Question 1

Capital rationing may be imposed because of all of the following EXCEPT

Accepted Answer

A)  capital market conditions are poor. 
B)  management has a fear of debt. 
C)  stockholder control problems prevent issuance of additional stock. 
D)  the company's stock price is at an historically high level. 
A)  capital market conditions are poor. 
B)  management has a fear of debt. 
C)  stockholder control problems prevent issuance of additional stock. 
D)  the company's stock price is at an historically high level.

Question 2

Mutually exclusive projects occur when

Accepted Answer

A)  projects have uneven cash flows. 
B)  more than one firm can use the projects. 
C)  a set of investment proposals perform essentially the same task. 
D)  projects are independent. 
A)  projects have uneven cash flows. 
B)  more than one firm can use the projects. 
C)  a set of investment proposals perform essentially the same task. 
D)  projects are independent.

Question 3

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

Accepted Answer

A) True 
 B)False

Question 4

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

Accepted Answer

A) True 
 B)False

Question 5

The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.

Accepted Answer

A) True 
 B)False

Question 6

Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

Accepted Answer

A) True 
 B)False

Question 7

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's profitability index?

Accepted Answer

A)  1.21 
B)  1.26 
C)  1.43 
D)  1.69 
A)  1.21 
B)  1.26 
C)  1.43 
D)  1.69

Question 8

Under what condition would you NOT accept a project that has a positive net present value?

Accepted Answer

A)  If the project has a profitability index less than zero. 
B)  If two or more projects are mutually inclusive. 
C)  If the firm is limited in the capital it has available (capital rationing). 
D)  If a project has more than one sign reversal. 
A)  If the project has a profitability index less than zero. 
B)  If two or more projects are mutually inclusive. 
C)  If the firm is limited in the capital it has available (capital rationing). 
D)  If a project has more than one sign reversal.

Question 9

Why is the search for new profitable projects so important?

Accepted Answer

Without question it is easier to evaluat

Question 10

Many firms today continue to use the payback method but also employ the NPV or IRR methods,especially when large projects are being analyzed.

Accepted Answer

A) True 
 B)False

Question 11

Given the following annual net cash flows,determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

Accepted Answer

A)  9% 
B)  11% 
C)  13% 
D)  15% 
A)  9% 
B)  11% 
C)  13% 
D)  15%

Question 12

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

Accepted Answer

A)  $540,000 
B)  $378,458 
C)  $192,369 
D)  $112,583 
A)  $540,000 
B)  $378,458 
C)  $192,369 
D)  $112,583

Question 13

Project LMK requires an initial outlay of $500,000 and has a profitability index of 1.4.The project is expected to generate equal annual cash flows over the next ten years.The required return for this project is 16%.What is project LMK's internal rate of return?

Accepted Answer

A)  19.88% 
B)  22.69% 
C)  24.78% 
D)  26.12% 
A)  19.88% 
B)  22.69% 
C)  24.78% 
D)  26.12%

Question 14

If a project's internal rate of return is greater than the project's required return,then the project's profitability index will be greater than one.

Accepted Answer

A) True 
 B)False

Question 15

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements about the net present value is true?

Accepted Answer

A)  It produces a percentage result that is easy to describe. 
B)  It has an inadequate reinvestment assumption. 
C)  It is likely that there will be more than one NPV for a project. 
D)  It may be used to select among projects of different sizes. 
A)  It produces a percentage result that is easy to describe. 
B)  It has an inadequate reinvestment assumption. 
C)  It is likely that there will be more than one NPV for a project. 
D)  It may be used to select among projects of different sizes.

Question 17

The net present value profile clearly demonstrates that the NPV of a project increases as the discount rate increases.

Accepted Answer

A) True 
 B)False

Question 18

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

Accepted Answer

A) True 
 B)False

Question 19

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

Accepted Answer

A) True 
 B)False

Question 20

The net present value always provides the correct decision provided that

Accepted Answer

A)  cash flows are constant over the asset's life. 
B)  the required rate of return is greater than the internal rate of return. 
C)  capital rationing is not imposed. 
D)  the internal rate of return is positive. 
A)  cash flows are constant over the asset's life. 
B)  the required rate of return is greater than the internal rate of return. 
C)  capital rationing is not imposed. 
D)  the internal rate of return is positive.

Capital rationing may be imposed because of all of the following EXCEPT

Mutually exclusive projects occur when

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.

Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

Under what condition would you NOT accept a project that has a positive net present value?

Why is the search for new profitable projects so important?

Many firms today continue to use the payback method but also employ the NPV or IRR methods,especially when large projects are being analyzed.

Given the following annual net cash flows,determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

Project LMK requires an initial outlay of $500,000 and has a profitability index of 1.4.The project is expected to generate equal annual cash flows over the next ten years.The required return for this project is 16%.What is project LMK's internal rate of return?

If a project's internal rate of return is greater than the project's required return,then the project's profitability index will be greater than one.

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Which of the following statements about the net present value is true?

The net present value profile clearly demonstrates that the NPV of a project increases as the discount rate increases.

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

The net present value always provides the correct decision provided that

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 10: Capital-Budgeting Techniques and Practice

Capital rationing may be imposed because of all of the following EXCEPT

Mutually exclusive projects occur when

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.

Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

Under what condition would you NOT accept a project that has a positive net present value?

Why is the search for new profitable projects so important?

Many firms today continue to use the payback method but also employ the NPV or IRR methods,especially when large projects are being analyzed.

Given the following annual net cash flows,determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

Project LMK requires an initial outlay of $500,000 and has a profitability index of 1.4.The project is expected to generate equal annual cash flows over the next ten years.The required return for this project is 16%.What is project LMK's internal rate of return?

If a project's internal rate of return is greater than the project's required return,then the project's profitability index will be greater than one.

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Which of the following statements about the net present value is true?

The net present value profile clearly demonstrates that the NPV of a project increases as the discount rate increases.

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

The net present value always provides the correct decision provided that

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters