Question 1

The more realistic reinvestment rate assumption, the required rate of return, is implicit in the _____.

Accepted Answer

A)  payback period method and the discounted payback period method 
B)  internal rate of return (IRR) method and the multiple internal rate of return method (MIRR) 
C)  multiple internal rate of return method (MIRR) and the discounted payback period method 
D)  discounted payback period method and the net present value (NPV) method 
E)  net present value (NPV) method and the multiple internal rate of return method (MIRR) 
A)  payback period method and the discounted payback period method 
B)  internal rate of return (IRR) method and the multiple internal rate of return method (MIRR) 
C)  multiple internal rate of return method (MIRR) and the discounted payback period method 
D)  discounted payback period method and the net present value (NPV) method 
E)  net present value (NPV) method and the multiple internal rate of return method (MIRR) E

Question 2

The present value of the expected net cash inflows of all the projects undertaken by a firm will most likely exceed the present value of the firm's expected net profit after tax, because:

Accepted Answer

A)  income is reduced by taxes paid, but cash flow is not. 
B)  there is a greater probability of realizing the projected cash flows than the forecasted income. 
C)  income is reduced by dividends paid, but cash flow is not. 
D)  income is reduced by depreciation charges, but cash flows are not. 
E)  cash flows lead to changes in net working capital, but sales do not. 
A)  income is reduced by taxes paid, but cash flow is not. 
B)  there is a greater probability of realizing the projected cash flows than the forecasted income. 
C)  income is reduced by dividends paid, but cash flow is not. 
D)  income is reduced by depreciation charges, but cash flows are not. 
E)  cash flows lead to changes in net working capital, but sales do not. D

Question 3

The net present value (NPV) is preferred to the internal rate of return (IRR) for capital budgeting decisions because:

Accepted Answer

A)  the internal rate of return (IRR) does not allow you to determine if the project is acceptable. 
B)  the net present value (NPV) is the only method that allows you to determine which independent project is acceptable. 
C)  the net present value (NPV) allows you to compare mutually exclusive projects. 
D)  the internal rate of return (IRR) for a project is different for each firm. 
E)  the net present value (NPV) contains information about a projects "safety margin" which is not inherent in the internal rate of return (IRR). 
A)  the internal rate of return (IRR) does not allow you to determine if the project is acceptable. 
B)  the net present value (NPV) is the only method that allows you to determine which independent project is acceptable. 
C)  the net present value (NPV) allows you to compare mutually exclusive projects. 
D)  the internal rate of return (IRR) for a project is different for each firm. 
E)  the net present value (NPV) contains information about a projects "safety margin" which is not inherent in the internal rate of return (IRR). C

Question 4

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's opportunity rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following methods of capital budgeting is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

Accepted Answer

A)  Internal rate of return (IRR) method 
B)  Traditional payback period method 
C)  Modified internal rate of return (MIRR) method 
D)  Net present value (NPV) method 
E)  Maturity value method 
A)  Internal rate of return (IRR) method 
B)  Traditional payback period method 
C)  Modified internal rate of return (MIRR) method 
D)  Net present value (NPV) method 
E)  Maturity value method

Question 6

Ace Inc. is evaluating two mutually exclusive projects-Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:

Accepted Answer

A)  Project B because it has no cash inflows in the first four years of its life. 
B)  Project B because it has a higher net present value (NPV). 
C)  Project A because it will yield cash every year for five years. 
D)  Project A because it has a positive net present value (NPV). 
E)  Project A because it will generate cash in the initial years of its life. 
A)  Project B because it has no cash inflows in the first four years of its life. 
B)  Project B because it has a higher net present value (NPV). 
C)  Project A because it will yield cash every year for five years. 
D)  Project A because it has a positive net present value (NPV). 
E)  Project A because it will generate cash in the initial years of its life.

Question 7

The two main purposes of post-audit are to improve forecasts, and to improve operations.

Accepted Answer

A) True 
 B)False

Question 8

The traditional internal rate of return (IRR) assumes that cash flows are reinvested at the _____.

