Question 1

The net present value (NPV) of a project is negative when the discount rate used is:

Accepted Answer

A)  equal to the internal rate of return. 
B)  equal to the yield to maturity of the bonds issued to finance the project. 
C)  greater than the internal rate of return. 
D)  lower than the coupon rate of the bonds issued to finance the project. 
E)  less than the internal rate of return. 
A)  equal to the internal rate of return. 
B)  equal to the yield to maturity of the bonds issued to finance the project. 
C)  greater than the internal rate of return. 
D)  lower than the coupon rate of the bonds issued to finance the project. 
E)  less than the internal rate of return.

Question 2

With the improvement in the technology and understanding of discounting techniques, both NPV and IRR methods of capital budgeting became more popular because _____.

Accepted Answer

A)  these techniques provide correct decisions with respect to payback period minimization 
B)  these techniques provide correct decisions with respect to the maximization of the required rate of return 
C)  these techniques provide correct decisions with respect to value maximization 
D)  these techniques provide correct decisions with respect to the minimization of the number of IRRs for every project 
E)  these techniques provide correct decisions with respect to the maximization of the initial capital investment 
A)  these techniques provide correct decisions with respect to payback period minimization 
B)  these techniques provide correct decisions with respect to the maximization of the required rate of return 
C)  these techniques provide correct decisions with respect to value maximization 
D)  these techniques provide correct decisions with respect to the minimization of the number of IRRs for every project 
E)  these techniques provide correct decisions with respect to the maximization of the initial capital investment

Question 3

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted, that is, each time outflows change to inflows.

Accepted Answer

A) True 
 B)False

Question 4

An increase in the discount rate of a project will lead to a decrease in the NPV of the project.

Accepted Answer

A) True 
 B)False

Question 5

Small businesses probably make less use of the DCF capital budgeting techniques than large businesses. This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for those firms.

Accepted Answer

A) True 
 B)False

Question 6

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is correct about the use of the net present value (NPV) method and the internal rate of return (IRR) method for capital budgeting decisions?

Accepted Answer

A)  The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment opportunity at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the required rate of return. 
C)  The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate. 
D)  The NPV method assumes that cash flows are not influenced by the inflation rate while the IRR method uses a rate of return after inflation adjustment. 
E)  The NPV method assumes that the project generates no cash flows beyond the payback period while the IRR method assumes no cash flow in the first year of the life of a project. 
A)  The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment opportunity at the IRR. 
B)  The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the required rate of return. 
C)  The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate. 
D)  The NPV method assumes that cash flows are not influenced by the inflation rate while the IRR method uses a rate of return after inflation adjustment. 
E)  The NPV method assumes that the project generates no cash flows beyond the payback period while the IRR method assumes no cash flow in the first year of the life of a project.

Question 8

The Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 per year in Years 1 through 2, $35,000 per year in Years 3 through 4, and $40,000 in Year 5. This investment will cost the firm $100,000 today, and the firm's required rate of return is 10 percent. What is the NPV for this investment? (Round off the answer to two decimal places.)

Accepted Answer

A)  $23,653.26 
B)  $27,104.46 
C)  $44,226.00 
D)  $40,235.34 
E)  $35,768.45 
A)  $23,653.26 
B)  $27,104.46 
C)  $44,226.00 
D)  $40,235.34 
E)  $35,768.45

Question 9

Which of the following statements is true when a project's discounted payback is less than its useful life?

Accepted Answer

A)  The terminal value of the future cash flows that the project is expected to generate is less than the future value of the initial cost of the asset. 
B)  The future cash flows that the project is expected to generate are less than the initial cost of the asset. 
C)  The present value of the future cash flows that the project is expected to generate exceeds the initial cost of the asset. 
D)  The future value of the cash flows from the resale of the asset acquired for the project is expected to exceed the initial cost of the asset. 
E)  The cost recovery from the project is expected to exceed the maximum cost-recovery time established by the firm. 
A)  The terminal value of the future cash flows that the project is expected to generate is less than the future value of the initial cost of the asset. 
B)  The future cash flows that the project is expected to generate are less than the initial cost of the asset. 
C)  The present value of the future cash flows that the project is expected to generate exceeds the initial cost of the asset. 
D)  The future value of the cash flows from the resale of the asset acquired for the project is expected to exceed the initial cost of the asset. 
E)  The cost recovery from the project is expected to exceed the maximum cost-recovery time established by the firm.

Question 10

A project's terminal value is _____.

Accepted Answer

A)  the present value of all the cash outflows including the initial cost of investment 
B)  the cash inflow in the last year of the project 
C)  the sum of the future values of the cash inflows compounded at the firm's required rate of return 
D)  the sum of the cash inflows after full recovery of the initial investment in the project 
E)  the excess of the cash outflows over the cash inflows generated by the project 
A)  the present value of all the cash outflows including the initial cost of investment 
B)  the cash inflow in the last year of the project 
C)  the sum of the future values of the cash inflows compounded at the firm's required rate of return 
D)  the sum of the cash inflows after full recovery of the initial investment in the project 
E)  the excess of the cash outflows over the cash inflows generated by the project

Question 11

In capital budgeting analysis, the riskiness of a project is evaluated to:

Accepted Answer

A)  determine the multiple internal rates of return from the project. 
B)  determine the appropriate rate of return to use for computing the present value of the estimated cash flows. 
C)  determine the duration of the project. 
D)  determine the role of management to ensure project completion within stipulated time. 
E)  determine the opportunity rate of return. 
A)  determine the multiple internal rates of return from the project. 
B)  determine the appropriate rate of return to use for computing the present value of the estimated cash flows. 
C)  determine the duration of the project. 
D)  determine the role of management to ensure project completion within stipulated time. 
E)  determine the opportunity rate of return.

Question 12

An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.6 years. What is the project's investment cost?

Accepted Answer

A)  $250 
B)  $500 
C)  $180 
D)  $140 
E)  $325 
A)  $250 
B)  $500 
C)  $180 
D)  $140 
E)  $325

The net present value (NPV) of a project is negative when the discount rate used is:

With the improvement in the technology and understanding of discounting techniques, both NPV and IRR methods of capital budgeting became more popular because _____.

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted, that is, each time outflows change to inflows.

An increase in the discount rate of a project will lead to a decrease in the NPV of the project.

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

Which of the following statements is correct about the use of the net present value (NPV) method and the internal rate of return (IRR) method for capital budgeting decisions?

Which of the following statements is true when a project's discounted payback is less than its useful life?

A project's terminal value is _____.

In capital budgeting analysis, the riskiness of a project is evaluated to:

An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.6 years. What is the project's investment cost?

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 net present value (NPV) of a project is negative when the discount rate used is:

With the improvement in the technology and understanding of discounting techniques, both NPV and IRR methods of capital budgeting became more popular because _____.

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted, that is, each time outflows change to inflows.

An increase in the discount rate of a project will lead to a decrease in the NPV of the project.

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

Which of the following statements is correct about the use of the net present value (NPV) method and the internal rate of return (IRR) method for capital budgeting decisions?

Which of the following statements is true when a project's discounted payback is less than its useful life?

A project's terminal value is _____.

In capital budgeting analysis, the riskiness of a project is evaluated to:

An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.6 years. What is the project's investment cost?

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