Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
A)  The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
B)  The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
C)  The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
D)  The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 
E)  The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Question 2

In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.

Accepted Answer

A) True 
 B)False

Question 3

The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

Accepted Answer

A) True 
 B)False

Question 4

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Accepted Answer

A) True 
 B)False

Question 5

Pet World is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative),in which case it will be rejected. $$\begin{array} { c c c c c c c } 
\text { Year } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flowr } & - \$ 9,500 & \$2,000 & \$ 2,025 & \$2,050 & \$2,075 & \$2,100
\end{array}$$

Accepted Answer

A)  2.08% 
B)  2.31% 
C)  2.57% 
D)  2.82% 
E)  3.10% 
A)  2.08% 
B)  2.31% 
C)  2.57% 
D)  2.82% 
E)  3.10%

Question 6

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

Accepted Answer

A)  Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale). 
B)  Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. 
C)  The crossover rate for the two projects must be 12%. 
D)  Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%. 
E)  The crossover rate for the two projects must be less than 12%. 
A)  Assuming the timing pattern of the two projects' cash flows is the same, Project B probably has a higher cost (and larger scale). 
B)  Assuming the two projects have the same scale, Project B probably has a faster payback than Project A. 
C)  The crossover rate for the two projects must be 12%. 
D)  Since B has the higher IRR, then it must also have the higher NPV if the crossover rate is less than the WACC of 12%. 
E)  The crossover rate for the two projects must be less than 12%.

Question 7

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

Accepted Answer

A)  One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. 
B)  If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
C)  The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. 
D)  If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. 
E)  The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. 
A)  One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. 
B)  If a project's payback is positive, then the project should be rejected because it must have a negative NPV. 
C)  The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. 
D)  If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. 
E)  The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

Question 8

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

Accepted Answer

A) True 
 B)False

Which of the following statements is CORRECT?

In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.

The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Pet World is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative),in which case it will be rejected. Year 0 1 2 3 4 5 Cash flowr -\ 9,500 \2 ,000 \ 2,025 \2 ,050 \2 ,075 \2 ,100

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters

Exam 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Which of the following statements is CORRECT?

In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.

The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is less than the projects' cost of capital.

The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.

Pet World is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative),in which case it will be rejected. Year 0 1 2 3 4 5 Cash flowr -\ 9,500 \2 ,000 \ 2,025 \2 ,050 \2 ,075 \2 ,100

Projects A and B are mutually exclusive and have normal cash flows.Project A has an IRR of 15% and B's IRR is 20%.The company's WACC is 12%,and at that rate Project A has the higher NPV.Which of the following statements is CORRECT?

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Risk and Return

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters