What are mutually exclusive projects? How might they complicate the capital-budgeting process?
What will be an ideal response?
When two projects are judged acceptable by the discounted cash flow criteria, it may be necessary to select only one of
them because they are mutually exclusive. Mutually exclusive projects are projects that, if undertaken, would serve the
same purpose.
When dealing with mutually exclusive projects, there are three general types of ranking problems:
• The size-disparity problem occurs when mutually exclusive projects of unequal size are examined. The project with
the largest NPV should be selected, provided there is no capital rationing. When capital rationing exists, the firm
should select the set of projects with the largest NPV.
• The time-disparity problem and the conflicting rankings that accompany it result from the differing reinvestment
assumptions made by the net present value and internal rate of return decision criteria. The NPV criterion assumes that
cash flows over the life of the project can be reinvested at the required rate of return or cost of capital, whereas the IRR
criterion implicitly assumes that the cash flows over the life of the project can be reinvested at the IRR. One possible
solution to this problem is to use the MIRR method that allows you to explicitly state the rate at which cash flows over
the life of the project will be reinvested.
• The final ranking problem arises when comparing mutually exclusive projects with different life spans. The two
most common ways of comparing these mutually exclusive projects are by creating a replacement chain to equalize
the life spans of projects or by calculating the equivalent annual annuity (EAA) of the projects. Using a replacement
chain, calls for the creation of a chain cycle for project A; that is, we assume that project A can be replaced with a
similar investment. One problem with replacement chains is that, depending on the life of each project, it can be quite
difficult to come up with equivalent lives. Calculating the equivalent annual annuity we determine the project's
equivalent annual annuity (EAA). A project's EAA is simply an annuity cash flow that yields the same present value as
the project's NPV. To calculate an EAA, we need only calculate a project's NPV and then determine what annual
annuity (PMT on your financial calculator) it is equal to. This can be done in two steps as follows: STEP 1 Calculate the
project's NPV. STEP 2 Calculate the EAA.
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Answer the following statements true (T) or false (F)
1. A defensive lockout occurs when an employer refuses to allow employees to work to prevent losses from an expected strike. 2. Bayfield & Berry's, a large retail company, enters into negotiations with a union in September. With the holiday season a mere 3 months away, the company is fearful of a strike. To preempt such a strike and pressure the union into a favorable settlement, they decide to stage a lockout in October. This is an example of a defensive lockout. 3. It is legal for an employer to hire permanent strike replacements during a lockout. 4. At the end of the NFL lockout of referees, the NFL could have kept the replacement referees on staff without hiring back the union referees if they had wanted to do so. 5. The PATCO strike in 1981 is commonly recognized as a turning point for labor in that it marks the start of a rise in the use of permanent strike replacements as a way to break a union.
BluTech performed statistical analyses to assess the validity of the tests it used to screen job candidates. One of those tests returned a validity coefficient of -1.00. This indicates
A. a complete lack of relationship. B. an error in the statistical methodology. C. a perfect negative relationship. D. a perfect positive relationship.
Under what circumstances may the buyer seek the remedy of replevin?
a. Where the buyer has been unable to obtain cover. b. Where the goods have been shipped under reservation of a security interest in the seller and that interest has been satisfied. c. Where the goods are specially manufactured but can be purchased from another source. d. Both if the buyer has been unable to obtain cover and where the goods have been shipped under reservation of a security interest in the seller and that interest has been satisfied.
Given the following financial statements for ARGON Corporation, and assuming that ARGON
paid a common dividend of $80,000 in 2010, what is the company's financing cash flow for 2010? Income Statement Balance Sheet Year Ended 12/31/10 12/31/2010 12/31/2 Sales $1,300,000 Current Assets $50,000 $45 Cost of Goods Sold 750,000 Gross Fixed Assets 880,000 650 Operating Expenses 200,000 Less Accumulated Depreciation 450,000 350 Depreciation Expense 100,000 Fixed Assets 430,000 350 EBIT 250,000 Total Assets $480,000 $395 Interest Expense 50,000 EBT 200,000 Current Liabilities $35,000 $50 Taxes 80,000 Long-term Debt 330,000 270 Net Income $120,000 Common Stock 5,000 5 Retained Earnings 110,000 70 Total Liabilities & Equity $480,000 $395 A) -$15,000 B) -$65,000 C) -$10,000 D) -$70,000