hinsafdar

When using net present value (NPV) profiles:

A) one should accept all independent projects with positive NPVs.

B) the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return.

C) one should accept all mutually exclusive projects with positive NPVs.

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Where the NPV intersects the vertical y-axis you have the value of the cash inflows less the cash outflows, assuming an absence of money having a time value (i.e., the discount rate is zero). Where the NPV intersects the horizontal x-axis you have the project’s internal rate of return. At this cost of financing, the cash inflows and cash outflows offset each other. The NPV profile is a tool that graphically plots the project’s NPV as calculated using different discount rates. Assuming an appropriate discount rate, one should accept all projects with positive net present values, if the projects are independent. If projects are mutually exclusive select the one with the higher NPV at any given level of the cost of capital.

hinsafdar

Which of the following firms is most likely to use a discounted cash flow technique as its primary capital budgeting tool?

A) A large, publicly held European firm that has managers with no formal business education.

B) A small, privately held European firm that has managers with no formal business education.

C) A large, publicly held U.S. firm where managers hold MBA degrees.

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Companies that favor discounted cash flow capital budgeting techniques such as NPV and IRR over payback period or other non-DCF capital budgeting techniques tend to have the following characteristics:

• Location: European firms tend to favor payback period.
• Size: Smaller firms tend to favor payback period.
• Ownership: Private firms tend to favor payback period.
• Management education: The more highly educated a firm’s management, the more likely it is to use a DCF capital budgeting technique as its primary tool.

hinsafdar

Osborn Manufacturing uses the NPV and IRR methods as its primary tools for evaluating capital projects. Which of the following most likely describes Osborn Manufacturing with regard to firm ownership and company size?

Firm ownership

Company size

A) Public Large

B) Public Small

C) Private Large

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Despite the theoretical superiority of the NPV and IRR methods for determining and ranking project profitability, surveys of corporate managers show that a variety of methods are used. Firms that use the NPV and IRR methods tend to be larger, publicly-traded, companies.

hinsafdar

Mollette Industries uses the payback period as its primary means for ranking capital projects. Which of the following most likely describes Mollette Industries with regard to location and management education?

Location

Management education

A) U.S. based firm Undergraduate degree or lower

B) European-based firm MBA degree or higher

C) European-based firm Undergraduate degree or lower

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Despite the theoretical superiority of the NPV and IRR methods for determining and ranking project profitability, surveys of corporate managers show that a variety of methods are used. Firms that were most likely to use the payback period method were European firms and management teams with less education.

hinsafdar

Garner Corporation is investing $30 million in new capital equipment. The present value of future after-tax cash flows generated by the equipment is estimated to be $50 million. Currently, Garner has a stock price of $28.00 per share with 8 million shares outstanding. Assuming that this project represents new information and is independent of other expectations about the company, what should the effect of the project be on the firm’s stock price?

A) The stock price will increase to $30.50.

B) The stock price will increase to $34.25.

C) The stock price will remain unchanged.

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In theory, a positive NPV project should provide an increase in the value of a firm's shares.
NPV of new capital equipment = $50 million - $30 million = $20 million
Value of company prior to equipment purchase = 8,000,000 × $28.00 = $224,000,000
Value of company after new equipment project = $224 million + $20 million = $244 million
Price per share after new equipment project = $244 million / 8 million = $30.50
Note that in reality, changes in stock prices result from changes in expectations more than changes in NPV.

terpsichorefan

thanks for sharing