Question 1

A project's net present value profile is a graph that plots a project's IRR for various discount rates.

Accepted Answer

A) True 
 B)False

Question 2

Table 10.2  
-Given the information in Table 10.2 and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?

Accepted Answer

(a) @#IMG-DLM& NPV = $98,820 -

Question 3

If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures and numerous projects compete for these dollars.

Accepted Answer

A) True 
 B)False

Question 4

Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.  
-Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4)

Accepted Answer

A)  1, 2, 3, 4, and 5 
B)  1, 2, 3, 5, and 6 
C)  2, 3, 4, and 5 
D)  1, 3, 4, 5, and 6 
A)  1, 2, 3, 4, and 5 
B)  1, 2, 3, 5, and 6 
C)  2, 3, 4, and 5 
D)  1, 3, 4, 5, and 6

Question 5

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows 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)  -$1,494,336 
B)  $158,011 
C)  -$158,011 
D)  $3,505,664 
A)  -$1,494,336 
B)  $158,011 
C)  -$158,011 
D)  $3,505,664

Question 6

An internal rate of return greater than the cost of capital guarantees that the firm will earn at least its required return.

Accepted Answer

A) True 
 B)False

Question 7

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called internal rate of return.

Accepted Answer

A) True 
 B)False

Question 8

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and 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)  Yes, since the payback period of the project is less than the maximum acceptable payback period. 
B)  No, since the payback period of the project is more than the maximum acceptable payback period. 
C)  Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure. 
D)  No, since the risk exposure of the project is more than the maximum acceptable risk exposure. 
A)  Yes, since the payback period of the project is less than the maximum acceptable payback period. 
B)  No, since the payback period of the project is more than the maximum acceptable payback period. 
C)  Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure. 
D)  No, since the risk exposure of the project is more than the maximum acceptable risk exposure.

Question 9

The financial decision makers find NPV more intuitive because it measures benefits relative to the amount invested.

Accepted Answer

A) True 
 B)False

Question 10

One weakness of payback period approach is its failure to recognize cash flows that occur after the payback period.

Accepted Answer

A) True 
 B)False

Question 11

If a project's IRR is greater than 0 percent, the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 12

Independent projects are those whose cash flows compete with one another and therefore more than one project needs to be accepted in order to implement the capital budgeting decision.

Accepted Answer

A) True 
 B)False

Question 13

The capital budgeting process consists of five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.

Accepted Answer

A) True 
 B)False

Question 14

Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.  
-Using the internal rate of return approach to ranking projects, which project(s) should the firm accept? (See Table 10.4)

Accepted Answer

A)  1, 2, 3, 4, and 5 
B)  1, 2, 3, and 5 
C)  2, 3, 4, and 6 
D)  1, 3, 4, and 6 
A)  1, 2, 3, 4, and 5 
B)  1, 2, 3, and 5 
C)  2, 3, 4, and 6 
D)  1, 3, 4, and 6

Question 15

Which of the following statements is true of payback period?

Accepted Answer

A)  If the payback period is less than the maximum acceptable payback period, management should be indifferent. 
B)  If the payback period is greater than the maximum acceptable payback period, accept the project. 
C)  If the payback period is less than the maximum acceptable payback period, accept the project. 
D)  If the payback period is greater than the maximum acceptable payback period, management should be indifferent. 
A)  If the payback period is less than the maximum acceptable payback period, management should be indifferent. 
B)  If the payback period is greater than the maximum acceptable payback period, accept the project. 
C)  If the payback period is less than the maximum acceptable payback period, accept the project. 
D)  If the payback period is greater than the maximum acceptable payback period, management should be indifferent.

Question 16

Comparing net present value and internal rate of return ________.

Accepted Answer

A)  always results in the same ranking of projects 
B)  always results in the same accept-reject decision 
C)  may give different accept-reject decisions 
D)  is only necessary on independent projects 
A)  always results in the same ranking of projects 
B)  always results in the same accept-reject decision 
C)  may give different accept-reject decisions 
D)  is only necessary on independent projects

Question 17

If the NPV is less than the initial investment, a project should be rejected.

Accepted Answer

A) True 
 B)False

Question 18

Table 10.5
Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows.  
-Which projects should the firm implement? (See Table 10.5)

Accepted Answer

The answer of Table 10.5
Galaxy Satellite Co. is attempting to...

Question 19

Economic value added is the difference between an investment's net operating profit after taxes and the accounting profit.

Accepted Answer

A) True 
 B)False

Question 20

A firm can accept a project with a net present value of zero because ________.

Accepted Answer

A)  the project would maintain the wealth of the firm's owners 
B)  the project would enhance the wealth of the firm's owners 
C)  the project would maintain the earnings of the firm 
D)  the project would enhance the earnings of the firm 
A)  the project would maintain the wealth of the firm's owners 
B)  the project would enhance the wealth of the firm's owners 
C)  the project would maintain the earnings of the firm 
D)  the project would enhance the earnings of the firm

A project's net present value profile is a graph that plots a project's IRR for various discount rates.

Table 10.2 -Given the information in Table 10.2 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures and numerous projects compete for these dollars.

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows 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?

An internal rate of return greater than the cost of capital guarantees that the firm will earn at least its required return.

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called internal rate of return.

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and 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?

The financial decision makers find NPV more intuitive because it measures benefits relative to the amount invested.

One weakness of payback period approach is its failure to recognize cash flows that occur after the payback period.

If a project's IRR is greater than 0 percent, the project should be accepted.

Independent projects are those whose cash flows compete with one another and therefore more than one project needs to be accepted in order to implement the capital budgeting decision.

The capital budgeting process consists of five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.

Which of the following statements is true of payback period?

Comparing net present value and internal rate of return ________.

If the NPV is less than the initial investment, a project should be rejected.

Economic value added is the difference between an investment's net operating profit after taxes and the accounting profit.

A firm can accept a project with a net present value of zero because ________.

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

A project's net present value profile is a graph that plots a project's IRR for various discount rates.

Table 10.2 -Given the information in Table 10.2 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures and numerous projects compete for these dollars.

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows 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?

An internal rate of return greater than the cost of capital guarantees that the firm will earn at least its required return.

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called internal rate of return.

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and 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?

The financial decision makers find NPV more intuitive because it measures benefits relative to the amount invested.

One weakness of payback period approach is its failure to recognize cash flows that occur after the payback period.

If a project's IRR is greater than 0 percent, the project should be accepted.

Independent projects are those whose cash flows compete with one another and therefore more than one project needs to be accepted in order to implement the capital budgeting decision.

The capital budgeting process consists of five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.

Which of the following statements is true of payback period?

Comparing net present value and internal rate of return ________.

If the NPV is less than the initial investment, a project should be rejected.

Economic value added is the difference between an investment's net operating profit after taxes and the accounting profit.

A firm can accept a project with a net present value of zero because ________.

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