the following statements about capital budgeting.
a. _______ is (are) more
appropriate for long-term investments.
b. _______ highlights risky
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
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.
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.
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.