CAPITAL BUDGETING

1. A corporation with a taxable income of $200,000 and a 40 percent tax rate is considering the sale of an asset.
The original cost of the asset is $10,000, with $6,000 of its depreciated. How much total after-tax cash will be
produced from the sale of the asset for $12,000?
a. $10,400 d. $(3,200)
b. $12,000 e. $8,800
c. $11,200

2. A machine that cost $50,000 and is fully depreciated is sold for $10,000. The $10,000 is then used as a down
payment on the purchase of a new machine costing $75,000. Assuming a 40% tax rate, the out-of-pocket cost
of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000

3. A machine that cost $50,000 and is fully depreciated is allowed as a $10,000 trade-in on a machine costing
$75,000. Assuming a 40% tax rate, the out-of-pocket cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000

4. Kline Corporation is expanding its plant, which requires an investment of $8 million in new equipment. Kline's
sales are expected to increase by $6 million per year as a result of the expansion. Cash investment in current
assets averages 30% of sales, and accounts payable and other current liabilities are 10% of sales. What is the
estimated total cash investment for this expansion?
A. $6.8 million. C. $9.2 million.
B. $8.6 million. D. $9.8 million.

5. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?

Year 1 Year 2 Year 3 Year 4

A. $400 $300 $200 $100

B. $100 $200 $300 $400

C. $250 $250 $250 $250

D. Any of these, since they each sum to $1,000.

6. A company considers a project that will generate cash sales of $50,000 per year. Fixed costs will be $10,000 per
year, variable costs will be 40% of sales, and depreciation of the equipment in the project will be $5,000 per
year. Taxes are 40%. The expected annual cash flow to the company resulting from the project is
A. $15,000 C. $19,000
B. $9,000 D. $14,000

7. Garfield Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year
and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is
$23,000, and Garfield expects to sell the equipment for $9,000 at the end of the tenth year. The equipment will
be depreciated over 7 years. The project requires a working capital investment of $7,000 at its inception and
another $5,000 at the end of year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the
project in the tenth year is (D)
a. $32,000 c. $20,000
b. $24,000 d. $11,000

8. Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the
next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net book
value of $0, a tax basis of $150,000, a cost to remove of $80,000, and scrap salvage value of $20,000.

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 Metrejean’s effective tax rate is 40%. What is the appropriate “end-of-life” cash flow related to these items that
should be used in the analysis?
a. $90,000 c. $24,000
b. $54,000 d. $(36,000)

9. If the tax rate is 40% and a company has $400,000 of income, a depreciation deduction of $80,000 would result
in a tax savings of
a. $52,800 c. $32,000
b. $48,000 d. $27,200

10. At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000,
$10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects
the time value of money in this situation?
A. $41,556. C. $32,400.
B. $47,700. D. $38,100.

11. A project requires an investment of $80,000 in equipment. Annual cash inflows of $16,000 are expected to occur
for the next 8 years. No salvage value is expected. The company uses the straight-line method of depreciation
with no mid-year convention. Ignore income taxes.

The accounting rate of return on original investment for the project is

a. 6.25% c. 16.00%
b. 7.50% d. 20.00%

12. The Mutya ng Pasig Company, a calendar company, purchased a new machine for P280,000 on January 1.
Depreciation for tax purposes will be P35,000 annually for eight years. The accounting (book value) rate of
return (ARR) is expected to be 20% on the initial increase in required investment. On the assumption of a
uniform cash inflow, this investment is expected to provide annual cash flow from operations, before 30 percent
income taxes, of
A. P80,000 C. P115,000
B. P91,000 D. P175,000

13. Whatney Company is considering the acquisition of a new, more efficient press. The cost of the press is
$360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line
depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax
rate. In evaluating equipment acquisition of this type, Whatney uses a goal of a 4-year payback period. To meet
Whatney’s desired payback period, the press must produce a minimum annual before-tax operating cash
savings of
a. $90,000 c. $114,000
b. $110,000 d. $150,000

14. The net initial investment for a piece of construction equipment is $1,000,000. Annual cash inflows are expected
to increase by $200,000 per year. The equipment has an 8-year useful life. What is the payback period?
a. 8.00 years c. 6.00 years
b. 7.00 years d. 5.00 years

15. Haig Aircraft is considering a project which has an up-front cost paid today at t = 0. The project will generate
positive cash flows of $60,000 a year at the end of each of the next five years. The project’s NPV is $75,000
and the company’s WACC is 10 percent. What is the project’s simple, regular payback?
a. 3.22 years d. 2.35 years
b. 1.56 years e. 4.16 years
c. 2.54 years

16. If an initial investment outlay is $60,000 and the cash flows projected are $15,000, $20,000, $25,000, and
$10,000 in each of the first four years, respectively, the payback period in years would be:
A. 3.3 D. 4.0
B. 3.0 E. 5.0
C. 2.5

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17. Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land,
which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected
at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm’s after-tax cash flow will be
increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a
10 percent rate annually over the next 10 years. What is the approximate payback period?
a. 2 years d. 8 years
b. 4 years e. 10 years
c. 6 years

18. Monck Management Services is considering an investment of $30,000. Data related to the investment are as
follows:

Cash Inflows
Year
1 $10,000
2 12,000
3 15,000
4 20,000
5 10,000
Cost of capital is 18 percent.

What is the payback period in years approximated to two decimal points assuming no taxes are paid?
a. 3.00 d. 2.22
b. 2.00 e. 5.00
c. 2.53

19. For $45,000, Harmon Company purchased a new machine with an estimated useful life of five years with no
salvage value. The machine is expected to produce cash flow from operations, net of income taxes, as follows:

1st year $ 9,000

2d year 12,000
3d year 15,000
4th year 9,000
5th year 8,000
Harmon will use the sum-of-the-years-digits' method to depreciate the new machine as follows:

1st year $15,000

2d year 12,000
3d year 9,000
4th year 6,000
5th year 3,000
What is the payback period?
A. 3 years C. 5 years
B. 4 years D. 2 years
D. 4.81 years.

20. Jordan Company is considering the purchase of a new machine for $200,000. The machine generates annual
revenues of $125,000 and annual expenses of $75,000 which includes $15,000 of depreciation. What is the
payback period in years on the machine approximated to one decimal point?
a. 1.6 d. 1.7
b. 3.1 e. 2.1
c. 4.0

21. Womark Company purchased a new machine on January 1 of this year for $90,000, with an estimated useful life
of 5 years and a salvage value of $10,000. The machine will be depreciated using the straight-line method. The
machine is expected to produce cash flow from operations, net of income taxes, of $36,000 a year in each of the
next 5 years. The new machine’s salvage value is $20,000 in years 1 and 2, and $15,0000 in years 3 and 4.
What will be the bailout period (rounded) for the new machine?

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 a. 1.4 years. c. 1.9 years.
b. 2.2 years. d. 3.4 years.

22. A project has the following cash flows:

Year Project Cash Flow

0 -$3,000
1 1,000
2 1,000
3 1,000
4 1,000

Its cost of capital is 10 percent. What is the project’s discounted payback period?
a. 3.00 years d. 3.75 years
b. 3.30 years e. 4.75 years
c. 3.52 years

23. Polk Products is considering an investment project with the following cash flows:

Year Project Cash Flow

0 -$100,000
1 40,000
2 90,000
3 30,000
4 60,000

The company has a 10 percent cost of capital. What is the project’s discounted payback?
a. 1.67 years d. 2.49 years
b. 1.86 years e. 2.67 years
c. 2.11 years

24. Shirt Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to
generate annual cash inflows of $300,000. The required rate of return is 12% and the current machine is
expected to last for four years. What is the maximum dollar amount Shirt Company would be willing to spend for
the machine, assuming its life is also four years? Income taxes are not considered.
a. $507,000 c. $791,740
b. $720,600 d. $911,100

25. Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating
costs by $30,000 in each of the first 2 years and by $20,000 in year 3. Present values of an annuity of $1 at
14% are:

Period 1 2 3

Factor 0.88 1.65 2.32

Using a 14% cost of capital, what is the present value of these future savings?
a. $59,600 c. $62,900
b. $60,800 d. $69,500

26. Shannon Industries is considering a project which has the following cash flows:
Year Project Cash Flow
0 ?

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 1 $2,000
2 3,000
3 3,000
4 1,500
The project has a payback of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net
present value NPV?
a. $ 577.68 d. $2,761.32
b. $ 765.91 e. $3,765.91
c. $1,049.80

27. You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per
year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the
cash flows occur at the end of each year, then how much should you be willing to pay for this investment?

You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per
year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the
cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
a. $15,819.27 d. $38,000.00
b. $21,937.26 e. $52,815.71
c. $32,415.85

28. A capital investment project requires an investment of $50,000 and has an expected life of 4 years. Annual cash
flows at the end of each year are expected to be as follows:
Amount
Year
1 $20,000
2 24,000
3 38,000
4 28,000

Ignoring income taxes, the net present value of the project using a 6% discount rate is
a. $44,316 c. $34,148
b. $12,396 d. $(14,148)

29. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing
machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now,
it may be sold for $60,000. The new machine will cost $200,000 and an additional cash investment in working
capital of $60,000 will be required. The new machine will reduce the average amount of time required to wash
clothing and will decrease labor costs. The investment is expected to net $50,000 in additional cash inflows
during the year of acquisition and $150,000 each additional year of use. The new machine has a three-year life,
and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the
end of each year. Income taxes are not considered in this problem. The working capital investment will not be
recovered at the end of the asset's life.

What is the net present value of the investment, assuming the required rate of return is 10%? Would the
company want to purchase the new machine?
a. $82,000; yes c. $(50,000); yes
b. $50,000; no d. $(82,000); no

30. R. D. Inc. purchased a machine for $240,000. The machine has a useful life of six years, no salvage value,
and straight-line depreciation is to be used. The machine is expected to generate cash flows from
operations, net of income tax, of $70,000 in each of the six years. R. D. Inc's cost of capital is 12%. The net
present value is:
A. $180,000 D. $121,680

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 B. $35,490 E. $123,330
C. $47,770

31. Drillers Inc. is evaluating a project to produce a high-tech deep-sea oil exploration device. The investment
required is $80 million for a plant with a capacity of 15,000 units a year for 5 years. The device will be sold
for a price of $12,000 per unit. Sales are expected to be 12,000 units per year. The variable cost is $7,000
and fixed costs, excluding depreciation, are $25 million per year. Assume Drillers employs straight-line
depreciation on all depreciable assets, and assume that they are taxed at a rate of 36%. If the required rate
of return is 12%, what is the approximate NPV of the project?
A. $17,225,000 C. $26,780,000
B. $21,511,000 D. $56,117,000

32. The following forecasts have been prepared for a new investment by Oxford Industries of $20 million with an 8-
year life:
Pessimistic Expected Optimistic
Market size 60,000 90,000 140,000
Market share, % 25 30 35
Unit price $750 $800 $875
Unit variable cost $500 $400 $350
Fixed cost, millions $7 $4 $3.5
Assume that Oxford employs straight-line depreciation, and that they are taxed at 35%. Assuming an opportunity
cost of capital of 14%, what is the NPV of this project, based on expected outcomes?
A. $2,626,415 C. $6,722,109
B. $4,563,505 D. $8,055,722

33. For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before
adjusting for $5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an
ordinary annuity of $1 per year at 10% for 2 years is 1.74. What is the lease’s after-tax present value using a
10% discount factor?
a. $2,610 c. $9,570
b. $4,350 d. $11,310

34. Mesa Company is considering an investment to open a new banana processing division. The project in question
would entail an initial investment of $45,000, and as a result of the project cash inflows of $20,000 can be
expected in each of the next 3 years. The hurdle rate is 10%. What is the profitability index for the project?
A. 1.0784 C. 1.1379
B. 1.1053 D. 1.1771

35. A firm is considering a project with annual cash flows of $40,000. The project would have a 10-year life, and the
company uses a discount rate of 8%. Ignoring income taxes, what is the maximum amount the company could
invest in the project and the project still be acceptable (rounded)?
a. $400,000 c. $203,210
b. $268,400 d. $363,604

36. Conte Inc. invested in a machine with a useful life of six years and no salvage value. The machine is expected
to produce annual cash flows from operations, net of income tax, of $2,000. If the estimated internal rate of
return is 10%, the amount of the original investment was:
A. $9,000 D. $5,640
B. $11,280 E. $8,710
C. $12,000

37. Kern Co. is planning to invest in a 2-year project that is expected to yield cash flows from operations, net of
income taxes, of $50,000 in the first year and $80,000 in the second year. Kern requires an internal rate of
return of 15%. The present value of $1 for one period at 15% is 0.870 and for two periods at 15% is 0.756. The
future value of $1 for one period at 15% is 1.150 and for two periods at 15% is 1.323. The maximum that Kern
should invest immediately is
a. $81,670 c. $130,000

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 b. $103,980 d. $163,340

38. Payback Company is considering the purchase of a copier machine for P42,825. The copier machine will be
expected to be economically productive for 4 years. The salvage value at the end of 4 years is negligible. The
machine is expected to provide 15% internal rate of return. The company is subject to 40% income tax rate.
The present value of an ordinary annuity of 1 for 4 periods is 2.85498. In order to realize the IRR of 15%, how
much is the estimated before-tax cash inflow to be provided by the machine?
A. P17,860 C. P25,000
B. P15,000 D. P35,700

39. Para Co. is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
What would be the annual savings needed to make the investment realize a 12% yield?
a. $8,189 c. $12,306
b. $11,111 d. $13,889

40. What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years?
A. 10% C. 22%
B. 12% D. 27%

41. Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per
year for 5 years?
A. NPV = $36,274. C. IRR = 1.4%.
B. NPV = $20,000. D. IRR is greater than 10%.

