Reading 44: Capital Budgeting-LOS c 习题精选 2011, executive, following, capital

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Session 11: Corporate Finance
Reading 44: Capital Budgeting

LOS c: Explain how the following project interactions affect the evaluation of a capital project: 1) independent versus mutually exclusive projects, 2) project sequencing, and 3) unlimited funds versus capital rationing.

 

 

Rosalie Woischke is an executive with ColaCo, a nationally known beverage company. Woischke is trying to determine the firm’s optimal capital budget. First, Woischke is analyzing projects Sparkle and Fizz. She has determined that both Sparkle and Fizz are profitable and is planning on having ColaCo accept both projects. Woischke is particularly excited about Sparkle because if Sparkle is profitable over the next year, ColaCo will have the opportunity to decide whether or not to invest in a third project, Bubble. Which of the following terms best describes the type of projects represented by Sparkle and Fizz as well as the opportunity to invest in Bubble?

Sparkle and Fizz

Opportunity to invest in Bubble

A) Independent projects Project sequencing

B) Independent projects Add-on project

C) Mutually exclusivve projects Project sequencing

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Independent projects are projects for which the cash flows are independent from one another and can be evaluated based on each project’s individual profitability. Since Woischke is accepting both projects, the projects must be independent. If the projects were mutually exclusive, only one of the two projects could be accepted. The opportunity to invest in Bubble is a result of project sequencing, which means that investing in a project today creates the opportunity to decide to invest in a related project in the future.

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The Chief Financial Officer of Large Closeouts Inc. (LCI) determines that the firm must engage in capital rationing for its capital budgeting projects. Which of the following describes the most likely reason for LCI to use capital rationing? LCI:

A) must choose between projects that compete with one another.

B) would like to arrange projects so that investing in a project today provides the option to accept or reject certain future projects.

C) has a limited amount of funds to invest.

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Capital rationing exists when a company has a fixed (maximum) amount of funds to invest. If profitable project opportunities exceed the amount of funds available, the firm must ration, or prioritize its funds to achieve the maximum value for shareholders given its capital limitations.

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Project sequencing is best described as:

A) an investment in a project today that creates the opportunity to invest in other projects in the future.

B) arranging projects in an order such that cash flows from the first project fund subsequent projects.

C) prioritizing funds to achieve the maximum value for shareholders, given capital limitations.

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Projects are often sequenced through time so that investing in a project today may create the opportunity to invest in other projects in the future. Note that funding from the first project is not a requirement for project sequencing.

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If two projects are mutually exclusive, a company:

A) must accept both projects or reject both projects.

B) can accept one of the projects, both projects, or neither project.

C) can accept either project, but not both projects.

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Mutually exclusive means that out of the set of possible projects, only one project can be selected. Given two mutually exclusive projects, the company can accept one of the projects or reject both projects, but cannot accept both projects.