Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce benefits over a period of time less than one year.

Accepted Answer

A) True 
 B)False

Question 3

In general,the greater the difference between the magnitude and/or timing of cash inflows,the greater the likelihood of conflicting ranking between NPV and IRR.

Accepted Answer

A) True 
 B)False

Question 4

An outlay for advertising and management consulting is considered to be a fixed asset expenditure.

Accepted Answer

A) True 
 B)False

Question 5

If a project's payback period is greater than the maximum acceptable payback period,we would accept it.

Accepted Answer

A) True 
 B)False

Question 6

Projects A and B both require an initial investment of $100,000.Project A produces $200,000 in cash flows in the subsequent 5 years.Project B produces cash flow of $400,000 next year,$300,000 in year 2,$200,000 in year 3,and $50,000 in years 4 and 5.Which of the following is TRUE?

Accepted Answer

A)  The NPV of project A will be more sensitive to changes in the cost of capital compared to the NPV of project B.
B)  The NPV of project B will be more sensitive to changes in the cost of capital compared to the NPV of project A.
C)  The two projects have NPVs that are equally sensitive to changes in the cost of capital.
D)  Neither project's NPV is sensitive to changes in the cost of capital.E) A) and C)
F) All of the above

Question 7

A firm with a cost of capital of 13.5 percent is evaluating three capital projects.The internal rates of return are as follows:  The firm should ________.

Accepted Answer

A)  accept Project 1 and 2,and reject Project 3
B)  accept Project 2,and reject Projects 1 and 3
C)  accept Project 1,and reject Projects 2 and 3
D)  accept Project 3,and reject Projects 1 and 2E) B) and C)
F) A) and D)

Question 8

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1,$20,000 in year 2,and $10,000 in year 3.The payback period of the project is ________.

Accepted Answer

A)  1 year
B)  2 years
C)  between 1 and 2 years
D)  between 2 and 3 yearsE) B) and D)
F) A) and B)

Question 9

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $2,000 each year for the next three years is 0.5 years.

Accepted Answer

A) True 
 B)False

Question 10

If the NPV is less than the initial investment,a project should be rejected.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

If the net present value of a project is greater than zero,the firm will earn a return greater than its cost of capital.The acceptance of such a project would enhance the wealth of the firm's owners.

Accepted Answer

A) True 
 B)False

Question 13

If a project's payback period is less than the maximum acceptable payback period,we would accept it.

Accepted Answer

A) True 
 B)False

Question 14

The first step in the capital budgeting process is ________.

Accepted Answer

A)  review and analysis
B)  implementation
C)  decision making
D)  proposal generationE) A) and D)
F) A) and C)

Question 15

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 cannot be accepted because its payback period is longer than 3 years.
B)  Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for 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.E) None of the above
F) C) and D)

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

Accepted Answer

A)  profitability index
B)  internal rate of return
C)  net present value
D)  payback periodE) C) and D)
F) B) and C)

Question 18

Which of the following capital budgeting techniques ignores the time value of money?

Accepted Answer

A)  payback period approach
B)  net present value
C)  internal rate of return
D)  profitability indexE) All of the above
F) C) and D)

Question 19

If a firm is subject to capital rationing,it is able to accept all independent projects that provide an acceptable return.

Accepted Answer

A) True 
 B)False

Question 20

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)  2.739E) A) and D)
F) A) and C)

Exam 10: Capital Budgeting Techniques

If the net present value of a project is greater than zero,the firm will earn a return greater than its cost of capital.The acceptance of such a project would enhance the wealth of the firm's owners.

Correct AnswerverifiedShow Answer

If a project's payback period is less than the maximum acceptable payback period,we would accept it.

Correct AnswerverifiedShow Answer

Projects A and B both require an initial investment of $100,000.Project A produces $200,000 in cash flows in the subsequent 5 years.Project B produces cash flow of $400,000 next year,$300,000 in year 2,$200,000 in year 3,and $50,000 in years 4 and 5.Which of the following is TRUE?

Correct AnswerverifiedShow Answer

A firm with a cost of capital of 13.5 percent is evaluating three capital projects.The internal rates of return are as follows: The firm should ________.

Correct AnswerverifiedShow Answer

An outlay for advertising and management consulting is considered to be a fixed asset expenditure.

Correct AnswerverifiedShow Answer

If a project's payback period is greater than the maximum acceptable payback period,we would accept it.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The first step in the capital budgeting process is ________.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1,$20,000 in year 2,and $10,000 in year 3.The payback period of the project is ________.

Correct AnswerverifiedShow Answer

Which of the following capital budgeting techniques ignores the time value of money?

Correct AnswerverifiedShow Answer

If the NPV is less than the initial investment,a project should be rejected.

Correct AnswerverifiedShow Answer

In general,the greater the difference between the magnitude and/or timing of cash inflows,the greater the likelihood of conflicting ranking between NPV and IRR.

Correct AnswerverifiedShow Answer

A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce benefits over a period of time less than one year.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $2,000 each year for the next three years is 0.5 years.

Correct AnswerverifiedShow Answer

If a firm is subject to capital rationing,it is able to accept all independent projects that provide an acceptable return.

Correct AnswerverifiedShow Answer

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