The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000; it is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's cost of capital is 14% and its tax rate is 40%, what is the project's IRR?
A) 8%
B) 14%
C) 18%
D) -5%
The owner of a small construction business has asked you to evaluate the purchase of a new front end loader. You have determined that this investment has a large, positive, NPV, but are afraid that your client will not understand the method. A good alternative method in this circumstance might be
A) the payback method.
B) the profitability index.
C) the internal rate of return.
D) the modified internal rate of return.
Whenever the IRR on a project equals that project's required rate of return
A) the NPV equals 0.
B) The NPV equals the initial investment.
C) The profitability index equals 0.
D) The NPV equals 1.
Aroma Candles, Inc. is evaluating a project with the following cash flows. Calculate the IRR of the project. (Round to the nearest whole percentage.)
Year Cash Flows
0 ($120,000)
1 $30,000
2 $70,000
3 $90,000
A) 18%
B) 23%
C) 28%
D) 33%
Aroma Candles, Inc. is evaluating a project with the following cash flows. The project involves a new product that will not affect the sales of any other project. Which two methods would always lead to the same accept/reject decision for this project, regardless of the discount rate.
Year Cash Flows
0 ($120,000)
1 $30,000
2 $70,000
3 $90,000
A) Payback and Discounted Payback
B) NPV and Payback
C) NPV and IRR
D) Discounted Payback and IRR
Which of the following is considered to be a deficiency of the IRR?
A) It fails to properly rank capital projects.
B) It could produce more than one rate of return.
C) It fails to utilize the time value of money.
D) It is not useful in accounting for risk in capital budgeting.
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