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Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV?
2. What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic?
3. Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR?
4. Describe the Modified Internal Rate of Return (MIRR) method for determining a capital budgeting project's desirability. What are MIRR's strengths and weaknesses?
5. Compute the NPV statistic for Project Y and tell [advise] whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.
Project Y
Time |
0 |
1 |
2 |
3 |
4 |
Cash Flow |
-$11,000 |
$3,350 |
$4,180 |
$1,520 |
$2,000 |
6. Compute the payback period statistic for Project B and decide whether the firm should accept or reject the project with the cash flows shown below if the maximum allowable payback is three years.
Project B
Time |
0 |
1 |
2 |
3 |
4 |
5 |
Cash Flow |
-$11,000 |
$3,350 |
$4,180 |
$1,520 |
$950 |
$1,000 |
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