Introduction to Finance

 1. 
(LO 17.1)
What is capital budgeting? Briefl y describe some 
characteristics of capital budgeting.
 2. 
(LO 17.1)
Why is proper management of fi xed assets crucial to 
the success of a fi rm?
 3. 
(LO 17.1)
How do mutually exclusive projects and independent 
projects diff er?
 4. 
(LO 17.1)
Where do businesses fi nd attractive capital budgeting 
projects?
 5. 
(LO 17.2)
Briefl y describe the fi ve stages in the capital budgeting 
process.
 6. 
(LO 17.2)
Identify some capital budgeting considerations unique 
to multinational corporations.
 7. 
(LO 17.2)
What kinds of fi nancial data are needed to conduct 
project analysis?
 8. 
(LO 17.2)
What kinds of nonfi nancial information are needed to 
conduct project analysis?
 9. 
(LO 17.3)
What is meant by a project’s net present value? How is 
it used for choosing among projects?
 10. 
(LO 17.4)
Identify the internal rate of return method and describe 
how it is used in making capital budgeting decisions.
 11. 
(LO 17.5)
How does the modifi ed internal rate of return measure 
improve upon the IRR measure?
 12. 
(LO 17.6)
Describe the term “profi tability index (PI),” and 
explain how it is used to compare projects.
 13. 
(LO 17.7)
Describe the payback period method for making capital 
budgeting decisions.
 14. 
(LO 17.8)
Why do the NPV, IRR, and PI technique sometimes 
rank projects diff erently?

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Problems
551
Problems
1. 
Find the net present value (NPV) and profi tability index (PI) of a 
project that costs $1,500 and returns $800 in year one and $850 in 
year two. Assume the project’s cost of capital is 8 percent.