Question 1

The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.

Accepted Answer

A) True 
 B)False

Question 2

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the payback period of this project?

Accepted Answer

A) 4.00 years 
B) 3.09 years 
C) 2.91 years 
D) 2.50 years

Question 3

Company K is considering two mutually exclusive projects.The cash flows of the projects are as follows:  
a.Compute the NPV and IRR for the above two projects,assuming a 13% required rate of return. 
b.Discuss the ranking conflict. 
c.What decision should be made regarding these two projects?

Accepted Answer

The answer of Company K is considering two mutually exclusive...

Question 4

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.The firm's required rate of return for these projects is 10%.The net present value for Project A is

Accepted Answer

A) $12,358. 
B) $16,947. 
C) $19,458. 
D) $26,074.

Question 5

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's equivalent annual annuity?

Accepted Answer

A) $52,377 
B) $42,923 
C) $41,387 
D) $40,399

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If a project has multiple internal rates of return,the lowest rate should be used for decision making purposes.

Accepted Answer

A) True 
 B)False

Question 8

Your company is considering a project with the following cash flows: Initial Outlay = $3,000,000 Cash Flows Year 1-8 = $547,000 Compute the internal rate of return on the project.

Accepted Answer

A) 6.38% 
B) 8.95% 
C) 9.25% 
D) 12.34%

Question 9

Which of the following statements is MOST correct?

Accepted Answer

A) If a project's internal rate of return (IRR)exceeds the required return,then the project's net present value (NPV)must be negative. 
B) If Project A has a higher IRR than Project B,then Project A must also have a higher NPV. 
C) The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR. 
D) A project with a NPV = 0 is not acceptable.

Question 10

One of the disadvantages of the payback method is that it ignores time value of money.

Accepted Answer

A) True 
 B)False

Question 11

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%.The modified internal rate of return for Project B is

Accepted Answer

A) 17.84%. 
B) 18.52%. 
C) 19.75%. 
D) 22.80%.

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

Accepted Answer

A) True 
 B)False

Question 14

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

Accepted Answer

A) 5.80 years 
B) 5.20 years 
C) 5.40 years 
D) 5.59 years

Question 15

The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below.  The required rate of return on these projects is 14 percent.What decision should be made? As part of your answer,calculate the NPV assuming a replacement chain for Project S,and also calculate the equivalent annual annuity for each project.

Accepted Answer

The answer of The Meacham Tire Company is considering two...

Question 16

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Accepted Answer

A) True 
 B)False

Question 17

The profitability index provides an advantage over the net present value method by reporting the present value of benefits per dollar invested.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

A significant advantage of the payback period is that it

Accepted Answer

A) places emphasis on time value of money. 
B) allows for the proper ranking of projects. 
C) tends to reduce firm risk because it favors projects that generate early,less uncertain returns. 
D) gives proper weighting to all cash flows.

Question 20

The Internal Rate of Return (to nearest whole percent)is

Accepted Answer

A) 10%. 
B) 18%. 
C) 20%. 
D) 24%.

Exam 10: Capital-Budgeting Techniques and Practice

The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.

Company K is considering two mutually exclusive projects.The cash flows of the projects are as follows: a.Compute the NPV and IRR for the above two projects,assuming a 13% required rate of return. b.Discuss the ranking conflict. c.What decision should be made regarding these two projects?

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

If a project has multiple internal rates of return,the lowest rate should be used for decision making purposes.

Your company is considering a project with the following cash flows: Initial Outlay = $3,000,000 Cash Flows Year 1-8 = $547,000 Compute the internal rate of return on the project.

Which of the following statements is MOST correct?

One of the disadvantages of the payback method is that it ignores time value of money.

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.

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

The profitability index provides an advantage over the net present value method by reporting the present value of benefits per dollar invested.

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

A significant advantage of the payback period is that it

The Internal Rate of Return (to nearest whole percent) is