## Capital Budgeting Techniques Practice Questions and Problems

Created by Pamela Peterson Drake

### Capital Budgeting Techniques Practice Questions

- Is it possible for a project to have a payback period of 2 years and yet have
a negative net present value? Explain.
- What is the decision-criteria for the profitability index? Does this
criteria agree with that of the net present value technique?
- Is it possible for a project's IRR to be less than its MIRR? Explain.
- Is it possible for a project to not pay back, according to the
discounted payback period method, and yet have a positive net present value? Explain.

### Capital Budgeting Practice Problems

- Consider the project with the following expected cash flows:
Year | Cash flow |

0 | -$200,000 |

1 | +50,000 |

2 | +50,000 |

3 | +$200,000 |

- If the discount rate is 0%, what is the project's net present value?
- If the discount rate is 5%, what is the project's net present value?
- What is this project's internal rate of return?
- If the reinvestment rate is 5%, what is this project's modified internal
rate of return?

- Consider a project with the expected cash flows:
Year | Cash flow |

0 | -$50,000 |

1 | +50,000 |

2 | +100,000 |

3 | -$100,000 |

- What is this project's internal rate of return?
- If the discount rate is 5%, what is this project's net present value?

- A project requiring a $1 million investment has a profitability index of
0.96. What is its net present value?

Solutions