Question 1

Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates others from further consideration.

Accepted Answer

A) True 
 B)False

Question 2

Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

Accepted Answer

A) True 
 B)False

Question 4

The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.

Accepted Answer

A) True 
 B)False

Question 5

The IRR is the compound annual rate of return that the firm will earn if it invests in a project and receives the estimated cash inflows.

Accepted Answer

A) True 
 B)False

Question 6

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 7

Table 10.5
Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows.  
-Use the NPV approach to select the best group of projects. (See Table 10.5)

Accepted Answer

Choose Projects C and D, since

Question 8

A non-conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by a series of inflows.

Accepted Answer

A) True 
 B)False

Question 9

The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

A firm with limited dollars available for capital expenditures is subject to

Accepted Answer

A)  capital dependency. 
B)  mutually exclusive projects. 
C)  working capital constraints. 
D)  capital rationing. 
A)  capital dependency. 
B)  mutually exclusive projects. 
C)  working capital constraints. 
D)  capital rationing.

Question 11

In capital budgeting, the preferred approaches in assessing whether a project is acceptable integrate time value procedures, risk and return considerations, valuation concepts, and the required payback period.

Accepted Answer

A) True 
 B)False

Question 12

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have multiple IRRs; this problem does not occur with the NPV approach.

Accepted Answer

A) True 
 B)False

Question 13

On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 14

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Accepted Answer

A)  Project A can be accepted because the payback period is 2.5 years but Project B can not be accepted because it's payback period is longer than 3 years. 
B)  Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B. 
C)  Project B should be accepted because you get more money paid back in the long run. 
D)  Both projects can be accepted because the payback is less than 3 years. 
A)  Project A can be accepted because the payback period is 2.5 years but Project B can not be accepted because it's payback period is longer than 3 years. 
B)  Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B. 
C)  Project B should be accepted because you get more money paid back in the long run. 
D)  Both projects can be accepted because the payback is less than 3 years.

Question 15

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

Accepted Answer

A) True 
 B)False

Question 16

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

Accepted Answer

A)  the NPV is greater than the crossover point. 
B)  the NPV is less than the crossover point. 
C)  the cost of capital is to the right of the crossover point. 
D)  the cost of capital is to the left of the crossover point. 
A)  the NPV is greater than the crossover point. 
B)  the NPV is less than the crossover point. 
C)  the cost of capital is to the right of the crossover point. 
D)  the cost of capital is to the left of the crossover point.

Question 17

In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the required rate of return

Accepted Answer

A) True 
 B)False

Question 20

Examples of sophisticated capital budgeting techniques include all of the following EXCEPT

Accepted Answer

A)  internal rate of return. 
B)  payback period. 
C)  annualized net present value. 
D)  net present value. 
A)  internal rate of return. 
B)  payback period. 
C)  annualized net present value. 
D)  net present value.

Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates others from further consideration.

Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.

The IRR is the compound annual rate of return that the firm will earn if it invests in a project and receives the estimated cash inflows.

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

A non-conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by a series of inflows.

The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.

A firm with limited dollars available for capital expenditures is subject to

In capital budgeting, the preferred approaches in assessing whether a project is acceptable integrate time value procedures, risk and return considerations, valuation concepts, and the required payback period.

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have multiple IRRs; this problem does not occur with the NPV approach.

On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.

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

The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the required rate of return

Examples of sophisticated capital budgeting techniques include all of the following EXCEPT

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 10: Capital Budgeting Techniques

Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates others from further consideration.

Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.

The IRR is the compound annual rate of return that the firm will earn if it invests in a project and receives the estimated cash inflows.

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

A non-conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by a series of inflows.

The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.

A firm with limited dollars available for capital expenditures is subject to

In capital budgeting, the preferred approaches in assessing whether a project is acceptable integrate time value procedures, risk and return considerations, valuation concepts, and the required payback period.

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have multiple IRRs; this problem does not occur with the NPV approach.

On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.

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

The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the required rate of return

Examples of sophisticated capital budgeting techniques include all of the following EXCEPT

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters