A College Intern Working at Anderson Paints Evaluated Potential Investments

question 50

Multiple Choice

A college intern working at Anderson Paints evaluated potential investments that is, capital budgeting projects using the firm's average required rate of return (WACC) , and he produced the following report for the capital budgeting manager:
$\begin{array}{llll}\underline{\text { Project }} &\underline{\text { NPV } }&\underline{\text { IRR }} & \underline{\text { Risk }} \\\text { LOM } & \$ 1,500 & 12.5 \% & \text { High } \\\text { QUE } & 0 & 11.0 & \text { Low } \\\text { YUP } & 800 & 9.5 & \text { Averag } \\\text { DOG } & (450) & 10.0 & \text { Low }\end{array}$
The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision.If a project has a risk that is different from average, she adjusts the average required rate of return by adding or subtracting 2 percentage points.If the four projected listed above are independent, which one(s) should the capital budgeting manager recommend be purchased?

• A)Project LOM only, because it has both the highest NPV and the higher IRR.
• B)Projects LOM, QUE, and YUP, because they all have positive NPVs and their IRRs.
• C)Projects DOG and QUE, because their IRRs are greater than their risk-adjusted discount he projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
• D)Projects QUE, YUP, and DOG, because their IRRs are greater than their risk-adjusted discount rates that is, the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them.
• E)There is not enough information to answer this question, because the firm's average required rate of return cannot be determined.

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Definitions:

Operating Lease

An Operating Lease is a leasing agreement allowing the use of an asset but does not convey rights of ownership, with the lease term substantially less than the asset's economic life.

Interest Revenue

Income earned by a company for lending money or through investments in interest-bearing assets.

Lease Rental Revenue

Income earned by a lessor from leasing out assets to lessees, under the terms specified in lease agreements.

Lease Receivable

An asset account on the balance sheet that represents the amount of rent due to the lessor from the lessee according to the lease agreement.