Question 1

A firm is evaluating three capital projects. The net present values for the projects are as follows:  The firm should ________.

Accepted Answer

A)  accept Projects 1 and 2, and reject Project 3 
B)  accept Projects 1 and 3, and reject Project 2 
C)  accept Project 3, and reject Projects 1 and 2 
D)  accept all projects

Question 2

Which of the following is true of the accept-reject approach?

Accepted Answer

A)  It involves ranking projects on the basis of some predetermined measure, such as the rate of return. 
B)  It cannot be used when the firm has limited funds. 
C)  It can be used for making capital budgeting decisions when there is capital rationing. 
D)  It can be used only for evaluating mutually exclusive projects.

Question 3

Which of the following is true of NPV profile?

Accepted Answer

A)  It is used for evaluating and comparing independent projects when conflicting ranking exists. 
B)  It is a graph that illustrates a project's IRR against various values of NPV. 
C)  It shows an inverse relationship between a project's IRR and NPV. 
D)  It charts the net present value of a project as a function of the cost of capital.

Question 4

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

Accepted Answer

A)  Capital; eliminates 
B)  Independent; does not eliminate 
C)  Mutually exclusive; eliminates 
D)  Replacement; eliminates

Question 5

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

Accepted Answer

A) True 
 B)False

Question 6

The NPV of a project 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 7

Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called ________.

Accepted Answer

A)  independent projects 
B)  mutually exclusive projects 
C)  replacement projects 
D)  capital projects

Question 8

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

The answer of Table 10.5
Galaxy Satellite Co. is attempting to...

Question 9

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure that would appear as a current asset on a firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 10

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?

Accepted Answer

A)  5.83% 
B)  9.67% 
C)  11.44% 
D)  6.85%

Question 11

The availability of funds for capital expenditures does not affect a firm's capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 12

On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because NPV 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 13

Table 10.3
A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: 
-The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. Based on IRR, his recommendation would be to ________.

Accepted Answer

A)  accept both the projects 
B)  accept Project A and reject Project B 
C)  reject Project A and accept Project B 
D)  reject both the projects

Question 14

________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.

Accepted Answer

A)  Recapitalizing assets 
B)  Capital budgeting 
C)  Ratio analysis 
D)  Securitization

Question 15

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?

Accepted Answer

A)  0.667 
B)  2.036 
C)  1.036 
D)  2.739

Question 16

One strength of payback period is that it fully accounts for the time value of money.

Accepted Answer

A) True 
 B)False

Question 17

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 18

Which of the following steps in the capital budgeting process follows the decision making step?

Accepted Answer

A)  proposal generation 
B)  review and analysis 
C)  transformation 
D)  implementation

Question 19

Fixed assets that provide the basis for a firm's earning and value are often called ________.

Accepted Answer

A)  tangible assets 
B)  noncurrent assets 
C)  earning assets 
D)  book assets

Question 20

Net present value is considered a sophisticated capital budgeting technique since it gives explicit consideration to the time value of money.

Accepted Answer

A) True 
 B)False

Exam 10: Capital Budgeting Techniques

A firm is evaluating three capital projects. The net present values for the projects are as follows: The firm should ________.

Which of the following is true of the accept-reject approach?

Which of the following is true of NPV profile?

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

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

The NPV of a project 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.

Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called ________.

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure that would appear as a current asset on a firm's balance sheet.

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?

The availability of funds for capital expenditures does not affect a firm's capital budgeting decisions.

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

________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth.

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?

One strength of payback period is that it fully accounts for the time value of money.

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

Which of the following steps in the capital budgeting process follows the decision making step?

Fixed assets that provide the basis for a firm's earning and value are often called ________.

Net present value is considered a sophisticated capital budgeting technique since it gives explicit consideration to the time value of money.