| Consider the following statements about capital budgeting. | |||||||||
| a. _______ is (are) more appropriate for long-term investments. | |||||||||
| b. _______ highlights risky investments. | |||||||||
| c. _______ shows the effect of the investment on the company’s accrual-based income. | |||||||||
| d. _______ is the interest rate that makes the NPV of an investment equal to zero. | |||||||||
| e. In capital rationing decisions, management must identify the discount rate when the _______ method is used. | |||||||||
| f. _______ provides management with information on how fast the cash invested will be recouped. | |||||||||
| g. _______ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset. | |||||||||
| h. _______ does not consider the asset’s profitability. | |||||||||
| i. _______ uses accrual accounting rather than net cash inflows in its computation. | |||||||||
| Requirement: | |||||||||
| 1. Fill in each statement with the appropriate capital budgeting method: Payback period, ROR, NPV, or IRR. |
| Water Planet is considering purchasing a water park in Atlanta, Georgia, for $1,870,000. The new facility will generate annual net cash inflows of $460,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 10% on investments of this nature. | ||||||||||||||
| Requirements: | ||||||||||||||
| 1. Compute the payback period, the ROR, the NPV, the IRR, and the profitability index of this investment. | ||||||||||||||
| 2. Recommend whether the company should invest in this project. |
