Exam 9: Capital Budgeting Techniques

A capital budgeting project is acceptable if the firm's rate of return required is greater than the project's internal rate of return (IRR). 

Seattle Inc. identified an investment opportunity that requires an initial cash outflow of $150,000. Seattle's required rate of return is 10 percent. The investment will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. Assume the cash flows occur evenly during the year. What is the traditional payback period for this investment?

If the net present value (NPV) of a project is positive,:

When considering two mutually exclusive projects, the financial manager should always select the project with the higher internal rate of return, provided the projects have the same initial cost. 

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

Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a project's true profitability than the internal rate of return (IRR) measure?

Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time value of money. Which of the following statements is correct?

The internal rate of return (IRR) technique assumes that cash flows are reinvested at the _____. 

Suppose a firm uses both the net present value (NPV) technique and the internal rate of return (IRR) technique to evaluate two mutually exclusive capital budgeting projects. If a ranking conflict exists between NPV and IRR, which of the following criteria should be used to make the final investment decision?

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12 percent. 

When the discounted payback period (DPB) technique is used to evaluate a capital budgeting project, it should be accepted when its DPB is greater than the project's expected life. 

A project's net present value is equal to:

The internal rate of return (IRR) of a project that generates its largest cash flows in the early years of its life is more sensitive to changes in the firm's required rate of return than is the IRR of a project whose largest cash flows come later in life.