Question

Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal.

a. 90

b. 100

c. 110

d. 115

The primary limitation of the cash payback method is that it

a. Uses before-tax cash flows.

b. Identifies the length of time it will take to recover the investment outlay in cash.

c. Ignores the profitability of one investment project as compared to another.

d. Involves a more sophisticated analysis than the net present value method.

Which of the following is not one of the considerations given to capital budgeting proposals?

Select one:

A. Whether there is an immediate need to replace or repair critical assets

B. Whether the proposal is in compliance with capital budgeting policies

C. Whether the proposal would meet the established minimum return on capital

D. Whether the proposal is congruent with the firm's long-term goals

E. All of the above are considerations given to capital budgeting proposals

Answer 1

1)
Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal. - d. 115

Excess Prsent Value Index = PV of cash inflows / PV of cash outflows, Thus higher the ratio more will be the PV of Inflow as compare to initial investment, which indicates higher NPV. So one should go with highest index ratio

2)
The primary limitation of the cash payback method is that it - c. Ignores the profitability of one investment project as compared to another.

Cash Payback focus on how soon invested money will be recovered, however it does ignore the size of the money invested, returned and actual returned earned on that project

3)
Which of the following is not one of the considerations given to capital budgeting proposals? E. All of the above are considerations given to capital budgeting proposals

Capital budgeting involves high amount of investment, and obviously these are made for long term and with the intent to add value to organization. Thus they need to be carefully analysed not only in terms of need of investment and of return on capital but also to compliances and long term visions and missions of organization