Accepted Answer

A)  firm's expected rate of return 
B)  project's internal rate of return 
C)  market rate of return 
D)  risk-free rate of return 
E)  firm's opportunity rate return 
A)  firm's expected rate of return 
B)  project's internal rate of return 
C)  market rate of return 
D)  risk-free rate of return 
E)  firm's opportunity rate return

Question 9

Project A has a pattern of high cash inflows in the early years, while Project B has majority of its cash inflows in the later years. At the current required rate of return, Projects A and B have identical NPVs. Assuming that interest rates are increasing, other things held constant, this change will cause B to become more preferable than A.

Accepted Answer

A) True 
 B)False

Question 10

Other things held constant, an increase in the required rate of return will result in _____.

Accepted Answer

A)  a decrease in the net present value of a project 
B)  a decrease in the internal rate of return (IRR) of a project 
C)  a decrease in the discounted payback period of a project 
D)  an increase in multiple internal rates of return of a project 
E)  a decrease in the cash outflow required for a project 
A)  a decrease in the net present value of a project 
B)  a decrease in the internal rate of return (IRR) of a project 
C)  a decrease in the discounted payback period of a project 
D)  an increase in multiple internal rates of return of a project 
E)  a decrease in the cash outflow required for a project

Question 11

The main reason that the NPV method is regarded as being conceptually superior to the IRR method, for the purpose of evaluating mutually exclusive investments, is that mutually exclusive projects have multiple IRRs.

Accepted Answer

A) True 
 B)False

Question 12

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal places.)

Accepted Answer

A)  10.04 percent 
B)  12.87 percent 
C)  15.23 percent 
D)  18.34 percent 
E)  20.72 percent 
A)  10.04 percent 
B)  12.87 percent 
C)  15.23 percent 
D)  18.34 percent 
E)  20.72 percent

Question 13

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12%. (Round off the answer to two decimal places.)

Accepted Answer

A)  $3,336.78 
B)  $2,486.23 
C)  $2,389.66 
D)  $1,889.45 
E)  $1,626.57 
A)  $3,336.78 
B)  $2,486.23 
C)  $2,389.66 
D)  $1,889.45 
E)  $1,626.57

Question 14

Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project. The initial cash outflow is $170,000 and cash inflow at the year-end of each of the following four years is $60,750. According to this information, which of the following statements is correct?

Accepted Answer

A)  The project's internal rate of return (IRR) must be less than 14 percent. 
B)  The project's discounted payback must be less that its economic life. 
C)  The project is acceptable as the net present value of the project is positive. 
D)  The project's discounted payback period should be compared with the traditional payback period to make the correct decision. 
E)  The project is not acceptable as the net present value is less than the difference in the total cash inflow and cash outflow. 
A)  The project's internal rate of return (IRR) must be less than 14 percent. 
B)  The project's discounted payback must be less that its economic life. 
C)  The project is acceptable as the net present value of the project is positive. 
D)  The project's discounted payback period should be compared with the traditional payback period to make the correct decision. 
E)  The project is not acceptable as the net present value is less than the difference in the total cash inflow and cash outflow.

Question 15

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is true of capital budgeting analysis?

Accepted Answer

A)  A project's discounted payback is normally shorter than its regular payback because discounted payback takes account of the required rate of return. 
B)  In the NPV method, the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found. 
C)  If the required rate of return is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/IRR conflict will not occur. 
D)  If you are choosing between two projects that have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile. 
E)  If the required rate of return is relatively high, this will favor larger, longer-term projects over smaller, shorter- term alternatives because it is good to earn high rates on larger amounts over longer periods. 
A)  A project's discounted payback is normally shorter than its regular payback because discounted payback takes account of the required rate of return. 
B)  In the NPV method, the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found. 
C)  If the required rate of return is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/IRR conflict will not occur. 
D)  If you are choosing between two projects that have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile. 
E)  If the required rate of return is relatively high, this will favor larger, longer-term projects over smaller, shorter- term alternatives because it is good to earn high rates on larger amounts over longer periods.

