Question 1

____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted.

Accepted Answer

A)  Mutually exclusive 
B)  Independent 
C)  Replacement 
D)  Expansion 
A)  Mutually exclusive 
B)  Independent 
C)  Replacement 
D)  Expansion

Question 2

Which of the following statements is correct?

Accepted Answer

A)  A relatively risky future cash outflow should be evaluated using a relatively low discount rate. 
B)  If a firm's managers want to maximize the value of the stock,they should concentrate exclusively on projects' market,or beta,risk. 
C)  If a firm evaluates all projects using the same required rate of return to determine NPVs,then the riskiness of the firm as measured by its beta will probably decline over time. 
D)  If a firm has a beta which is less than 1.0,say 0.9,this would suggest that its assets' returns are negatively correlated with the returns of most other firms' assets. 
E)  The above statements are all false. 
A)  A relatively risky future cash outflow should be evaluated using a relatively low discount rate. 
B)  If a firm's managers want to maximize the value of the stock,they should concentrate exclusively on projects' market,or beta,risk. 
C)  If a firm evaluates all projects using the same required rate of return to determine NPVs,then the riskiness of the firm as measured by its beta will probably decline over time. 
D)  If a firm has a beta which is less than 1.0,say 0.9,this would suggest that its assets' returns are negatively correlated with the returns of most other firms' assets. 
E)  The above statements are all false.

Question 3

Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of this,they should be excluded from the financial analyses.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is correct?

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 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 IRR. 
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 does not consider the inflation premium. 
E)  The IRR method does not consider all relevant cash flows,and particularly cash flows beyond the payback period. 
A)  The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment 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 IRR. 
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 does not consider the inflation premium. 
E)  The IRR method does not consider all relevant cash flows,and particularly cash flows beyond the payback period.

Question 5

The NPV and IRR methods,when used to evaluate an independent project,will lead to different accept/reject decisions unless the IRR is greater than the required rate of return.

Accepted Answer

A) True 
 B)False

Question 6

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.

Accepted Answer

A)  9% 
B)  7% 
C)  5% 
D)  3% 
E)  11% 
A)  9% 
B)  7% 
C)  5% 
D)  3% 
E)  11%

Question 7

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal),we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is most correct?

Accepted Answer

A)  Sunk costs should be ignored in capital budgeting. 
B)  Opportunity costs should be ignored in capital budgeting. 
C)  Externalities should be ignored in capital budgeting. 
D)  Answers a,b,and c are all correct. 
E)  Answers a,b,and c are all incorrect. 
A)  Sunk costs should be ignored in capital budgeting. 
B)  Opportunity costs should be ignored in capital budgeting. 
C)  Externalities should be ignored in capital budgeting. 
D)  Answers a,b,and c are all correct. 
E)  Answers a,b,and c are all incorrect.

Question 9

Repatriation of funds is not relevant in multinational capital budgeting analysis as the funds generated in foreign countries can be reinvested in that country generating larger cash flows for the parent company.

Accepted Answer

A) True 
 B)False

Question 10

Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.

Accepted Answer

A) True 
 B)False

Question 11

One of the disadvantages of the payback method for evaluating capital budgeting projects is that it does not adjust for the riskiness of different projects.

Accepted Answer

A) True 
 B)False

Question 12

Capital budgeting is process of planning expenditures on assets whose cash flows are expected to end in less than one year.

Accepted Answer

A) True 
 B)False

Question 13

Mom's Cookies Inc.is considering the purchase of a new cookie oven.The original cost of the old oven was $30,000;it is now 5 years old,and it has a current market value of $13,333.33.The old oven is being depreciated over a 10-year life towards a zero estimated salvage value on a straight line basis,resulting in a current book value of $15,000 and an annual depreciation expense of $3,000.The old oven can be used for 6 more years but has no market value after its depreciable life is over.Management is contemplating the purchase of a new oven whose cost is $25,000 and whose estimated salvage value is zero.Expected before-tax cash savings from the new oven are $4,000 a year over its full MACRS depreciable life.Depreciation is computed using MACRS over a 5-year life,and the required rate of return is 10 percent.Assume a 40 percent tax rate.What is the net present value of the new oven?

Accepted Answer

A)  −$2,418 
B)  −$1,731 
C)  $1,568 
D)  $163 
E)  $1,731 
A)  −$2,418 
B)  −$1,731 
C)  $1,568 
D)  $163 
E)  $1,731

Question 14

Real Time Inc.
The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's required rate of return is 14 percent.
-Refer to Real Time Inc.What is the initial investment outlay required at t = 0?

