Question 1

Which of the following is an advantage of the modified internal rate of return (MIRR) over the traditional internal rate of return?

Accepted Answer

A)  Modified internal rate of return (MIRR) assumes that the cash flows are reinvested at the project's own internal rate of return (IRR). 
B)  Modified internal rate of return (MIRR) assumes that the terminal value of the project is the profit from the project. 
C)  Modified internal rate of return (MIRR) assumes that the cash flows are reinvested at the required rate of return. 
D)  Modified internal rate of return (MIRR) assumes that the future value of cash outflow is equal to the terminal value of the project. 
E)  Modified internal rate of return (MIRR) assumes that the multiple cash outflows in a project increase the required rate of return of the project. 
A)  Modified internal rate of return (MIRR) assumes that the cash flows are reinvested at the project's own internal rate of return (IRR). 
B)  Modified internal rate of return (MIRR) assumes that the terminal value of the project is the profit from the project. 
C)  Modified internal rate of return (MIRR) assumes that the cash flows are reinvested at the required rate of return. 
D)  Modified internal rate of return (MIRR) assumes that the future value of cash outflow is equal to the terminal value of the project. 
E)  Modified internal rate of return (MIRR) assumes that the multiple cash outflows in a project increase the required rate of return of the project.

Question 2

A project's net present value is equal to:

Accepted Answer

A)  the present value of the expected future cash flows minus the present value of all the cash outflows. 
B)  the present value of the cash outflows plus the present value of cash inflows. 
C)  the present value of the last cash inflow. 
D)  the present value of all the expected future cash outflows. 
E)  the present value of all the cash inflows after the full recovery of the initial investment. 
A)  the present value of the expected future cash flows minus the present value of all the cash outflows. 
B)  the present value of the cash outflows plus the present value of cash inflows. 
C)  the present value of the last cash inflow. 
D)  the present value of all the expected future cash outflows. 
E)  the present value of all the cash inflows after the full recovery of the initial investment.

Question 3

The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?

Accepted Answer

A)  8 percent 
B)  14 percent 
C)  18 percent 
D)  −5 percent 
E)  12 percent 
A)  8 percent 
B)  14 percent 
C)  18 percent 
D)  −5 percent 
E)  12 percent

Question 4

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

Accepted Answer

A) True 
 B)False

Question 5

Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of the following statements best describes this situation?

Accepted Answer

A)  The NPV and IRR methods will select the same project if the required rate of return is greater than 10 percent; for example, 18 percent. 
B)  The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent. 
C)  As the NPV profiles cross at a discount rate of 10 percent resulting in conflict, none of these two projects should be selected. 
D)  Project L should be selected at any required rate of return, because it has a higher IRR. 
E)  Project S should be selected at any required rate of return, because it has a higher IRR. 
A)  The NPV and IRR methods will select the same project if the required rate of return is greater than 10 percent; for example, 18 percent. 
B)  The NPV and IRR methods will select the same project if the cost of capital is less than 10 percent; for example, 8 percent. 
C)  As the NPV profiles cross at a discount rate of 10 percent resulting in conflict, none of these two projects should be selected. 
D)  Project L should be selected at any required rate of return, because it has a higher IRR. 
E)  Project S should be selected at any required rate of return, because it has a higher IRR.

Question 6

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000 and it is expected to generate $5,000 per year for three years. If the required rate of return is 10%, what is the terminal value of the project?

Accepted Answer

A)  $15,000 
B)  $16,550 
C)  $11,550 
D)  $14,050 
E)  $12,500 
A)  $15,000 
B)  $16,550 
C)  $11,550 
D)  $14,050 
E)  $12,500

Question 7

Which of the following results from a negative cash flow that occurs at the end of a project's life in addition to the initial investment in the project?

Accepted Answer

A)  Higher return from the investment in the project 
B)  Lower project terminal value as compared to the cost of the project 
C)  Negative net cash flow from the project 
D)  More than one internal rate of return (IRR) of the project 
E)  Shorter payback period for the project 
A)  Higher return from the investment in the project 
B)  Lower project terminal value as compared to the cost of the project 
C)  Negative net cash flow from the project 
D)  More than one internal rate of return (IRR) of the project 
E)  Shorter payback period for the project

Question 8

Discounted payback's primary advantage over traditional payback is that:

Accepted Answer

A)  discounted payback considers cash flows that occur after the discounted payback period. 
B)  discounted payback is always shorter than the traditional payback period. 
C)  discounted payback considers the time value of money. 
D)  discounted payback ensures more payback by accepting projects with longer payback period. 
E)  discounted payback ensures faster recovery of investment by accepting projects with longer payback periods. 
A)  discounted payback considers cash flows that occur after the discounted payback period. 
B)  discounted payback is always shorter than the traditional payback period. 
C)  discounted payback considers the time value of money. 
D)  discounted payback ensures more payback by accepting projects with longer payback period. 
E)  discounted payback ensures faster recovery of investment by accepting projects with longer payback periods.