Question 17

The NPV and IRR methods will always lead to the same accept/reject decision for mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 18

When considering two mutually exclusive projects, the financial manager should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost.

Accepted Answer

A) True 
 B)False

Question 19

Two firms-Tangerine Inc. and Cyan Inc. analyze the same project for capital budgeting decision. Tangerine Inc. determines that the project's internal rate of return (IRR) is 9 percent. Cyan Inc. uses the net present value (NPV) method and determines that the project is unacceptable. Given this information, which of the following statements is correct?

Accepted Answer

A)  The net present value of the project must be positive for both the firms. 
B)  Cyan Inc.'s internal rate of return (IRR) from the project is less than 9 percent. 
C)  Tangerine's CFO should use the traditional payback period method to evaluate the project. 
D)  Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present value (NPV) method. 
E)  Cyan Inc.'s required rate of return is greater than 9 percent. 
A)  The net present value of the project must be positive for both the firms. 
B)  Cyan Inc.'s internal rate of return (IRR) from the project is less than 9 percent. 
C)  Tangerine's CFO should use the traditional payback period method to evaluate the project. 
D)  Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present value (NPV) method. 
E)  Cyan Inc.'s required rate of return is greater than 9 percent.

Question 20

A firm's effective capital budgeting procedures result in:

Accepted Answer

A)  lower net present values (NPVs). 
B)  a higher stock price. 
C)  a higher expected rate of return. 
D)  lower internal rates of return. 
E)  a higher number of projects having multiple internal rates of return. 
A)  lower net present values (NPVs). 
B)  a higher stock price. 
C)  a higher expected rate of return. 
D)  lower internal rates of return. 
E)  a higher number of projects having multiple internal rates of return.

The more realistic reinvestment rate assumption, the required rate of return, is implicit in the _____.

The present value of the expected net cash inflows of all the projects undertaken by a firm will most likely exceed the present value of the firm's expected net profit after tax, because:

The net present value (NPV) is preferred to the internal rate of return (IRR) for capital budgeting decisions because:

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's opportunity rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Which of the following methods of capital budgeting is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

The two main purposes of post-audit are to improve forecasts, and to improve operations.

The traditional internal rate of return (IRR) assumes that cash flows are reinvested at the _____.

Other things held constant, an increase in the required rate of return will result in _____.

The main reason that the NPV method is regarded as being conceptually superior to the IRR method, for the purpose of evaluating mutually exclusive investments, is that mutually exclusive projects have multiple IRRs.

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal places.)

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Which of the following statements is true of capital budgeting analysis?

The NPV and IRR methods will always lead to the same accept/reject decision for mutually exclusive projects.

When considering two mutually exclusive projects, the financial manager should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost.

A firm's effective capital budgeting procedures result in:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 9: Capital Budgeting Techniques

The more realistic reinvestment rate assumption, the required rate of return, is implicit in the _____.

The present value of the expected net cash inflows of all the projects undertaken by a firm will most likely exceed the present value of the firm's expected net profit after tax, because:

The net present value (NPV) is preferred to the internal rate of return (IRR) for capital budgeting decisions because:

Any capital budgeting decision should depend solely on a project's forecasted cash flows and the firm's opportunity rate of return. Such a decision should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.

Which of the following methods of capital budgeting is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

The two main purposes of post-audit are to improve forecasts, and to improve operations.

The traditional internal rate of return (IRR) assumes that cash flows are reinvested at the _____.

Other things held constant, an increase in the required rate of return will result in _____.

The main reason that the NPV method is regarded as being conceptually superior to the IRR method, for the purpose of evaluating mutually exclusive investments, is that mutually exclusive projects have multiple IRRs.

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal places.)

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Which of the following statements is true of capital budgeting analysis?

The NPV and IRR methods will always lead to the same accept/reject decision for mutually exclusive projects.

When considering two mutually exclusive projects, the financial manager should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost.

A firm's effective capital budgeting procedures result in:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters