Question 1

If a project's net present value (NPV) is positive,:

Accepted Answer

A) its internal rate of return (IRR) is equal to the firm's required rate of return. 
B) it is not an acceptable project. 
C) it is an acceptable investment. 
D) the firm's required rate of return is not attainable. 
E) its payback period is greater than the maximum cost-recovery time established by the firm. 
A) its internal rate of return (IRR) is equal to the firm's required rate of return. 
B) it is not an acceptable project. 
C) it is an acceptable investment. 
D) the firm's required rate of return is not attainable. 
E) its payback period is greater than the maximum cost-recovery time established by the firm. C

Question 2

Two firms, Tangerine Inc. and Cyan Inc. analyzed the same capital budgeting project. Tangerine Inc. determined that the project's internal rate of return (IRR) is 9 percent. Cyan Inc. used the net present value (NPV) method to evaluate the project and determined that it is not acceptable. Given this information, which of the following statements is correct?

Accepted Answer

A) The net present value of the project must be positive for both the firms. 
B) If it had computed the project's IRR, Cyan would have found the IRR to be less than 9 percent. 
C) Tangerine's chief financial officer (CFO) should use the traditional payback period method to evaluate the project. 
D) Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present value (NPV) method. 
E) Cyan Inc.'s required rate of return is greater than 9 percent. 
A) The net present value of the project must be positive for both the firms. 
B) If it had computed the project's IRR, Cyan would have found the IRR to be less than 9 percent. 
C) Tangerine's chief financial officer (CFO) should use the traditional payback period method to evaluate the project. 
D) Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present value (NPV) method. 
E) Cyan Inc.'s required rate of return is greater than 9 percent. E

Question 3

A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost?

Accepted Answer

A) $200 
B) $120 
C) $180 
D) $140 
E) $150 
A) $200 
B) $120 
C) $180 
D) $140 
E) $150 C

Question 4

The net present value (NPV) and internal rate of return (IRR) methods will always lead to the same investment decisions when mutually exclusive projects are being evaluated.

Accepted Answer

A) True 
 B)False

Question 5

The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years, and produces after-tax cash flows equal to $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's internal rate of return (IRR)?

Accepted Answer

A) 8% 
B) 14% 
C) 18% 
D) 5% 
E) 20% 
A) 8% 
B) 14% 
C) 18% 
D) 5% 
E) 20%

Question 6

The modified internal rate of return (MIRR) is the discount rate that forces the ______.

Accepted Answer

A) future value of the project's terminal value to equal the future value of its cash outflows 
B) present value of the project's terminal value to equal the present value of its costs (cash outflows) 
C) future value of the project's terminal value to equal the present value of its costs 
D) present value of the project's terminal value to equal the future value of its costs 
E) present value of the project's terminal value to equal the sum of its undiscounted cash inflows 
A) future value of the project's terminal value to equal the future value of its cash outflows 
B) present value of the project's terminal value to equal the present value of its costs (cash outflows) 
C) future value of the project's terminal value to equal the present value of its costs 
D) present value of the project's terminal value to equal the future value of its costs 
E) present value of the project's terminal value to equal the sum of its undiscounted cash inflows

Question 7

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evaluate capital budgeting projects?

Accepted Answer

A) To compute a project's DPB, simply add up the unadjusted expected cash flows for each year until the cumulative value equals the amount that is initially invested. 
B) According to DPB, a project should be accepted when its discounted payback period is greater than its useful life. 
C) The DPB does not provide information about the liquidity of a project. 
D) The DPB method considers the time value of money. 
E) To compute a project's DPB, its internal rate of return (IRR) must be known. 
A) To compute a project's DPB, simply add up the unadjusted expected cash flows for each year until the cumulative value equals the amount that is initially invested. 
B) According to DPB, a project should be accepted when its discounted payback period is greater than its useful life. 
C) The DPB does not provide information about the liquidity of a project. 
D) The DPB method considers the time value of money. 
E) To compute a project's DPB, its internal rate of return (IRR) must be known.

