Practice Problem Set #8: Capital budgeting Theoretical and conceptual questions: (see notes or textbook) 1. What is meant by a capital budgeting' decisions? Provide examples of capital budgeting decisions that CFOs of corporations would make. 2. What are the characteristics we look for in a good investment criteria? 3. How does NPV compare to Payback, IRR and Profitability Index when we apply the criteria in 2.? Your manager is a CPA and insists on using Accounting Return as the main investment criteria. How do you respond? 5. The owner-manager of the company you work for insists on using the Payback rule as the main investment criteria for a risky project with a 20 year project life. How do you respond? 6. Differentiate between conventional and unconventional project cash flows. 7. Under what circumstances could NPV and IRR lead to conflicting answers? 8. Why is IRR a popular investment criteria among financial managers? 9. Provide an example of a sunk cost of a project. Would you include it in the project cash flows? 10. Provide an example of an opportunity cost of a project. Would you include it in the project cash flows? 11. What is meant by the standalone principle? 12. Why is it important to do sensitivity, scenario or breakeven analyses for projects? 13. The City of Vancouver is contemplating the automation of the cleaning of facilities by using robots to clean floors of community centres. A pilot of this project was done at UBC and at the Vancouver airport and the technology works well. The NPV of the project is also positive. Consider the qualitative effect of their decision on stakeholders