Exam 10: Capital Budgeting Techniques

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

Comparing net present value and internal rate of return

Since the cost of capital tends to be a reasonable estimate of the rate at which the firm could actually reinvest intermediate cash inflows, the use of NPV is in theory preferable to IRR.

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?

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

A capital expenditure is all of the following EXCEPT

Capital budgeting is the process of evaluating and selecting short-term investments consistent with the firm's goal of owner wealth maximization.

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.

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

The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is

Payback is considered an unsophisticated capital budgeting because it

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 for the next three years is 3.33 years.

________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.

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

Which of the following statements is false?

Net present value profiles are most useful when selecting among mutually exclusive projects.

________ projects have the same function; the acceptance of one ________ the others from consideration.

The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criteria is called

The discount rate (which is also known as the required return, cost of capital, or opportunity cost) is the minimum return that must be earned on a project to leave the firm's market value unchanged.