Question 8

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

Accepted Answer

A) 9% 
B) 7% 
C) 5% 
D) 3% 
E) 11% 
A) 9% 
B) 7% 
C) 5% 
D) 3% 
E) 11%

Question 9

When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.

Accepted Answer

A) True 
 B)False

Question 10

One advantage to using the traditional payback period technique is that it provides a rough measure of a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 11

Suppose a capital budgeting project generates its largest cash flows in the early years of its life?(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

Accepted Answer

A) The project's traditional payback period will be greater than the years expected to recover the original investment. 
B) The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life. 
C) The required rate of return of the project must be revised throughout its life. 
D) The net present value of the project must be negative. 
E) The project will have multiple internal rates of return. 
A) The project's traditional payback period will be greater than the years expected to recover the original investment. 
B) The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life. 
C) The required rate of return of the project must be revised throughout its life. 
D) The net present value of the project must be negative. 
E) The project will have multiple internal rates of return.

Question 12

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

Accepted Answer

A) The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR. 
B) The NPV method assumes that the project's cash flows will be reinvested at the risk-free rate, whereas the IRR method assumes reinvestment at the firm's required rate of return. 
C) The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the risk-free rate. 
D) The NPV method assumes that the project's cash flows are not reinvested, whereas the IRR method assumes the cash flows are reinvested at the firm's required rate of return. 
E) The NPV method assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas the IRR method assumes the cash flows are not reinvested. 
A) The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR. 
B) The NPV method assumes that the project's cash flows will be reinvested at the risk-free rate, whereas the IRR method assumes reinvestment at the firm's required rate of return. 
C) The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the risk-free rate. 
D) The NPV method assumes that the project's cash flows are not reinvested, whereas the IRR method assumes the cash flows are reinvested at the firm's required rate of return. 
E) The NPV method assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas the IRR method assumes the cash flows are not reinvested.

Question 13

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:

Accepted Answer

A) considers only the cash flows after the project's payback period. 
B) has a decision rule that is easier to apply than the IRR decision rule. 
C) assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas IRR assumes the cash flows are reinvested at the project's IRR. 
D) assumes that the project's cash flows are reinvested at the risk-free rate. 
E) assumes that the project's cash flows are discounted at its IRR. 
A) considers only the cash flows after the project's payback period. 
B) has a decision rule that is easier to apply than the IRR decision rule. 
C) assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas IRR assumes the cash flows are reinvested at the project's IRR. 
D) assumes that the project's cash flows are reinvested at the risk-free rate. 
E) assumes that the project's cash flows are discounted at its IRR.

Question 14

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's required rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is correct?

Accepted Answer

A) A project's discounted payback period (DBP) is normally shorter than its traditional payback period (P
B)  because DPB accounts for the time value of money, whereas PB does not. 
B) To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero. 
C) Two firms could compute different internal rate of return (IRR) for a project if their required rates of return differ. 
D) If a project's net present value (NPV) is equal to its internal rate of return (IRR), the project's value is in equilibrium. 
E) Everything else equal, firms with higher required rates of return generally are able to purchase more capital budgeting projects than firms will lower required rates of return. 
A) A project's discounted payback period (DBP) is normally shorter than its traditional payback period (P
B)  because DPB accounts for the time value of money, whereas PB does not. 
B) To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero. 
C) Two firms could compute different internal rate of return (IRR) for a project if their required rates of return differ. 
D) If a project's net present value (NPV) is equal to its internal rate of return (IRR), the project's value is in equilibrium. 
E) Everything else equal, firms with higher required rates of return generally are able to purchase more capital budgeting projects than firms will lower required rates of return.

Question 16

The two main purposes of post-audit are to improve forecasts and to improve operations.

