Question 1

In calculation of a payback period, what use is made of cash flows occurring after the end of the payback period?

Accepted Answer

A)  They are ignored. 
B)  They are discounted back to time zero. 
C)  They are included in the accept/reject decision. 
D)  They are normally canceled by initial negative cash flows. 
A)  They are ignored. 
B)  They are discounted back to time zero. 
C)  They are included in the accept/reject decision. 
D)  They are normally canceled by initial negative cash flows.

Question 2

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations. Now it appears that technology is noncompliant with existing regulations. New technology must replace the old project. The $450,000 would represent:

Accepted Answer

A)  an opportunity cost 
B)  an operating expenditure 
C)  a sunk cost 
D)  a revised cost 
A)  an opportunity cost 
B)  an operating expenditure 
C)  a sunk cost 
D)  a revised cost

Question 3

All of the following statements are correct except:

Accepted Answer

A)  Capital budgeting is the process of identifying, evaluating, and implementing a firm's investment opportunities. 
B)  Capital budgeting seeks to identify projects that will enhance a firm's competitive advantage and by so doing increase shareholders' wealth. 
C)  By its nature, capital budgeting involves long-term projects, although capital budgeting techniques also can be applied to working capital decisions 
D)  Capital budgeting projects usually require small initial investments and may involve acquiring or constructing plant and equipment. 
A)  Capital budgeting is the process of identifying, evaluating, and implementing a firm's investment opportunities. 
B)  Capital budgeting seeks to identify projects that will enhance a firm's competitive advantage and by so doing increase shareholders' wealth. 
C)  By its nature, capital budgeting involves long-term projects, although capital budgeting techniques also can be applied to working capital decisions 
D)  Capital budgeting projects usually require small initial investments and may involve acquiring or constructing plant and equipment.

Question 4

The stage in the capital budgeting process that involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion is called the _____________ stage.

Accepted Answer

A)  follow-up. 
B)  selection. 
C)  identification. 
D)  development. 
A)  follow-up. 
B)  selection. 
C)  identification. 
D)  development.

Question 5

When a project's net present value (NPV) exceeds zero, then:

Accepted Answer

A)  the project should be accepted 
B)  the project will be acceptable using the payback period method 
C)  the IRR should be calculated to ensure that the project's IRR exceeds the cost of capital 
D)  the payback period is always less than one year 
A)  the project should be accepted 
B)  the project will be acceptable using the payback period method 
C)  the IRR should be calculated to ensure that the project's IRR exceeds the cost of capital 
D)  the payback period is always less than one year

Question 6

Which of the following is not considered a stage in the capital budgeting process?

Accepted Answer

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

Question 7

The stand-alone principle suggests that a project must be viewed separately from the rest of the firm.

Accepted Answer

A) True 
 B)False

Question 8

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

Accepted Answer

A) True 
 B)False

Question 9

Mutually exclusive projects are projects that are not in direct competition with one another.

Accepted Answer

A) True 
 B)False

Question 10

When the net present value for a project is negative, the internal rate of return is _________ the cost of capital.

Accepted Answer

A)  greater than 
B)  greater than or equal to 
C)  less than 
D)  equal to 
A)  greater than 
B)  greater than or equal to 
C)  less than 
D)  equal to

Question 11

The net present value of an investment is the present value of a project's future cash flows minus its initial cost.

Accepted Answer

A) True 
 B)False

Question 12

A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost, but also all financing costs.

Accepted Answer

A) True 
 B)False

Question 13

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)  MOGS. 
B)  SMOG. 
C)  OMGS. 
D)  GOMS. 
A)  MOGS. 
B)  SMOG. 
C)  OMGS. 
D)  GOMS.

Question 14

The capital budgeting process consists of all of the following stages except:

Accepted Answer

A)  follow-up. 
B)  selection. 
C)  refurbishing. 
D)  development. 
A)  follow-up. 
B)  selection. 
C)  refurbishing. 
D)  development.

Question 15

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 8%. Based on this information, the IRR of the project is _________ percent and the firm should _________ the project.

Accepted Answer

A)  9.9; accept 
B)  9.9, reject 
C)  8.9, accept 
D)  8.9, reject 
A)  9.9; accept 
B)  9.9, reject 
C)  8.9, accept 
D)  8.9, reject

In calculation of a payback period, what use is made of cash flows occurring after the end of the payback period?

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations. Now it appears that technology is noncompliant with existing regulations. New technology must replace the old project. The $450,000 would represent:

All of the following statements are correct except:

The stage in the capital budgeting process that involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion is called the _____________ stage.

When a project's net present value (NPV) exceeds zero, then:

Which of the following is not considered a stage in the capital budgeting process?

The stand-alone principle suggests that a project must be viewed separately from the rest of the firm.

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

Mutually exclusive projects are projects that are not in direct competition with one another.

When the net present value for a project is negative, the internal rate of return is _________ the cost of capital.

The net present value of an investment is the present value of a project's future cash flows minus its initial cost.

A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost, but also all financing costs.

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

The capital budgeting process consists of all of the following stages except:

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

In calculation of a payback period, what use is made of cash flows occurring after the end of the payback period?

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations. Now it appears that technology is noncompliant with existing regulations. New technology must replace the old project. The $450,000 would represent:

All of the following statements are correct except:

The stage in the capital budgeting process that involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion is called the _____________ stage.

When a project's net present value (NPV) exceeds zero, then:

Which of the following is not considered a stage in the capital budgeting process?

The stand-alone principle suggests that a project must be viewed separately from the rest of the firm.

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

Mutually exclusive projects are projects that are not in direct competition with one another.

When the net present value for a project is negative, the internal rate of return is _________ the cost of capital.

The net present value of an investment is the present value of a project's future cash flows minus its initial cost.

A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost, but also all financing costs.

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

The capital budgeting process consists of all of the following stages except:

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