Question 9

If the NPV of a project is positive, it means that:

Accepted Answer

A)  the project's discounted payback period is longer than the useful life of the project. 
B)  the internal rate of return is lower than the discount rate used. 
C)  the project is not acceptable on a risk adjusted basis. 
D)  the project's discounted payback period is less than its payback period. 
E)  accepting the project increases the value of the firm. 
A)  the project's discounted payback period is longer than the useful life of the project. 
B)  the internal rate of return is lower than the discount rate used. 
C)  the project is not acceptable on a risk adjusted basis. 
D)  the project's discounted payback period is less than its payback period. 
E)  accepting the project increases the value of the firm.

Question 10

A capital budgeting project is acceptable if the rate of return required for a project is greater than the project's internal rate of return.

Accepted Answer

A) True 
 B)False

Question 11

The modified IRR (MIRR) method has wide appeal to academics, but most business executives prefer the NPV method to either the regular or modified IRR.

Accepted Answer

A) True 
 B)False

Question 12

To add the greatest value to a firm, mutually exclusive projects that differ in scale or timing should be evaluated using the _____.

Accepted Answer

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

Question 13

A ranking conflict that occurs when evaluating two mutually exclusive projects using the NPV technique and the IRR technique can be resolved by _____.

Accepted Answer

A)  using the profitability index method 
B)  using the modified internal rate of return (MIRR) method 
C)  using the internal rate of return (IRR) method 
D)  using discounted payback period method 
E)  using traditional payback period method 
A)  using the profitability index method 
B)  using the modified internal rate of return (MIRR) method 
C)  using the internal rate of return (IRR) method 
D)  using discounted payback period method 
E)  using traditional payback period method

Question 14

Which of the following statements is true of a project with a long payback period?

Accepted Answer

A)  A long payback period increases the project's risk. 
B)  A long payback period ensures enough liquidity for the firm. 
C)  A long payback period ensures positive net present value of the project. 
D)  A long payback period results in the expected rate of return being more than the internal rate of return. 
E)  A long payback period results in the terminal value of the project being higher than the present value of its cash outflows. 
A)  A long payback period increases the project's risk. 
B)  A long payback period ensures enough liquidity for the firm. 
C)  A long payback period ensures positive net present value of the project. 
D)  A long payback period results in the expected rate of return being more than the internal rate of return. 
E)  A long payback period results in the terminal value of the project being higher than the present value of its cash outflows.

Question 15

One advantage of the payback period method is that it provides a rough measure of a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 16

The _____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

Accepted Answer

A)  discounted payback 
B)  internal rate of return 
C)  post-audit 
D)  net present value 
E)  economic value added 
A)  discounted payback 
B)  internal rate of return 
C)  post-audit 
D)  net present value 
E)  economic value added

Question 17

Which of the following statements is true of capital budgeting methods that consider the time value of money to evaluate independent projects?

Accepted Answer

A)  They choose the projects with the highest rate of return. 
B)  They provide the same accept/reject decisions. 
C)  They choose the project with the shortest payback period. 
D)  They provide the highest terminal values of the projects. 
E)  They choose the project with multiple internal rates of return. 
A)  They choose the projects with the highest rate of return. 
B)  They provide the same accept/reject decisions. 
C)  They choose the project with the shortest payback period. 
D)  They provide the highest terminal values of the projects. 
E)  They choose the project with multiple internal rates of return.

Question 18

As per the payback period method, a project is acceptable to a firm if _____.

Accepted Answer

A)  the total cash inflows yield a rate of return more than the expected rate of return from the project 
B)  the payback period is longer than the life of the project 
C)  there are no cash outflows during the payback period 
D)  discounted value of cash inflows is less than the initial investment 
E)  the payback period is less than the maximum cost-recovery time established by the firm 
A)  the total cash inflows yield a rate of return more than the expected rate of return from the project 
B)  the payback period is longer than the life of the project 
C)  there are no cash outflows during the payback period 
D)  discounted value of cash inflows is less than the initial investment 
E)  the payback period is less than the maximum cost-recovery time established by the firm

Question 19

Which of the following criteria should be used to choose a project if there is a conflict between two mutually exclusive projects?

Accepted Answer

A)  The project whose internal rate of return is higher than its modified internal rate of return should be chosen. 
B)  The project whose internal rate of return is equal to the expected rate of return should be chosen. 
C)  The project with a higher net present value (NPV) should be chosen. 
D)  The project whose payback period is equal to the expected years required to recover the original investment should be chosen. 
E)  The project whose discounted payback period is longer than its traditional payback period should be chosen. 
A)  The project whose internal rate of return is higher than its modified internal rate of return should be chosen. 
B)  The project whose internal rate of return is equal to the expected rate of return should be chosen. 
C)  The project with a higher net present value (NPV) should be chosen. 
D)  The project whose payback period is equal to the expected years required to recover the original investment should be chosen. 
E)  The project whose discounted payback period is longer than its traditional payback period should be chosen.

Question 20

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

Accepted Answer

A)  Higher discount rates are used for computing the net present values (NPVs) of riskier cash flows. 
B)  A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs). 
C)  The payback period method should be used for capital budgeting decisions if there is a conflict in the project rankings as per the NPV method and the IRR method. 
D)  The net present value (NPV) method should be used to evaluate independent projects, and the internal rate of return (IRR) method for mutually exclusive projects. 
E)  The payback period method should be used for capital budgeting decisions if the project has multiple cash outflows. 
A)  Higher discount rates are used for computing the net present values (NPVs) of riskier cash flows. 
B)  A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs). 
C)  The payback period method should be used for capital budgeting decisions if there is a conflict in the project rankings as per the NPV method and the IRR method. 
D)  The net present value (NPV) method should be used to evaluate independent projects, and the internal rate of return (IRR) method for mutually exclusive projects. 
E)  The payback period method should be used for capital budgeting decisions if the project has multiple cash outflows.

Which of the following is an advantage of the modified internal rate of return (MIRR) over the traditional internal rate of return?

A project's net present value is equal to:

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000 and it is expected to generate $5,000 per year for three years. If the required rate of return is 10%, what is the terminal value of the project?

Which of the following results from a negative cash flow that occurs at the end of a project's life in addition to the initial investment in the project?

Discounted payback's primary advantage over traditional payback is that:

If the NPV of a project is positive, it means that:

A capital budgeting project is acceptable if the rate of return required for a project is greater than the project's internal rate of return.

The modified IRR (MIRR) method has wide appeal to academics, but most business executives prefer the NPV method to either the regular or modified IRR.

To add the greatest value to a firm, mutually exclusive projects that differ in scale or timing should be evaluated using the _____.

A ranking conflict that occurs when evaluating two mutually exclusive projects using the NPV technique and the IRR technique can be resolved by _____.

Which of the following statements is true of a project with a long payback period?

One advantage of the payback period method is that it provides a rough measure of a project's liquidity and risk.

The _____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

Which of the following statements is true of capital budgeting methods that consider the time value of money to evaluate independent projects?

As per the payback period method, a project is acceptable to a firm if _____.

Which of the following criteria should be used to choose a project if there is a conflict between two mutually exclusive projects?

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

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

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Exam 9: Capital Budgeting Techniques

Which of the following is an advantage of the modified internal rate of return (MIRR) over the traditional internal rate of return?

A project's net present value is equal to:

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000 and it is expected to generate $5,000 per year for three years. If the required rate of return is 10%, what is the terminal value of the project?

Which of the following results from a negative cash flow that occurs at the end of a project's life in addition to the initial investment in the project?

Discounted payback's primary advantage over traditional payback is that:

If the NPV of a project is positive, it means that:

A capital budgeting project is acceptable if the rate of return required for a project is greater than the project's internal rate of return.

The modified IRR (MIRR) method has wide appeal to academics, but most business executives prefer the NPV method to either the regular or modified IRR.

To add the greatest value to a firm, mutually exclusive projects that differ in scale or timing should be evaluated using the _____.

A ranking conflict that occurs when evaluating two mutually exclusive projects using the NPV technique and the IRR technique can be resolved by _____.

Which of the following statements is true of a project with a long payback period?

One advantage of the payback period method is that it provides a rough measure of a project's liquidity and risk.

The _____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

Which of the following statements is true of capital budgeting methods that consider the time value of money to evaluate independent projects?

As per the payback period method, a project is acceptable to a firm if _____.

Which of the following criteria should be used to choose a project if there is a conflict between two mutually exclusive projects?

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

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