Chapter 11 Capital Budgeting Assigned Problem 1

Chapter 11 Capital Budgeting Assigned Problem 1 in $2 OnlyChapter 11 Capital Budgeting Assigned Problem 1

Winston clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 12 percent.

a. Which is the project’s payback?

b. What is the project’s NPV? It’s IRR?

c. Is the project financially acceptable? Explain your answer.

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FIN 534 Week 6 Homework Chapter 11

FIN 534 Week 6 Homework Chapter 11

1. Which of the following statements is CORRECT?

a. An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.

c. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.

d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

e. Identifying an externality can never lead to an increase in the calculated NPV.