Uses of Capital
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Question 1 of 8
1. Question
The Capital Budgeting Process
Rank the following types of capital projects from the highest uncertainty in future cash flows to the lowest uncertainty. (Drag and drop)
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Expansion project to grow the business
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Producing new product / entering new market
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Replacement of existing equipment with newer, more efficient equipment
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Replacement of faulty/aged equipment with the same type to keep the business running
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Question 2 of 8
2. Question
Basic Principles of Capital Allocation
Vanila Corp invested $100,000 into a building project, In addition, the firm paid $6,000 to a consultation firm to evaluate the project, and $4,000 in fees to a broker who helped to procure the land. What is the initial cost of the project from a capital budgeting perspective?
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Question 3 of 8
3. Question
Investment Decision Criteria
Titan Corp is evaluating a capital project which requires $800 initial investment. The project is expected to bring in $0 in the first year, $600 in the second, and a salvage value of $900 at the end of the third year. The cost of capital for Titan Corp is 19%.
What is the NPV of the project? (You may want to practise using the cash flow features in your calculator)
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Question 4 of 8
4. Question
Investment Decision Criteria
Cedar Corp is evaluating a capital project that requires an initial capital of $1200. The expected cash inflow is $800 at the end of the first year, and $1300 at the end of the second year.The company is required to pay a fee of $200 at the end of the third year to close the project.
What is the IRR of the project? (You may want to try using the cash flow features of your calculator)
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Question 5 of 8
5. Question
Investment Decision Criteria
A firm is evaluating 3 mutually exclusive projects. Which project should the firm choose based only on the following data?
Project NPV IRR A $230 8.5% B -$12 4.5% C $420 6.1% CorrectIncorrect -
Question 6 of 8
6. Question
Investment Decision Criteria
Happy Corp just announced a new project which has a positive NPV to the company. However, the company stock price fell immediately after the announcement. Which is the LEAST likely reason for the fall in share price?
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Question 7 of 8
7. Question
Real Options
Chung Gaming is considering an invitation to build a new casino in Megaland with 20-year license to operate the casino. The project requires an initial outlay of $300M, and is expected to bring in$35M per year for 20 years. The license has an option to expand the casino for $100M at the 10th year, but the payoff for exercising the option is unclear. Should Chung Gaming accept the project based on NPV analysis? (The project’s required rate of return is 8%)
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Question 8 of 8
8. Question
Common Pitfalls in Capital Budgeting
A manager is deciding between mutually-exclusive projects A and B, Which of the following is the MOST justifiable reason for choosing project A over project B.
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