Saint leo MBA 570 quiz 3

shows the payback period – the point at which NPV is positive.
shows the internal rate of return – the point at which NPV is zero.
shows the NPV over a range of discount rates.
shows the internal rate of return – the point at which NPV is zero and shows the NPV over a range of discount rates.

The IRR investment rule will identify the correct decision in many, but not all, situations.
By setting the NPV equal to zero and solving forr, we find the IRR.
If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
The simplest investment rule is the NPV investment rule.

It is possible that an IRR does not exist for an investment opportunity.
If the payback period is less than a pre-specified length of time, then you accept the project.
The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity, then you should undertake the investment opportunity.
It is possible that there is no discount rate that will set the NPV equal to zero.

If there is a fixed supply of resource available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed.
Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources.
If there is a fixed supply of resources available so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision.
The profitability index is calculated as the NPV divided by the resources consumed by the project.

Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project.
Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis.
Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.
When computing the incremental earnings of an investment decision, we should include all changes between the firm’s earnings with the project versus without the project.

Many projects use a resource that the company already owns.
When evaluating a capital budgeting decision, we generally include interest expense.
Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.
As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

$24.0 million
$56.0 million
$31.5 million
$13.5 million

Depreciation is a method used for accounting and tax purposes to allocate the original purchase cost of the asset over its life.
Sometimes the firm explicitly forecast free cash flow over a shorter horizon than the full horizon of the project or investment.
Earnings include the cost of capital investments, but do not include non-cash charges, such as depreciation.
Firms often report a different depreciation expense for accounting and for tax purposes.

$650,000
$0
$100,000
$750,000

scenario analysis.
IRR analysis.
accounting break-even analysis.
sensitivity analysis.