Accepted Answer

A)  −$42,000 
B)  −$40,000 
C)  −$38,600 
D)  −$37,600 
E)  −$36,600 
A)  −$42,000 
B)  −$40,000 
C)  −$38,600 
D)  −$37,600 
E)  −$36,600

Question 15

Assume a project has normal cash flows (i.e. ,the initial cash flow is negative,and all other cash flows are positive).Which of the following statements is most correct?

Accepted Answer

A)  All else equal,a project's IRR increases as the required rate of return declines. 
B)  All else equal,a project's NPV increases as the required rate of return declines. 
C)  All else equal,a project's IRR is unaffected by changes in the required rate of return. 
D)  Answers a and b are both correct. 
E)  Answers b and c are both correct. 
A)  All else equal,a project's IRR increases as the required rate of return declines. 
B)  All else equal,a project's NPV increases as the required rate of return declines. 
C)  All else equal,a project's IRR is unaffected by changes in the required rate of return. 
D)  Answers a and b are both correct. 
E)  Answers b and c are both correct.

Question 16

Truck Acquisition
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent.
-Refer to Truck Acquisition.The truck's required rate of return is 10 percent.What is its NPV?

Accepted Answer

A)  −$1,547 
B)  −$562 
C)  $0 
D)  $562 
E)  $1,034 
A)  −$1,547 
B)  −$562 
C)  $0 
D)  $562 
E)  $1,034

Question 17

Opportunity costs include those cash inflows that could be generated from assets the firm already owns,if those assets are not used for the project being evaluated.

Accepted Answer

A) True 
 B)False

Question 18

In its most general sense,capital budgeting is concerned both with the demand for and the supply of funds for long-term investment.

Accepted Answer

A) True 
 B)False

Question 19

Superior analytical techniques,such as NPV,used in combination with adjustments to the average required rate of return,can overcome the problem of poor cash flow estimation in decision making.

Accepted Answer

A) True 
 B)False

Question 20

The internal rate of return for a project that has initial costs of $10,000 and generates cash flows of $7,000 in year one,$8,000 in year two,and $5,000 in year three is 35.7%.

Accepted Answer

A) True 
 B)False

____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted.

Which of the following statements is correct?

Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of this,they should be excluded from the financial analyses.

Which of the following statements is correct?

The NPV and IRR methods,when used to evaluate an independent project,will lead to different accept/reject decisions unless the IRR is greater than the required rate of return.

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal),we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Which of the following statements is most correct?

Repatriation of funds is not relevant in multinational capital budgeting analysis as the funds generated in foreign countries can be reinvested in that country generating larger cash flows for the parent company.

Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.

One of the disadvantages of the payback method for evaluating capital budgeting projects is that it does not adjust for the riskiness of different projects.

Capital budgeting is process of planning expenditures on assets whose cash flows are expected to end in less than one year.

Assume a project has normal cash flows (i.e. ,the initial cash flow is negative,and all other cash flows are positive).Which of the following statements is most correct?

Opportunity costs include those cash inflows that could be generated from assets the firm already owns,if those assets are not used for the project being evaluated.

In its most general sense,capital budgeting is concerned both with the demand for and the supply of funds for long-term investment.

Superior analytical techniques,such as NPV,used in combination with adjustments to the average required rate of return,can overcome the problem of poor cash flow estimation in decision making.

The internal rate of return for a project that has initial costs of $10,000 and generates cash flows of $7,000 in year one,$8,000 in year two,and $5,000 in year three is 35.7%.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 13: Capital Budgeting

____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted.

Which of the following statements is correct?

Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of this,they should be excluded from the financial analyses.

Which of the following statements is correct?

The NPV and IRR methods,when used to evaluate an independent project,will lead to different accept/reject decisions unless the IRR is greater than the required rate of return.

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal),we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Which of the following statements is most correct?

Repatriation of funds is not relevant in multinational capital budgeting analysis as the funds generated in foreign countries can be reinvested in that country generating larger cash flows for the parent company.

Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.

One of the disadvantages of the payback method for evaluating capital budgeting projects is that it does not adjust for the riskiness of different projects.

Capital budgeting is process of planning expenditures on assets whose cash flows are expected to end in less than one year.

Assume a project has normal cash flows (i.e. ,the initial cash flow is negative,and all other cash flows are positive).Which of the following statements is most correct?

Opportunity costs include those cash inflows that could be generated from assets the firm already owns,if those assets are not used for the project being evaluated.

In its most general sense,capital budgeting is concerned both with the demand for and the supply of funds for long-term investment.

Superior analytical techniques,such as NPV,used in combination with adjustments to the average required rate of return,can overcome the problem of poor cash flow estimation in decision making.

The internal rate of return for a project that has initial costs of $10,000 and generates cash flows of $7,000 in year one,$8,000 in year two,and $5,000 in year three is 35.7%.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters