Finc 5000 Homework Assignment for Week 6:

FINC 5000 Homework Assignment for Week 6:
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For Week 6, please turn in the answers to the following questions:

1. List the three steps that make up the general approach to capital budgeting.
2. Define an “Incremental cash flow” as the term is used in capital budgeting
3. Define the payback period method in capital budgeting and state the payback period decision rule.
4. What is the payback period of the following project?

Initial Investment:             $60,000
Projected life:                       7 years
Net cash flows each year:   $14,000

5. Define the discounted payback period method in capital budgeting and state the payback period decision rule.
6. What is the discounted payback period of the project in Question 4, assuming your cost of capital is 7%?

7. Define the Net present Value (NPV) method in capital budgeting and state the NPV decision rule.   In economic terms, what does the NPV amount represent?
8. Your firm is looking at a new investment opportunity, Project Z, with net cash flows as follows:

---- Net Cash Flows ----
        Project Z

            Initial Cost at T-0 (Now)               ($100,000)
cash inflow at the end of year 1           50,000
cash inflow at the end of year 2           40,000
cash inflow at the end of year 3           30,000

Calculate project Z's Net Present Value (NPV), assuming your firm’s required rate of return is 8%.
9. What is a “profitability index” (PI) as the term is used in capital budgeting?
10. What is the Profitability Index of project Z in question 8?
11. Consider Project Z and another Project, Project N, with net cash flows as follows:
a. Construct NPV Profiles for these two projects.   Are we to assume it’s still at 8%?

b. If the two projects were mutually exclusive, which would you accept if your firm’s cost of capital were 5%?   Which would you accept if your firm’s cost of capital...