Question 1

The first step in the capital budgeting process is ________.

Accepted Answer

A)  review and analysis 
B)  implementation 
C)  decision making 
D)  proposal generation 
A)  review and analysis 
B)  implementation 
C)  decision making 
D)  proposal generation

Question 2

The IRR is the compounded annual rate of return that a firm will earn if it invests in a project and receives the estimated cash inflows.

Accepted Answer

A) True 
 B)False

Question 3

Time value of money should be ignored in capital budgeting techniques to make accurate decisions.

Accepted Answer

A) True 
 B)False

Question 4

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 profitability index.

Accepted Answer

A) True 
 B)False

Question 5

Capital budgeting techniques are used to evaluate a firm's fixed asset investments which provide the basis for the firm's earning power and value.

Accepted Answer

A) True 
 B)False

Question 6

The ________ measures the amount of time it takes a firm to recover its initial investment.

Accepted Answer

A)  profitability index 
B)  internal rate of return 
C)  net present value 
D)  payback period 
A)  profitability index 
B)  internal rate of return 
C)  net present value 
D)  payback period

Question 7

A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.

Accepted Answer

A) True 
 B)False

Question 8

In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.

Accepted Answer

A) True 
 B)False

Question 9

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?

Accepted Answer

A)  4.33 years 
B)  3.33 years 
C)  2.33 years 
D)  1.33 years 
A)  4.33 years 
B)  3.33 years 
C)  2.33 years 
D)  1.33 years

Question 10

By measuring how quickly a firm recovers its initial investment, the payback period gives implicit consideration to the time value of money and ignores the timing of cash flows.

Accepted Answer

A) True 
 B)False

Question 11

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 12

On a purely theoretical basis, NPV is preferred over IRR because NPV assumes a more conservative reinvestment rate and does not exhibit the mathematical problem of multiple IRRs that often occurs when IRRs are calculated for nonconventional cash flows.

Accepted Answer

A) True 
 B)False

Question 13

Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

Accepted Answer

A)  net present value 
B)  internal rate of return 
C)  payback 
D)  accounting rate of return 
A)  net present value 
B)  internal rate of return 
C)  payback 
D)  accounting rate of return

Question 14

Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?

Accepted Answer

A)  It measures the benefits relative to the relative amount invested. 
B)  The reinvestment rate assumed by this method is reasonable. 
C)  Financial decision makers are inclined to higher rates of return. 
D)  Interest rates are expressed as annual rates of return. 
A)  It measures the benefits relative to the relative amount invested. 
B)  The reinvestment rate assumed by this method is reasonable. 
C)  Financial decision makers are inclined to higher rates of return. 
D)  Interest rates are expressed as annual rates of return.

Question 15

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Sketch a net present value profile for each of these projects. Which project should the firm choose if the cost of capital is 10 percent? What if the cost of capital is 25 percent? Show all work.

Accepted Answer

@#IMG-DLM& @#IMG-DLM& At a cost of capital of 10 p

Question 16

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

Accepted Answer

A) True 
 B)False

Question 17

An annuity is ________.

Accepted Answer

A)  a mix of cash flows in conventional and nonconventional 
B)  a stream of perpetual cash flows 
C)  a series of constantly growing cash flows 
D)  a series of equal annual cash flows 
A)  a mix of cash flows in conventional and nonconventional 
B)  a stream of perpetual cash flows 
C)  a series of constantly growing cash flows 
D)  a series of equal annual cash flows

Question 18

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

Accepted Answer

A)  15.57% 
B)  0.00% 
C)  13.57% 
D)  12.25% 
A)  15.57% 
B)  0.00% 
C)  13.57% 
D)  12.25%

Question 19

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Accepted Answer

A)  Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years. 
B)  Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in Project B. 
C)  Project B should be accepted because you get more money paid back in the long run. 
D)  Both projects can be accepted because the payback is less than 3 years. 
A)  Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years. 
B)  Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in Project B. 
C)  Project B should be accepted because you get more money paid back in the long run. 
D)  Both projects can be accepted because the payback is less than 3 years.

Question 20

________ projects do not compete with each other; the acceptance of one ________ the others from consideration.

Accepted Answer

A)  Capital; eliminates 
B)  Independent; does not eliminate 
C)  Mutually exclusive; eliminates 
D)  Replacement; eliminates 
A)  Capital; eliminates 
B)  Independent; does not eliminate 
C)  Mutually exclusive; eliminates 
D)  Replacement; eliminates

The first step in the capital budgeting process is ________.

The IRR is the compounded annual rate of return that a firm will earn if it invests in a project and receives the estimated cash inflows.

Time value of money should be ignored in capital budgeting techniques to make accurate decisions.

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 profitability index.

Capital budgeting techniques are used to evaluate a firm's fixed asset investments which provide the basis for the firm's earning power and value.

The ________ measures the amount of time it takes a firm to recover its initial investment.

A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.

In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?

By measuring how quickly a firm recovers its initial investment, the payback period gives implicit consideration to the time value of money and ignores the timing of cash flows.

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

On a purely theoretical basis, NPV is preferred over IRR because NPV assumes a more conservative reinvestment rate and does not exhibit the mathematical problem of multiple IRRs that often occurs when IRRs are calculated for nonconventional cash flows.

Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

An annuity is ________.

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

projects do not compete with each other; the acceptance of one the others from consideration.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 10: Capital Budgeting Techniques

The first step in the capital budgeting process is ________.

The IRR is the compounded annual rate of return that a firm will earn if it invests in a project and receives the estimated cash inflows.

Time value of money should be ignored in capital budgeting techniques to make accurate decisions.

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 profitability index.

Capital budgeting techniques are used to evaluate a firm's fixed asset investments which provide the basis for the firm's earning power and value.

The ________ measures the amount of time it takes a firm to recover its initial investment.

A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.

In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?

By measuring how quickly a firm recovers its initial investment, the payback period gives implicit consideration to the time value of money and ignores the timing of cash flows.

On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

On a purely theoretical basis, NPV is preferred over IRR because NPV assumes a more conservative reinvestment rate and does not exhibit the mathematical problem of multiple IRRs that often occurs when IRRs are calculated for nonconventional cash flows.

Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

An annuity is ________.

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

________ projects do not compete with each other; the acceptance of one ________ the others from consideration.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

projects do not compete with each other; the acceptance of one the others from consideration.