42. A firm is considering a project requiring an investment of $100,000. The project would generate annual cash
inflows of $27,739 per year for the next 5 years. The company uses the straight-line method of depreciation with
no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is
a. 9% d. 16%
b. 10% e. 28%
c. 12%

43. Foster Company is considering the purchase of a new machine for $38,000. The machine would generate a net
cash inflow of $11,607 per year for five years. At the end of five years, the machine would have no salvage
value. The company’s cost of capital is 12 percent. The company uses straight-line depreciation with no mid-
year convention.

What is the internal rate of return for the machine rounded to the nearest percent, assuming no taxes are paid?
a. 12% c. 14%
b. 18% d. 16%

44. Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been
investigating a new piece of machinery for its production department. The old equipment has a remaining life of
three years and the new equipment has a value of $52,650 with a three-year life. The expected additional cash
inflows are $25,000 per year. What is the internal rate of return?
a. 20% c. 10%
b. 16% d. 8%

45. Whitney Crane Inc. has the following independent investment opportunities for the coming year:

Project Cost Annual Cash Inflows Life (Years) IRR

A $10,000 $11,800 1
B 5,000 3,075 2 15
C 12,000 5,696 3
D 3,000 1,009 4 13
The IRRs for Projects A and C, respectively, are:

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 a. 16% and 14% d. 18% and 13%
b. 18% and 10% e. 16% and 13%
c. 18% and 20%

46. The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected
to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s
cost of capital is 14 percent and its tax rate is 40 percent, what is the project’s IRR?
a. 8% d. -5%
b. 14% e. 12%
c. 18%

47. Two fellow financial analysts are evaluating a project with the following net cash flows:

Year Cash Flow

0 -$ 10,000
1 100,000
2 -100,000

One analyst says that the project has an IRR of between 12 and 13 percent. The other analyst calculates an
IRR of just under 800 percent, but fears his calculator’s battery is low and may have caused an error. You agree
to settle the dispute by analyzing the project cash flows. Which statement best describes the IRR for this
project?
a. There is a single IRR of approximately 12.7 percent.
b. This project has no IRR, because the NPV profile does not cross the X axis.
c. There are multiple IRRs of approximately 12.7 percent and 787 percent.
d. This project has two imaginary IRRs.
e. There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this
project.

48. Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated
production line project it is considering. The project has a cost of $275,000 and is expected to provide after-tax
annual cash flows of $73,306 for eight years. The firm’s management is uncomfortable with the IRR
reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the
firm of 12 percent. What is the project’s MIRR?
a. 15.0% d. 16.0%
b. 14.0% e. 17.0%
c. 12.0%

49. You just passed the CPA licensure examination and took your oath. As you started your practice, Kon Fuse, Inc.
came to you for help in establishing a minimum desired rate of return to be used in the evaluation of a capital
project with a five year life. The following data were provided:

Inflation rate for the past 5 years 13%

Expected inflation rate for the next five years 9%
“Risk-free” element 5%
“Risk” premium demanded for the project 7%
You will advice the client to consider a minimum desired rate of return of
a. 20% c. 16%
b. 21% d. 25%

50. Suzie owns a computer reselling business and is expanding her business. Suzie is presented with one proposal,
Proposal A, such that the estimated investment for the expansion project is $85,000, and it is expected to
produce cash flows after taxes of $25,000 for each of the next 6 years. An alternate proposal, Proposal B,
involves an investment of $32,000 and after-tax cash flows of $10,000 for each of the next 6 years. The cost of
capital that would make Suzie indifferent between these two proposals lies between
a. 10% and 12% c. 16% and 18%
b. 14% and 16% d. 18% and 20%

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51. The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies have submitted bids
to Cliff Kraven, the postal inspector responsible for choosing a machine. A cash flow analysis of the two
machines indicates the following:
Year Machine A Machine B
0 -$30,000 -$30,000
1 0 13,000
2 0 13,000
3 0 13,000
4 60,000 13,000
If the cost of capital for the Postal Service is 8%, which of the two mail sorters should Cliff choose and why?
A. Machine A, because NPVA > NPVB, by $1,044.
B. Machine B, because NPVA < NPVB, by $22,000.
C. Machine A, because NPVA > NPVB, by $8,000.
D. Machine B, because IRRA < IRRB.

