Question 1

In the case of independent projects:

Accepted Answer

A) the financial manager is responsible for choosing the average of these alternatives since only one can be chosen;selecting one project requires the selection of the other. 
B) they are to be evaluated based on their expected effect on net income;all such projects that enhance net income should be included in the firm's capital budget. 
C) the financial manager is responsible for choosing the best of these alternatives since only one can be chosen;selecting one project precludes the other from being undertaken. 
D) they are to be evaluated based on their past effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
E) none of the above statements are correct 
A) the financial manager is responsible for choosing the average of these alternatives since only one can be chosen;selecting one project requires the selection of the other. 
B) they are to be evaluated based on their expected effect on net income;all such projects that enhance net income should be included in the firm's capital budget. 
C) the financial manager is responsible for choosing the best of these alternatives since only one can be chosen;selecting one project precludes the other from being undertaken. 
D) they are to be evaluated based on their past effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
E) none of the above statements are correct

Question 2

Capital budgeting is

Accepted Answer

A) the process of identifying,evaluating,and implementing a firm's working capital requirements. 
B) the process of identifying,evaluating,and implementing a firm's management objectives. 
C) the process of identifying,evaluating,and implementing a firm's strategic plans. 
D) the process of identifying,evaluating,and implementing a firm's financing requirements. 
E) none of the above statements are correct 
A) the process of identifying,evaluating,and implementing a firm's working capital requirements. 
B) the process of identifying,evaluating,and implementing a firm's management objectives. 
C) the process of identifying,evaluating,and implementing a firm's strategic plans. 
D) the process of identifying,evaluating,and implementing a firm's financing requirements. 
E) none of the above statements are correct

Question 3

In the case of mutually exclusive projects:

Accepted Answer

A) the financial manager is responsible for choosing the average of these alternatives since only one can be chosen;selecting one project requires the selection of the other. 
B) they are to be evaluated based on their expected effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
C) the financial manager is responsible for choosing the top three of these alternatives since only three can be chosen. 
D) they are to be evaluated based on their past effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
E) none of the above statements are correct 
A) the financial manager is responsible for choosing the average of these alternatives since only one can be chosen;selecting one project requires the selection of the other. 
B) they are to be evaluated based on their expected effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
C) the financial manager is responsible for choosing the top three of these alternatives since only three can be chosen. 
D) they are to be evaluated based on their past effect on shareholder wealth;all such projects that enhance shareholder wealth should be included in the firm's capital budget. 
E) none of the above statements are correct

Question 4

Which of the following statements is correct?

Accepted Answer

A) Capital budgeting analysis is not a framework for evaluating all business decisions;it is only a tool for the "financial" types. 
B) Proper analysis will identify irrelevant cash flows and an appropriate discount rate to reflect the risk of the strategy and will compare the benefits and costs of the project without considering the time value of money. 
C) Whether the investment is one in a business strategy,building a new warehouse,seeking fuel efficient methods of doing business,upgrading information technology systems,or investing in human resources,we should not try to quantify the benefits and cost of these choices in order to evaluate them properly. 
D) To achieve success over time,a firm's managers must identify and invest in projects that provide higher than average profits to maximize shareholder wealth. 
E) none of the above statements are correct 
A) Capital budgeting analysis is not a framework for evaluating all business decisions;it is only a tool for the "financial" types. 
B) Proper analysis will identify irrelevant cash flows and an appropriate discount rate to reflect the risk of the strategy and will compare the benefits and costs of the project without considering the time value of money. 
C) Whether the investment is one in a business strategy,building a new warehouse,seeking fuel efficient methods of doing business,upgrading information technology systems,or investing in human resources,we should not try to quantify the benefits and cost of these choices in order to evaluate them properly. 
D) To achieve success over time,a firm's managers must identify and invest in projects that provide higher than average profits to maximize shareholder wealth. 
E) none of the above statements are correct

Question 5

Only one of the following features is characteristic of a payback period.Identify this feature.

Accepted Answer

A) uses discounting 
B) ignores cash flows beyond the payback period 
C) equivalent to net present value 
D) considers time value of money 
A) uses discounting 
B) ignores cash flows beyond the payback period 
C) equivalent to net present value 
D) considers time value of money

Question 6

Which of the following statements is correct?

Accepted Answer

A) Capital budgeting is the process of identifying,evaluating,and implementing a firm's financing strategies. 
B) Capital budgeting seeks to identify projects that will reduce a firm's competitive advantage and by so doing decrease shareholders' wealth. 
C) By its nature,capital budgeting involves short-term projects. 
D) Capital budgeting projects usually require small initial investments and may involve acquiring or constructing plant and equipment. 
E) none of the above statements are correct 
A) Capital budgeting is the process of identifying,evaluating,and implementing a firm's financing strategies. 
B) Capital budgeting seeks to identify projects that will reduce a firm's competitive advantage and by so doing decrease shareholders' wealth. 
C) By its nature,capital budgeting involves short-term projects. 
D) Capital budgeting projects usually require small initial investments and may involve acquiring or constructing plant and equipment. 
E) none of the above statements are correct

Question 7

With independent projects,NPV and IRR provide identical accept/reject decisions.If,however,you have two mutually exclusive projects to evaluate,the most accurate thing you could say about the eventual results is that:

Accepted Answer

A) NPV and IRR may give conflicting results 
B) NPV and IRR never give the same result 
C) NPV and IRR always give the same result 
D) IRR is more lenient in accepting 
A) NPV and IRR may give conflicting results 
B) NPV and IRR never give the same result 
C) NPV and IRR always give the same result 
D) IRR is more lenient in accepting

Question 8

Internal rate of return (IRR)and net present value (NPV)methods:

Accepted Answer

A) generally arrive at the same accept/reject decisions 
B) are less sophisticated than the payback period 
C) cannot make use of the same cash flows 
D) can be substituted for by the payback period 
A) generally arrive at the same accept/reject decisions 
B) are less sophisticated than the payback period 
C) cannot make use of the same cash flows 
D) can be substituted for by the payback period

Question 9

What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1,$1,900,000 in year 2,$700,000 in year 3 and $1,800,000 in year 4?

