A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - Profitability index (PI)
A financial a...
D076 Module 11
A company is considering five projects that are not mutually exclusive. However, the company does not
have enough money to do all of them. In order to prioritize projects that fit within the company's
budget, which capital budgeting method should be used? - ✔✔Profitability index (PI)
A financial analyst for the company Bobby's Books has been asked to evaluate a potential investment
using a method that considers the time value of money. Is there more than one way to do this? - ✔✔
Yes, the analyst could use both the NPV and the IRR.
Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - ✔✔It should choose the
projects with the highest PIs until all capital has been used.
Beckingham Sports is an American sporting goods company. Based on a $400,000 market study and a
$600,000 fee for consulting spent prior to the project, the firm can increase its annual operating cash
flow by $3,000,000 by selling overseas. Because the firm was considering the expansion, it spent
$2,000,000 to purchase a land for new factory and equipment. However, someone is making an offer to
pay the company $3,000,000 for the land it purchased for the new factory. What is relevant to include in
the company's capital budgeting decision? - ✔✔3,000,000 for the offer price of the land
How are non-incremental cash flows different from incidental cash flows? - ✔✔Incidental cash flows
are indirect cash flows that are not explicitly revenues or costs. Nevertheless, they must be included in
the analysis.
How can having more debt benefit a company? - ✔✔Interest expense on debts is paid before taxes are
calculated.
How do corporations and purchasers of financial securities view returns? - ✔✔Purchasers of financial
securities look at returns as the amount of money they require in order to lend or give their money to
the corporation that issued those securities.
, How do you factor sunk costs into capital investment analysis? - ✔✔For the purposes of analysis, sunk
costs are irrelevant.
How does allocated overhead affect the selection of capital investment projects? - ✔✔These cash flows
are not a direct result of a specific project but are a general cost to the firm.
How does cannibalization factor into capital investment decisions? - ✔✔If your company is planning on
launching a product, and that product is going to steal some of the sales of another of the company's
products, that loss of sales could be an incidental cost or revenue caused by the new product.
How does management choose between two projects that are seemingly the same? - ✔✔Management
can analyze the different inherent risks that change the cost of capital to the firm.
If two projects are mutually exclusive, which decision-making criterion will help you make the best
decision about which project to accept? - ✔✔Net present value (NPV)
incidental cash flows - ✔✔a type of incremental cash flow that are indirectly created by a project but
are not explicit revenues or costs.
Suppose you are a manager at a firm. One of your financial analysts places a report on your desk of
valuation calculations for some potential investment projects. When you look at the calculations later,
you notice that the analyst did not indicate if she used the NPV or IRR method. However, you do notice
that the results of the calculations are all percentages. What can you conclude? - ✔✔The analyst used
the IRR method.
Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the
goal of the firm, which capital budgeting method should Talia use? - ✔✔Net present value (NPV)
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