52. Union Electric Company must clean up the water released from its generating plant. The company's cost of
capital is 11 percent for average projects, and that rate is normally adjusted up or down by 2 percentage points
for high- and low-risk projects. Clean-Up Plan A, which is of average risk, has an initial cost of $10 million, and
its operating cost will be $1 million per year for its 10-year life. Plan B, which is a high-risk project, has an initial
cost of $5 million, and its annual operating cost over Years 1 to 10 will be $2 million. What is the approximate PV
of costs for the better project?
A. -$5.9 million. C. -$16.8 million.
B. -$15.9 million. D. -$17.8 million.

53. A company's marginal cost of new capital (MCC) is 10% up to $600,000. MCC increases .5% for the next
$400,000 and another .5% thereafter. Several proposed capital projects are under consideration, with projected
cost and internal rates of return (IRR) as follows:
Project Cost IRR
A $100,000 10.5%
B $300,000 14.0%
C $450,000 10.8%
D $350,000 13.5%
E $400,000 12.0%
What should the company's capital budget be?
A. $0 C. $1,500,000
B. $1,050,000 D. $1,600,000

54. Five mutually exclusive projects had the following information:

A B C D E
NPV $500 $(200) $100 $200 $1,000
IRR 12% 8% 11% 13% 10%
Which project is preferred?
a. A d. D
b. B e. E
c. C

55. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects
with the following net cash flows:
Year Project X Cash Flow Project Z Cash Flow
0 -$100,000 -$100,000
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000
If Denver’s cost of capital is 15 percent, which project would you choose?
a. Neither project. d. Project X, since it has the higher NPV.
b. Project X, since it has the higher IRR. e. Project Z, since it has the higher IRR.

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 c. Project Z, since it has the higher NPV.

56. Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:
Year Project A Cash Flow Project B Cash Flow
0 ($100,000) ($100,000)
1 39,500 0
2 39,500 0
3 39,500 133,000
Based only on the information given, which of the two projects would be preferred, and why?
a. Project A, because it has a shorter payback period.
b. Project B, because it has a higher IRR.
c. Indifferent, because the projects have equal IRRs.
d. Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both
cases.
e. Choose neither, since their NPVs are negative.

57. What is the expected value of NPV (to the nearest dollar) for the following situation? The firm expects an NPV of
$10,000 if the economy is exceptionally strong (40% probability), an NPV of $4,000 if the economy is normal
(40% probability), and an NPV of -$2,000 if the economy is exceptionally weak (20% probability).
A. $5,600 C. $6,000
B. $5,200 D. None of the answers are correct.

58. Jackson Corporation is evaluating the following four independent, investment opportunities:
Project Cost Rate of Return
A $300,000 14%
B 150,000 10
C 200,000 13
D 400,000 11
Jackson’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the
company’s debt is 10 percent. Jackson will incur flotation costs for a new equity issuance of 12 percent. The
growth rate is a constant 6 percent. The stock price is currently $35 per share for each of the 10,000 shares
outstanding. Jackson expects to earn net income of $100,000 this coming year and the dividend payout ratio will
be 50 percent. If the company’s tax rate is 30 percent, which of the projects will be accepted?
a. Project A
b. Projects A and C
c. Projects A, C, and D
d. All of the investment projects will be taken.
e. None of the investment projects will be taken.

59. Photon Corporation has a target capital structure that consists of 60 percent equity and 40 percent debt. The firm
can raise an unlimited amount of debt at a before-tax cost of 9 percent. The company expects to retain earnings
of $300,000 in the coming year and to face a tax rate of 35 percent. The last dividend (D 0) was $2 per share and
the growth rate of the company is constant at 6 percent. If the company needs to issue new equity, then the
flotation cost will be $5 per share. The current stock price (P0) is $30. Photon has the following investment
opportunities:

Project Cost IRR

1 $100,000 10.5%
2 200,000 13.0
3 100,000 12.0
4 150,000 14.0
5 75,000 9.0
What is the company’s optimal capital budget?
a. $625,000 d. $550,000
b. $450,000 e. $150,000
c. $350,000

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60. The investment opportunity schedule (IOS) shows, in rank order, how much money the company would invest at
different rates of return. Such schedules can be drawn only for a set of projects that
a. Have the same investment cost. c. Have the same net present value.
b. Are mutually exclusive. d. Are independent.

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