Accepted Answer

A) True 
 B)False

Question 17

The traditional payback period technique that is used in capital budgeting analyses:

Accepted Answer

A) is the simplest and oldest formal method used to evaluate capital budgeting projects. 
B) directly accounts for the time value of money. 
C) considers the discounted value of cash flows beyond the project's payback period. 
D) always results in maximizing the value of the firm when used to evaluate mutually exclusive projects. 
E) incorporates risk into the discount rate that is used to compute the payback period. 
A) is the simplest and oldest formal method used to evaluate capital budgeting projects. 
B) directly accounts for the time value of money. 
C) considers the discounted value of cash flows beyond the project's payback period. 
D) always results in maximizing the value of the firm when used to evaluate mutually exclusive projects. 
E) incorporates risk into the discount rate that is used to compute the payback period.

Question 18

The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to reinvest at the project's IRR.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is true about capital budgeting analysis?

Accepted Answer

A) A project should be purchased if its net present value (NPV) is positive. 
B) A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs). 
C) The traditional payback period method should be used for capital budgeting decisions when there is a conflict in the project rankings using the NPV method and the internal rate of return (IRR) method. 
D) The net present value (NPV) method should be used to evaluate independent projects, but the internal rate of return (IRR) method should be used to evaluate mutually exclusive projects. 
E) The payback period method should be used to evaluate capital budgeting projects that have multiple cash outflows. 
A) A project should be purchased if its net present value (NPV) is positive. 
B) A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs). 
C) The traditional payback period method should be used for capital budgeting decisions when there is a conflict in the project rankings using the NPV method and the internal rate of return (IRR) method. 
D) The net present value (NPV) method should be used to evaluate independent projects, but the internal rate of return (IRR) method should be used to evaluate mutually exclusive projects. 
E) The payback period method should be used to evaluate capital budgeting projects that have multiple cash outflows.

Question 20

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

Accepted Answer

A) It is the same as the firm's required rate of return. 
B) It is the discount rate that equates the present value of a project's cash outflows (or costs) with the present value of its cash inflows. 
C) It is the discount rate at which the net present value of a project is negative. 
D) It is the rate of return at which a project's payback period is shortest. 
E) It is the discount rate that should be used to evaluate a project with multiple cash outflows. 
A) It is the same as the firm's required rate of return. 
B) It is the discount rate that equates the present value of a project's cash outflows (or costs) with the present value of its cash inflows. 
C) It is the discount rate at which the net present value of a project is negative. 
D) It is the rate of return at which a project's payback period is shortest. 
E) It is the discount rate that should be used to evaluate a project with multiple cash outflows.

If a project's net present value (NPV) is positive,:

A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost?

The net present value (NPV) and internal rate of return (IRR) methods will always lead to the same investment decisions when mutually exclusive projects are being evaluated.

The modified internal rate of return (MIRR) is the discount rate that forces the ______.

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evaluate capital budgeting projects?

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.

One advantage to using the traditional payback period technique is that it provides a rough measure of a project's liquidity and risk.

Suppose a capital budgeting project generates its largest cash flows in the early years of its life?(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's required rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Which of the following statements is correct?

The two main purposes of post-audit are to improve forecasts and to improve operations.

The traditional payback period technique that is used in capital budgeting analyses:

The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to reinvest at the project's IRR.

Which of the following statements is true about capital budgeting analysis?

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 9: Capital Budgeting Techniques

If a project's net present value (NPV) is positive,:

A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost?

The net present value (NPV) and internal rate of return (IRR) methods will always lead to the same investment decisions when mutually exclusive projects are being evaluated.

The modified internal rate of return (MIRR) is the discount rate that forces the ______.

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evaluate capital budgeting projects?

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.

One advantage to using the traditional payback period technique is that it provides a rough measure of a project's liquidity and risk.

Suppose a capital budgeting project generates its largest cash flows in the early years of its life?(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's required rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Which of the following statements is correct?

The two main purposes of post-audit are to improve forecasts and to improve operations.

The traditional payback period technique that is used in capital budgeting analyses:

The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to reinvest at the project's IRR.

Which of the following statements is true about capital budgeting analysis?

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters