for the project is 10%, then what is the net present value of the project?
1. €1,346.06
2. €246.06
3. €146.06
4. €136.06
Expressive Art can purchase a tattoo removal instrument for €25,000. The new device will encourage a larger number of people to risk getting a tattoo and therefore increase cash inflow by €12,000 for years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the net present value of the project?
1. €38,038.39
2. €13,038.39
3. €3,038.39
4. €338.39
Pardon Springs Swimming Club can purchase a water filter that will cost €3,000. The filter will encourage more swimmers and therefore increase cash inflow by €1,300, €1,200, and €1,100, and €500 for years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the profitability index of the project?
1. 2.01
2. 1.57
3. 1.11
4. 1.08
The discount rate that the payback period uses for cash inflows that occur after the critical period is:
1. zero.
2. infinite.
3. the cost of capital.
4. the risk-free rate.
A disadvantage of the payback period is:
1. it weights early cash inflows the same as all later cash inflows.
2. the critical period is arbitrary.
3. all cash flows are treated equally.
4. all of the above.
Pardon Springs Swimming Club can purchase a water filter that will cost €3,000. The filter will encourage more swimmers and therefore increase cash inflow by €1,300, €1,200, and €1,100, and €500 for years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the net present value of the project?
1. €3,041.51
2. €1,700.00
3. €341.51
4. €241.51
Expressive Art can purchase a tattoo removal instrument for €25,000. The new device will encourage a larger number of people to risk getting a tattoo and therefore increase cash inflow by €12,000 for years 1, 2, 3, and 4. What is the internal rate of return for the project?
1. 32.36%
2. 23.24%
3. 13.24%
4. 3.24%
The Kore's Beer Company can purchase an alcohol fabricator that will cost €4,000. The fabricator will reduce cash expense of €1,200, €2,000, and €2,400 for years 1, 2, and 3 but will increase expenses by €800 in year 4 . What is the internal rate of return for the project?
1. 16.79%
2. 15.79%
3. 14.79%
4. IRR should not be relied upon in this case

Chapter 8:Capital budgeting process and techniques

Quiz