Exam 10: Capital Budgeting Techniques

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________.

Which of the following is true of a capital expenditure?

The purchase of additional physical facilities, such as additional property or a new factory, is an example of a capital expenditure.

The final step in the capital budgeting process is ________.

A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to a firm's cost of capital is called net present value.

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

If a project's IRR is greater than the cost of capital, the project should be rejected.

The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return.

When evaluating projects using NPV approach, ________.

The capital budgeting process consists of four distinct but interrelated steps: proposal generation, review and analysis, decision making, and termination.

Capital expenditure proposals are reviewed to assess their appropriateness in light of a firm's overall objectives and plans, and to evaluate their economic validity.

The ________ is the compound annual rate of return that a firm will earn if it invests in the project and receives the given cash inflows.

The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.

The basic motive for capital expenditure is to ________.

If a project's payback period is less than the maximum acceptable payback period, we would accept it.

The appeal of the IRR technique is due to the general disposition of business people to think in terms of rates of return rather than actual dollar returns.

Table 10.3 A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: -If the firm in Table 10.3 has a required payback of two years, it should ________.

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $2,000 each year for the next three years is 0.5 years.

Table 10.2 -The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2)

The primary motive for capital expenditures is to refurbish fixed assets.