12.3: Identify capital budgeting challenges and refi.. a) Two years ago, Green Industries decided to undertake a
Question:
12.3: Identify capital budgeting challenges and refi..
a)Two years ago, Green Industries decided to undertake a new construction project because it estimated the project's NPV was $95,000. Now, during its post-audit of the project, Green estimates that the project's actual NPV is closer to $48,000. What is the most likely reason why this new NPV is lower than the previous one?
- A
- :
- Green calculated the new NPV using different evaluation techniques.
- B
- :
- Green calculated the new NPV using actual dollar amounts instead of estimated dollar amounts.
- C
- :
- Green calculated the new NPV using a lower discount rate.
- D
- :
- Green calculated the new NPV using a shorter project lifespan.
b)Arco Inc. is thinking about building a new factory overseas. The firm has already calculated the NPV of the project using its usual discount rate of 8%. As part of its process of sensitivity analysis, Arco now wants to see how the project's NPV might be affected by increased economic instability in the new factory's home country. Which discount rate would be most appropriate to use in this set of calculations?
- A
- :
- 10%
- B
- :
- 4%
- C
- :
- 6%
- D
- :
- 8%
c) Q 12.23:Industrial Products Inc. is trying to decide whether to build a new manufacturing plant or a new warehouse. Both facilities require the same initial investment and are expected to generate the same annual cash flows and intangible benefits. However, when calculating the NPVs of the projects, Industrial uses a lower discount rate for the warehouse than for the manufacturing plant. This tells us that
- A
- :
- the warehouse will have a higher NPV than the plant, because Industrial believes the warehouse presents a higher degree of risk.
- B
- :
- the warehouse will have a lower NPV than the plant, because Industrial believes the warehouse presents a lower degree of risk.
- C
- :
- the warehouse will have a lower NPV than the plant, because Industrial believes the warehouse presents a higher degree of risk.
- D
- :
- the warehouse will have a higher NPV than the plant, because Industrial believes the warehouse presents a lower degree of risk.
d) Industrial Products Inc. is trying to decide whether to build a new manufacturing plant or a new warehouse. Both facilities require the same initial investment and are expected to generate the same annual cash flows and intangible benefits. However, when calculating the NPVs of the projects, Industrial uses a lower discount rate for the warehouse than for the manufacturing plant. This tells us that
- A
- :
- the warehouse will have a higher NPV than the plant, because Industrial believes the warehouse presents a higher degree of risk.
- B
- :
- the warehouse will have a lower NPV than the plant, because Industrial believes the warehouse presents a lower degree of risk.
- C
- :
- the warehouse will have a lower NPV than the plant, because Industrial believes the warehouse presents a higher degree of risk.
- D
- :
- the warehouse will have a higher NPV than the plant, because Industrial believes the warehouse presents a lower degree of risk.