Chapter Seven
Questions and Exercises
NOTE: Some instructors may choose to combine this chapter with chapter 14, Debt
Administration, because capital budgeting is (in practice) often related to debt policy.
1. The requests as submitted will obviously shatter the ceiling on capital expenditure per
year. Thus, the exercise requires some organized rescheduling and reductions according
to reasonable priorities. Issues to consider:
2. Average annual compound rate of return to 2010:
= 1.107 – 1 = 10.7%
3. Bank A:
4. r = r(1,000 / 55)1/45 – 1
= 1.0666 -1 = 0.0666 or 6.7%
5. Let X = Liability
6.
7.
Examination Questions
1. A lower discount rate applied to a given flow of returns in the future (e.g., $5,000 at the
end of 5 years, $10,000 at the end of 10 years, $15,000 at the end of 15 years, etc.) will
cause the present value of that flow to:
2. To what value would $20,000 compound in five years, assuming an annual discount rate
of 5%?
3. Advantages of a capital budget process include all the following EXCEPT:
4. Which of the following is not a characteristic of a capital expenditure, for the purposes of
government budgeting?
5. Which of the following statements is accurate?
6. Benefits received in the future are adjusted to their present value (discounted) because:
7. Which of the following would be a reasonable component of a state capital budget?
8. Why are the capital costs of long-term projects discounted to present value?
9. What is the Benefit Cost Ratio for a project costing $200,000 in the first year (no
discount) that produces a net benefit of $50,000/year for five years when the discount rate
is 5%?
10. What is the Net Present Value for a project costing $200,000 in the first year (no
discount) that produces a net benefit of $40,000/year for seven years when the discount
rate is 7%?
11. When evaluating the viability of a project, the test of economic efficiency requires that: