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Description

Answer the following questions and complete the following problems, as applicable.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

**Note:** In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

- Question 1:
- Proficient-level: Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV?
- Distinguished-level: Identify the NPV method's strengths and weaknesses.

- Question 2:
- Proficient-level: What is the payback period statistic? What is the acceptance benchmark when using the payback period statistic?
- Distinguished-level: Identify what problem of the Payback Period method is corrected by using the Discounted Payback Period method.

- Question 3:
- Proficient-level: Describe the Internal Rate of Return (IRR) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using IRR?
- Distinguished-level: Explain how the NPV and IRR methods are similar and how they are different.

- Question 4:
- Proficient-level: Describe the Modified Internal Rate of Return (MIRR) method for determining a capital budgeting project's desirability. What are MIRR's strengths and weaknesses?
- Distinguished-level: Explain the differences in the reinvestment rate assumption that distinguishes MIRR from IRR.

- Question 5:
- Proficient-level: Compute the NPV statistic for Project Y and tell [advise] whether the firm should accept or reject the project with the cash flows shown in the chart if the appropriate cost of capital is 12 percent.
- Distinguished-level: Explain how decreases in the cost of capital lead to an increase in the number of approved projects.

Time | 0 | 1 | 2 | 3 | 4 |
---|---|---|---|---|---|

Cash Flow | -$8,000 | $3,350 | $4,180 | $1,520 | $300 |

(Cornett, Adair, & Nofsinger, 2016, p. 332).

- Question 6:
- Proficient-level: Compute the payback period statistic for Project A and recommend whether the firm should accept or reject the project with the cash flows shown in the chart if the maximum allowable payback is four years.
- Distinguished-level: If the discounted payback period were computed, identify if it would be less than, equal to, or greater than the non-discounted payback period.

Time | 0 | 1 | 2 | 3 | 4 | 5 |
---|---|---|---|---|---|---|

Cash Flow | -$1,000 | $350 | $480 | $520 | $300 | $100 |

(Cornett, Adair, & Nofsinger, 2016).

Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). *M: Finance* (3rd ed.). New York, NY: McGraw-Hill.

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