1 Whih of the following are examples of a capital budgeting project? Check all that apply A European Satellite Corp.'s25,000 investment in short-term marketable securities B Natural Gas Producers Corp.'s investment in a research and development program C Universal Computer Corp.'s investment in employee education and training programs Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows Green Caterpillar Garden Supplies Inc.'s weighted average cost of capital is 9%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV? Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $400,000 $450,000 $475,000 AO -$1,533,243 B-$1,883,243 CO -s2,259,892 DO-$5,108,243 2 Green Caterpillar Garden Supplies Inc.'s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should- 3 project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? 4 Answer Choices 1. A, B, C, D 2. A, B, C, D 3. Accept, Reject 4. A, B, C, D 5. A, B, C, D 6. A, B 7. A, B, C, D 8 Reject Project Delta, Accept Project Delta 9. A, B, C O No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows. O No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows Rydell Corporation is evaluating a proposed capital budgeting project that will require an initial investment of $148,000. The project is expected to generate the following net cash flows: Assume the desired rate of return on a project of this type is 11%, what is the net present value of this project? Cash Flow Year Year 1 Year 2 Year 3 $41,800 5 Ao -$15,732.70 $51,200 $47,100 $45,400 BO $15,845.40 CO $13,065.40 DO -$4,441.77 Suppose Rydell Corporation has enough capital to fund the project, and the project is not competing for funding with other projects. Should Rydell Corporatlon accept or reject this project? 6 AO Accept the project Reject the project Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000 Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 7%, and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Which of the following is the correct calculation of project Delta's IRR? Year Year 1 Year 2 Year 3 Year 4 Cash Flow $275,000 $400,000 $450,000 $425,000 A) 2.30% BO 2.55% CO 2.17% DO 3.06% If this is an independent project, the IRR method states that the firm should 8 If the project's cost of capital were to increase, how would that affect the IRR? 9 AO The IRR would decrease B C The IRR would increase. The IRR would not change