Problem 5. For each capital budgeting project below, indicate whether management

Question

Problem 5. For each capital budgeting project below, indicate whether management should Accept or Reject by printing an A or R, respectively, in the space provided next each project. Select the best reason for the respective acti from the list of Reasons by printing a legible, CAPITAL uppercase letter in the space provided Possible Reasons A. the investment will generate a return that is less thar investment earns C. the investment will generate a return that is greater than the cost of capital D. profit is less than zero E. the investment will generate a return that is less than the return specified by management G the investment will generate a return that is greater than the return specified by management H. the hurdle rate is less than the minimum return specified by management J. the hurdle rate is greater than the minimum return specified by management X. Not enough information to make a decision Capital Budgeting Projects Trayham evaluated a potential investment and determined the net present value of the expected cash flows to be $400. The cost of capital is 5.8% and the hurdle rate is 7.5% Tonico evaluated a potential investment and determined the ARR to be 6.4%. The company's required rate of return is 6.1% and its cost of capital is 4.5% An investment project has an IRR of return of 7.1% The initial outlay for the investment is $246,000. The hurdle rate is 75.0% A or R? Reason

Explanation / Answer

In cases of capital budgeting, the minimum return can not be less than the cost on capital deployed by the company. The hurdle rate is the rate of return that the management has set for itself in the sense that company will discount all the cash flows at the hurdle rate to arrive at present value of cash flows.

Capital Budgeting Projects A or R? Reason Case 1 A C Case 2 A G Case 3 R E

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