Exam 10: Capital-Budgeting Techniques and Practice

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.

All of the following are sufficient indications to accept a project EXCEPT (assume that there is no capital rationing constraint,and no consideration is given to payback as a decision tool)

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.Which project would you recommend using the replacement chain method to evaluate the projects with different lives?

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

Both the profitability index (PI)and net present value (NPV)are based on the present value of all future free cash flows,but the PI is a relative measure while the NPV is an absolute measure of a project's desirability.

What does a net present value profile tell you,and how is it constructed? How does the IRR enter into the net present value profile?

A significant advantage of the internal rate of return is that it

Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

A major disadvantage of the discounted payback period is the arbitrariness of the process used to select the maximum desired payback period.

Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%. Initial Outlay = $100

For any individual project,if the project is acceptable based on its internal rate of return,then the project will also be acceptable based on its modified internal rate of return.

If the NPV (Net Present Value)of a project with multiple sign reversals is positive,then the project's required rate of return ________ its calculated IRR (Internal Rate of Return).

Different discounted cash flow evaluation methods may provide conflicting rankings of investment projects when

Free cash flows represent the benefits generated from accepting a capital-budgeting proposal.

A project's net present value profile shows how sensitive the project is to the choice of a discount rate.

Finance theory suggests that the IRR criterion is the most favorable capital budgeting decision tool.

How might capital rationing conflict with the goal of maximizing shareholders' wealth?

If a project is acceptable using the net present value criteria,then it will also be acceptable under the less stringent criteria of the payback period.