Homework
Answer all the following questions in full sentences:
I. Define capital expenditure?
II. Define operating expenditure?
III. What are the five steps of the capital budgeting process and explain each step?
IV. Define payback period?
V. What are the decision criteria for payback period? What are the weaknesses in using payback period?
VI. What are the decision criteria for NPV? How are they related to the firm's market value?
VII. Explain the similarities and differences between NPV, PI, EVA?
VIII. What are the decision criteria for IRR? How are they related to a firm's market value?
IX. Do the NPV and IRR always agree with respect to accept-reject decisions? With respect to ranking decisions? Explain
X. Define ranking approach?
XI. Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%.
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Project M
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Project N
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Initial Investment (CF)
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$28,000
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$27,000
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Year (t)
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Cash inflows (CFt)
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1
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$10,000
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$11,000
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|
2
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$10,000
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$10,000
|
|
3
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$10,000
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$9,000
|
|
4
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$10,000
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$8,000
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i. Calculate each projects payback period
ii. Calculate the net present value (NPV) for each project
Format your homework according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the homework, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.