Question 1

A profitability index of two means that the project returns a value of $2 for every $1 invested.

Accepted Answer

A) True 
 B)False

Question 2

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. If the firm's required return or cost of capital is 15%, should it accept the project using the IRR as a decision criteria?

Accepted Answer

A)  yes 
B)  no 
C)  only if the NPV is less than 1 
D)  only if the PI is negative 
A)  yes 
B)  no 
C)  only if the NPV is less than 1 
D)  only if the PI is negative

Question 3

The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account.

Accepted Answer

A) True 
 B)False

Question 4

The stand-alone principle focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.

Accepted Answer

A) True 
 B)False

Question 5

MIRR and IRR will always agree on their rankings of projects.

Accepted Answer

A) True 
 B)False

Question 6

The stand-alone principle means that:

Accepted Answer

A)  projects should not be evaluated against one another 
B)  projects must operate independently of the firm's other projects 
C)  analysts should focus on the project's cash flows, uncontaminated by cash flows from the firm's other activities 
D)  projects should be rejected that have the same IRR 
A)  projects should not be evaluated against one another 
B)  projects must operate independently of the firm's other projects 
C)  analysts should focus on the project's cash flows, uncontaminated by cash flows from the firm's other activities 
D)  projects should be rejected that have the same IRR

Question 7

The identification stage in capital budgeting involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion.

Accepted Answer

A) True 
 B)False

Question 8

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

Accepted Answer

A)  SWOT. 
B)  MOGS. 
C)  STOW. 
D)  GOMS. 
A)  SWOT. 
B)  MOGS. 
C)  STOW. 
D)  GOMS.

Question 9

A higher-risk project needs to be evaluated using a lower required rate of return.

Accepted Answer

A) True 
 B)False

Question 10

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.

Accepted Answer

A)  payback period 
B)  average rate of return 
C)  cost of capital 
D)  internal rate of return 
A)  payback period 
B)  average rate of return 
C)  cost of capital 
D)  internal rate of return

Question 11

Which one of the following best explains the impact on a firm that accepts a project with a negative NPV?

Accepted Answer

A)  negative cash flows 
B)  decrease in the value of the firm 
C)  high marginal cost of capital 
D)  low initial returns 
A)  negative cash flows 
B)  decrease in the value of the firm 
C)  high marginal cost of capital 
D)  low initial returns

Question 12

In the case of independent projects:

Accepted Answer

A)  the financial manager is responsible for choosing the average of these alternatives since only one can be chosen; selecting one project requires the selection of the other. 
B)  they are to be evaluated based on their expected effect on shareholder wealth; all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
C)  the financial manager is responsible for choosing the best of these alternatives since only one can be chosen; selecting one project precludes the other from being undertaken. 
D)  they are to be evaluated based on their past effect on shareholder wealth; all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
A)  the financial manager is responsible for choosing the average of these alternatives since only one can be chosen; selecting one project requires the selection of the other. 
B)  they are to be evaluated based on their expected effect on shareholder wealth; all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
C)  the financial manager is responsible for choosing the best of these alternatives since only one can be chosen; selecting one project precludes the other from being undertaken. 
D)  they are to be evaluated based on their past effect on shareholder wealth; all such projects that enhance shareholder wealth should be included in the firm's capital budget.

Question 13

An examples of internal financial data required for project analysis include which of the following?

Accepted Answer

A)  management stock options 
B)  number of employees 
C)  length of time the firm has been in business 
D)  transportation costs 
A)  management stock options 
B)  number of employees 
C)  length of time the firm has been in business 
D)  transportation costs

Question 14

The profitability index measures the present value of benefits received for each dollar invested.

Accepted Answer

A) True 
 B)False

Question 15

When considering the time value of money, which of the following four methods of project evaluation would appear to be the least satisfactory?

Accepted Answer

A)  internal rate of return 
B)  profitability index 
C)  net present value 
D)  payback period method 
A)  internal rate of return 
B)  profitability index 
C)  net present value 
D)  payback period method

Question 16

Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project's initial investment.

Accepted Answer

A) True 
 B)False

Question 17

All of the following are considered stages in the capital budgeting process EXCEPT:

Accepted Answer

A)  invention 
B)  development 
C)  implementation 
D)  selection 
A)  invention 
B)  development 
C)  implementation 
D)  selection

Question 18

Any positive economic profit or positive net present value must arise from

Accepted Answer

A)  market imperfections or inefficiencies such as a monopoly situation. 
B)  cost-saving projects that allow the firm to increase costs above the current level such as economies of scale and access to distribution channels. 
C)  accelerated depreciation assisting in cash flow. 
D)  less actual risk than perceived risk 
A)  market imperfections or inefficiencies such as a monopoly situation. 
B)  cost-saving projects that allow the firm to increase costs above the current level such as economies of scale and access to distribution channels. 
C)  accelerated depreciation assisting in cash flow. 
D)  less actual risk than perceived risk

Question 19

Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years. The firm's cost of capital is 10%. Based on this information, the NPV of the project is _________ million and the firm should _________ the project.

Accepted Answer

A)  $151.63; accept 
B)  -$151.63, reject 
C)  $4.37, accept 
D)  -$4.37, reject 
A)  $151.63; accept 
B)  -$151.63, reject 
C)  $4.37, accept 
D)  -$4.37, reject

Question 20

Two or more projects that perform the same function are said to be:

Accepted Answer

A)  mutually exclusive projects 
B)  independent projects 
C)  joint projects 
D)  combined projects 
A)  mutually exclusive projects 
B)  independent projects 
C)  joint projects 
D)  combined projects

A profitability index of two means that the project returns a value of $2 for every $1 invested.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. If the firm's required return or cost of capital is 15%, should it accept the project using the IRR as a decision criteria?

The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account.

The stand-alone principle focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.

MIRR and IRR will always agree on their rankings of projects.

The stand-alone principle means that:

The identification stage in capital budgeting involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion.

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

A higher-risk project needs to be evaluated using a lower required rate of return.

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.

Which one of the following best explains the impact on a firm that accepts a project with a negative NPV?

In the case of independent projects:

An examples of internal financial data required for project analysis include which of the following?

The profitability index measures the present value of benefits received for each dollar invested.

When considering the time value of money, which of the following four methods of project evaluation would appear to be the least satisfactory?

Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project's initial investment.

All of the following are considered stages in the capital budgeting process EXCEPT:

Any positive economic profit or positive net present value must arise from

Two or more projects that perform the same function are said to be:

The Financial Environment

Money and the Monetary System

Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuations

Securities and Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Structure and the Cost of Capital

Filters

Exam 17: Capital Budgeting Analysis

A profitability index of two means that the project returns a value of $2 for every $1 invested.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. If the firm's required return or cost of capital is 15%, should it accept the project using the IRR as a decision criteria?

The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account.

The stand-alone principle focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.

MIRR and IRR will always agree on their rankings of projects.

The stand-alone principle means that:

The identification stage in capital budgeting involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion.

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

A higher-risk project needs to be evaluated using a lower required rate of return.

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.

Which one of the following best explains the impact on a firm that accepts a project with a negative NPV?

In the case of independent projects:

An examples of internal financial data required for project analysis include which of the following?

The profitability index measures the present value of benefits received for each dollar invested.

When considering the time value of money, which of the following four methods of project evaluation would appear to be the least satisfactory?

Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project's initial investment.

All of the following are considered stages in the capital budgeting process EXCEPT:

Any positive economic profit or positive net present value must arise from

Two or more projects that perform the same function are said to be:

The Financial Environment

Money and the Monetary System

Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuations

Securities and Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Structure and the Cost of Capital

Filters