"Corporate finance"exercise:Capital Budgeting

来源：正保会计网校 2020-09-15

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Questions 1:

A firm is considering a project that would require an initial investment of THB270 million (Thai baht). The project will help increase the firm’s after-tax net cash flows by THB30 million per year in perpetuity, and it is found to have a negative NPV of THB20 million. The IRR (%) of the project is closest to:

A 、11.1%.

B、 10.3%.

C 、12.0%.

Questions 2:

Which of the following is most likely associated with a strong corporate code of ethics? The code of ethics is:

A 、updated at least every 10 years.

B 、signed by employees on a voluntary basis.

C 、developed and its implementation overseen by the governance committee.

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. The IRR is the discount rate that makes the NPV = 0. Because the cash flow stream is in perpetuity, it can be solved as follows: 0 = –270 + (30/IRR) IRR = 11.1%

B is incorrect. It assumes a positive NPV of 20 and solves for IRR = 30/290 = 10.34%.

C is incorrect. It assumes a negative NPV of 20 and solves for IRR = 30/250 = 12.00%

【Answer to question 2】C

【analysis】

C is correct. The governance committee typically develops and oversees implementation of the company’s code of ethics.

A is incorrect. The code of ethics should be reviewed on a regular basis to incorporate relevant developments and new regulatory requirements. A review period of 10 years is too long.

B is incorrect. Codes of ethics establish the company’s values and standards of ethical behavior and must be followed

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