Question Details

What is the project- discounted payback 



1.	A major disadvantage of the payback period is that it

a.	Is useless as a risk indicator.
b.	Ignores cash flows beyond the payback period.
c.	Does not directly account for the time value of money.
d.	Statements b and c are correct.  


2.	Which of the following statements is most correct?

a.	If a project- internal rate of return (IRR) exceeds the cost of capital, then the project- net present value (NPV) must be positive.  
b.	If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c.	The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
d.	Statements a and c are correct.



3.	The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.  This investment will cost the firm $150,000 today, and the firm- cost of capital is 10 percent.  Assume cash flows occur evenly during the year, 1/365th each day.  What is the payback period for this investment?

a.	5.23 years
b.	4.86 years  
c.	4.00 years
d.	6.12 years

4.	Coughlin Motors is considering a project with the following expected cash flows:

		Project
	Year          Cash Flow	
0	-$700 million
1	200 million
2	370 million
3	225 million
4	700 million

The project- WACC is 10 percent.  What is the project- discounted payback?

a.	3.15 years
b.	4.09 years
c.	1.62 years
d.	3.09 years  
5.	As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

           		    Project X  	   Project Z
                  Year     Cash Flow     Cash Flow
                   0       -$100,000     -$100,000
                   1          50,000        10,000
                   2          40,000        30,000
         	      3          30,000         40,000
                   4          10,000        60,000

If Denver- cost of capital is 15 percent, which project would you choose?

a.	Neither project.  
b.	Project X, since it has the higher IRR.
c.	Project Z, since it has the higher NPV.
d.	Project X, since it has the higher NPV.




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