Capital Budgeting Techniques Practice Questions and Problems

Created by Pamela Peterson Drake

Capital Budgeting Techniques Practice Questions

  1. Is it possible for a project to have a payback period of 2 years and yet have a negative net present value? Explain.
  2. What is the decision-criteria for the profitability index? Does this criteria agree with that of the net present value technique?
  3. Is it possible for a project's IRR to be less than its MIRR? Explain.
  4. 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

  1. Consider the project with the following expected cash flows:
    YearCash flow
    0-$200,000
    1 +50,000
    2 +50,000
    3 +$200,000

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

  2. Consider a project with the expected cash flows:
    YearCash flow
    0-$50,000
    1+50,000
    2+100,000
    3-$100,000

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

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