Exam 9: Capital Budgeting Techniques

With the improvement in the technology and understanding of discounting techniques, both the net present value (NPV) technique and internal rate of return (IRR) technique used in capital budgeting analyses have become more popular because these techniques provide decisions that help the firm to _____. 

If a project's net present value (NPV) is positive,:

Which of the following cash flow patterns would produce multiple internal rates of return (IRRs) for a project?

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

Suppose a firm is evaluating a capital budgeting project using the internal rate of return (IRR) technique. If the firm's required rate of return increases, the project's IRR will decrease. 

If a project's discounted payback period is less than its useful life, _____. 

Project A, which costs of $1,000 to purchase, will generate net cash inflows equal to $500 at the end of each of the next three years. The project's required rate of return is 10 percent. What are the project's internal rate of return (IRR) and modified internal rate of return (MIRR)?

Ace Inc. is evaluating two mutually exclusive projects-Project A and Project B. The initial investment for each project is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $99,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?

In capital budgeting analyses, the net present value (NPV) method and the internal rate of return (IRR) method both assume that the reinvestment of the project's cash flows occurs at the same rate. 

Which of the following is true about the net present value (NPV) capital budgeting technique?

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 firm's required rate of return is 10 percent, what is the project's terminal value?

Which of the following capital budgeting assumes that any cash flows generated by a project can be reinvested at its internal rate of return (IRR)?

Everything else equal, a project that has a long traditional payback period (PB) _____. 

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

Although the modified internal rate of return (MIRR) method has wide appeal to academics, most business executives prefer to use the net present value (NPV) method to evaluate capital budgeting projects. 

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

The ultimate purpose of a capital budget is to forecast _____. 

If a firm discovers a ranking conflict exists after evaluating two mutually exclusive capital budgeting projects using the net present value (NPV) technique and the internal rate of return (IRR) technique, which of the following capital budgeting techniques should it use to ensure the correct value-maximizing decision is made?

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)?

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