Exam 10: Capital Budgeting Techniques

If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars.

If a firm has unlimited funds, it is able to accept all independent projects that provide an acceptable return.

Which of the following statements is false?

If the NPV is greater than the cost of capital, a project should be accepted.

Which of the following statements is false?

The ________ measures the amount of time it takes the firm to recover its initial investment.

For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.

The minimum return that must be earned on a project in order to leave the firm's value unchanged is

A nonconventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.

To increase its production capacity, a firm is considering: 1) to expand its plant, 2) to acquire another company, or 3) to contract with another company for production. These three projects would appear to be good examples of independent projects.

The capital budgeting process consists of four distinct but interrelated steps: proposal generation, review and analysis, decision making, and termination.

All of the following are motives for capital budgeting expenditures EXCEPT

A firm would accept a project with a net present value of zero because

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all the following reasons EXCEPT

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?

________ projects do not compete with each other; the acceptance of one ________ the others from consideration.

The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is $856.49.

The major weakness of payback period in evaluating projects is that it cannot specify the appropriate payback period in light of the wealth maximization goal.

The cash flows of any project having a conventional pattern include all of the basic components EXCEPT