Question 1

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Accepted Answer

A) True 
 B)False

Question 2

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

Accepted Answer

A) True 
 B)False

Question 3

A significant disadvantage of the internal rate of return is that it

Accepted Answer

A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  may have an unrealistic reinvestment assumption. 
D)  It is expressed as a percentage. 
A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  may have an unrealistic reinvestment assumption. 
D)  It is expressed as a percentage.

Question 4

The profitability index is the ratio of the present value of the future free cash flows to the initial investment.

Accepted Answer

A) True 
 B)False

Question 5

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The profitability index for Project B is

Accepted Answer

A)  1.55. 
B)  1.48. 
C)  1.39. 
D)  1.33. 
A)  1.55. 
B)  1.48. 
C)  1.39. 
D)  1.33.

Question 6

Welltran Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

Accepted Answer

A)  $558,378 
B)  $513,859 
C)  $473,498 
D)  $447,292 
A)  $558,378 
B)  $513,859 
C)  $473,498 
D)  $447,292

Question 7

The required rate of return reflects the costs of funds needed to finance a project.

Accepted Answer

A) True 
 B)False

Question 8

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

Accepted Answer

A)  the firm's discount rate, the internal rate of return 
B)  the internal rate of return, the internal rate of return 
C)  the internal rate of return, the firm's discount rate 
D)  neither criteria assumes reinvestment of future cash flows 
A)  the firm's discount rate, the internal rate of return 
B)  the internal rate of return, the internal rate of return 
C)  the internal rate of return, the firm's discount rate 
D)  neither criteria assumes reinvestment of future cash flows

Question 9

The advantages of NPV are all of the following except:

Accepted Answer

A)  it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years. 
B)  it provides the amount by which positive NPV projects will increase the value of the firm. 
C)  it allows the comparison of benefits and costs in a logical manner through the use of time value of money principles. 
D)  it recognizes the timing of the benefits resulting from the project. 
A)  it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years. 
B)  it provides the amount by which positive NPV projects will increase the value of the firm. 
C)  it allows the comparison of benefits and costs in a logical manner through the use of time value of money principles. 
D)  it recognizes the timing of the benefits resulting from the project.

Question 10

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

Accepted Answer

A)  3.33 years 
B)  3.16 years 
C)  2.67 years 
D)  2.33 years 
A)  3.33 years 
B)  3.16 years 
C)  2.67 years 
D)  2.33 years

Question 11

A project's equivalent annual annuity (EAA)is the annuity cash flow that yields the same present value as the project's NPV.

Accepted Answer

A) True 
 B)False

Question 12

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

Accepted Answer

A) True 
 B)False

Question 13

Many firms today continue to use the payback method but also employ the NPV or IRR methods especially when large projects are being analyzed.

Accepted Answer

A) True 
 B)False

Question 14

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The net present value for Project A is

Accepted Answer

A)  $12,358. 
B)  $16,947. 
C)  $19,458. 
D)  $26,074. 
A)  $12,358. 
B)  $16,947. 
C)  $19,458. 
D)  $26,074.

Question 15

Your firm is considering investing in one of two mutually exclusive projects.Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years.Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years.The appropriate discount rate for your firm is 12% and it is not subject to capital rationing.Assuming both projects can be replaced with a similar investment at the end of their respective lives,compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.

Accepted Answer

A)  $2,232 and $85 
B)  $5,000 and $1,500 
C)  $2,865 and $94 
D)  $3,528 and $136 
A)  $2,232 and $85 
B)  $5,000 and $1,500 
C)  $2,865 and $94 
D)  $3,528 and $136

Question 16

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

Accepted Answer

A) True 
 B)False

Question 17

IRR should not be used to choose between mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 18

The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life.

Accepted Answer

A) True 
 B)False

Question 19

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Accepted Answer

A) True 
 B)False

Question 20

Project A has an internal rate of return (IRR)of 15 percent.Project B has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is most correct?

Accepted Answer

A)  Both projects have a positive net present value (NPV). 
B)  Project A must have a higher NPV than project B. 
C)  If the required return were less than 12 percent, Project B would have a higher IRR than Project A. 
D)  Project B has a higher profitability index than Project A. 
A)  Both projects have a positive net present value (NPV). 
B)  Project A must have a higher NPV than project B. 
C)  If the required return were less than 12 percent, Project B would have a higher IRR than Project A. 
D)  Project B has a higher profitability index than Project A.

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

A significant disadvantage of the internal rate of return is that it

The profitability index is the ratio of the present value of the future free cash flows to the initial investment.

Welltran Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

The required rate of return reflects the costs of funds needed to finance a project.

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .

The advantages of NPV are all of the following except:

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

A project's equivalent annual annuity (EAA)is the annuity cash flow that yields the same present value as the project's NPV.

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

Many firms today continue to use the payback method but also employ the NPV or IRR methods especially when large projects are being analyzed.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

IRR should not be used to choose between mutually exclusive projects.

The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life.

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Project A has an internal rate of return (IRR)of 15 percent.Project B has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is most correct?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

Exam 10: Capital-Budgeting Techniques and Practice

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

A significant disadvantage of the internal rate of return is that it

The profitability index is the ratio of the present value of the future free cash flows to the initial investment.

Welltran Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

The required rate of return reflects the costs of funds needed to finance a project.

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

The advantages of NPV are all of the following except:

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

A project's equivalent annual annuity (EAA)is the annuity cash flow that yields the same present value as the project's NPV.

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

Many firms today continue to use the payback method but also employ the NPV or IRR methods especially when large projects are being analyzed.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

IRR should not be used to choose between mutually exclusive projects.

The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life.

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Project A has an internal rate of return (IRR)of 15 percent.Project B has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is most correct?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .