An investment yields $5,000 each year for four years, at which point the technol
ID: 2796315 • Letter: A
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An investment yields $5,000 each year for four years, at which point the technology is obsolete and no further cash flows are possible. If your discount rate is 5% annually, how much is the present value of these cash flows? 7) a. 5,000/(1.05)0 b. 20,000/(1.05) c. 5,000x(1.05) d. 20,000 x (1.05) e. 5,000/4(1.05) If while making a capital budgeting decision you are faced with a ranking conflict, generally speaking you must go with the investment that has the highest 8) a. Internal Rate of Return b. Profitability Potential c. Net Present Value d. Payback Period e. Cash Flow If we are constrained by capital, in addition to NPV one budgeting factor that we might consider might be: 9) a. b. c. d. A higher interest rate A higher IRR A shorter payback Period Modified IRR 10) Using the Discount Payback Period versus Payback Period is better because: a. It simplifies cash flows b. It is cheaper to use c. It discounts cash flows back to the Present Value d. It does not factor utility 11) When calculating the present value of a perpetuity using a higher discount rate: a. b. c. d. results in a higher terminal value of the perpetuity results in a lower terminal value of the perpetuity has no effect on the terminal value of the perpetuity means the perpetuity should be worth more 12) If we are considering the cash flows of two independent projects, then we should choose the project: a. b. c. d. based solely on which project yields higher cash flows regardless of their timing select both projects as long as they both have a positive NPV choose the project that returns the principal back in the shortest time frame only choose the project with the highest NPVExplanation / Answer
7.
The investment provide cash flow in annuity, so we cannot calculate using simple compounding rule.
8.
From various measure of capital budgeting, net present value is considered as best measure of capital budgeting because of following reason.
1. Net present value consider the reinvestment of cash flow at discount rate while another method IRR consider reinvestment at IRR rate
2. Net present value consider time value of money and consider whole period of cash flow which is not available with payback period and discounted payback period methods.
3. The NPV is the most valuable tool because it is the most accurate. because it considers all cash flow and cost of capital which is discount rate.
Option (C) is correct answer.
9.
if we are constrained by capital, in addition to NPVone budgeting that we might consider is modified IRR. this is because Modified IRR has same reinvestment assumtion as NPV.
Option (D) is correct answer.
10.
Discounted Payback period consider discounting factor of future cash flow which is not considering in regular payback period.
Option (C) is correct answer.
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