Accepted Answer

A) 4.33 years 
B) 3.33 years 
C) 2.33 years 
D) none of the above 
A) 4.33 years 
B) 3.33 years 
C) 2.33 years 
D) none of the above

Question 10

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 11

All of the following are considered stages in the capital budgeting process EXCEPT:

Accepted Answer

A) invention 
B) development 
C) implementation 
D) selection 
E) all are included 
A) invention 
B) development 
C) implementation 
D) selection 
E) all are included

Question 12

Examples of internal financial data required for project analysis include all of the following except:

Accepted Answer

A) investment costs 
B) estimates of revenues,costs,and cash flows 
C) financing costs 
D) transportation costs 
E) all of the above are included 
A) investment costs 
B) estimates of revenues,costs,and cash flows 
C) financing costs 
D) transportation costs 
E) all of the above are included

Question 13

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 
E) none of the above 
A) 9.9;accept 
B) -9.9,reject 
C) 8.9,accept 
D) -8.9,reject 
E) none of the above

Question 14

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 15

Which of the following is the best expression of the net preset value (NPV)acceptance criterion?

Accepted Answer

A) positive cash flows total greater than negative flows 
B) number of positive cash flows exceeds negative 
C) payback within one third the life of the project 
D) NPV is greater than or equal to zero 
A) positive cash flows total greater than negative flows 
B) number of positive cash flows exceeds negative 
C) payback within one third the life of the project 
D) NPV is greater than or equal to zero

Question 16

All of the following statements are correct except:

Accepted Answer

A) The NPV and IRR methods will always agree on whether a project enhances or harms shareholder wealth. 
B) If a project has a positive NPV,its IRR will always be greater than the cost of capital. 
C) If a project has a negative NPV,its IRR will always be less than the cost of capital. 
D) There is sometimes a conflict between NPV and IRR in the case of mutually exclusive projects. 
E) all of the above are correct 
A) The NPV and IRR methods will always agree on whether a project enhances or harms shareholder wealth. 
B) If a project has a positive NPV,its IRR will always be greater than the cost of capital. 
C) If a project has a negative NPV,its IRR will always be less than the cost of capital. 
D) There is sometimes a conflict between NPV and IRR in the case of mutually exclusive projects. 
E) all of the above are correct

Question 17

The internal rate of return is the return that caused the net present value to be zero.

Accepted Answer

A) True 
 B)False

Question 18

The final step in the capital budgeting process is

Accepted Answer

A) implementation 
B) selection 
C) follow-up 
D) development 
A) implementation 
B) selection 
C) follow-up 
D) development

Question 19

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%,the NPV of the project is:

Accepted Answer

A) $5,000 
B) $6,862 
C) -$5,000 
D) -$6,862 
E) none of the above 
A) $5,000 
B) $6,862 
C) -$5,000 
D) -$6,862 
E) none of the above

Question 20

Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty.

Accepted Answer

A) True 
 B)False

In the case of independent projects:

Capital budgeting is

In the case of mutually exclusive projects:

Which of the following statements is correct?

Only one of the following features is characteristic of a payback period.Identify this feature.

Which of the following statements is correct?

With independent projects,NPV and IRR provide identical accept/reject decisions.If,however,you have two mutually exclusive projects to evaluate,the most accurate thing you could say about the eventual results is that:

Internal rate of return (IRR)and net present value (NPV)methods:

What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1,$1,900,000 in year 2,$700,000 in year 3 and $1,800,000 in year 4?

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

All of the following are considered stages in the capital budgeting process EXCEPT:

Examples of internal financial data required for project analysis include all of the following except:

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

Which of the following is the best expression of the net preset value (NPV)acceptance criterion?

All of the following statements are correct except:

The internal rate of return is the return that caused the net present value to be zero.

The final step in the capital budgeting process is

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%,the NPV of the project is:

Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty.

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Interest Rates

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Financial Return and Risk Concepts

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Exam 17: Capital Budgeting Analysis

In the case of independent projects:

Capital budgeting is

In the case of mutually exclusive projects:

Which of the following statements is correct?

Only one of the following features is characteristic of a payback period.Identify this feature.

Which of the following statements is correct?

With independent projects,NPV and IRR provide identical accept/reject decisions.If,however,you have two mutually exclusive projects to evaluate,the most accurate thing you could say about the eventual results is that:

Internal rate of return (IRR)and net present value (NPV)methods:

What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1,$1,900,000 in year 2,$700,000 in year 3 and $1,800,000 in year 4?

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

All of the following are considered stages in the capital budgeting process EXCEPT:

Examples of internal financial data required for project analysis include all of the following except:

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

Which of the following is the best expression of the net preset value (NPV)acceptance criterion?

All of the following statements are correct except:

The internal rate of return is the return that caused the net present value to be zero.

The final step in the capital budgeting process is

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%,the NPV of the project is:

Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty.

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 Valuation

Securities 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