Question 1

Consider a project with the following information:

Initial outlay = $1,500
Compute the profitability index if the company's discount rate is 10%.

Accepted Answer

A)  15.8 
B)  1.61 
C)  1.81 
D)  0.62

Question 2

For the net present value (NPV)criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.

Accepted Answer

A)  greater than zero; greater than the required return 
B)  greater than or equal to zero; greater than zero 
C)  greater than one; greater than or equal to one 
D)  greater than or equal to zero; greater than or equal to one

Question 3

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

Accepted Answer

A) True 
 B)False

Question 4

Lithium,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.Lithium,Inc.'s required rate of return for these projects is 10%.The net present value for Project B is

Accepted Answer

A)  $58,097. 
B)  $66,363. 
C)  $74,538. 
D)  $112,000.

Question 5

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below.
  
Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

Accepted Answer

The answer of The Dickerson PR Firm is considering two...

Question 6

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Accepted Answer

A) True 
 B)False

Question 7

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments,

Accepted Answer

A)  the payback period for Project W will be longer than 5.6 years. 
B)  the payback period for Project W will be shorter than 5.6 years. 
C)  the IRR of Project W will increase. 
D)  the NPV of Project W will decrease.

Question 8

The disadvantage of the IRR method is that

Accepted Answer

A)  the IRR deals with cash flows. 
B)  the IRR gives equal regard to all returns within a project's life. 
C)  the IRR will always give the same project accept/reject decision as the NPV. 
D)  the IRR requires long, detailed cash flow forecasts.

Question 9

If two projects are mutually exclusive,then the IRR is more important than the NPV in deciding the project that should be chosen.

Accepted Answer

A) True 
 B)False

Question 10

You are considering investing in a project with the following year-end after-tax cash flows:
Year 1: $57,000
Year 2: $72,000
Year 3: $78,000
If the initial outlay for the project is $185,000,compute the project's internal rate of return.

Accepted Answer

A)  3.98% 
B)  5.54% 
C)  11.89% 
D)  14.74%

Question 11

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 12

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

Question 13

The internal rate of return is

Accepted Answer

A)  the discount rate that makes the NPV positive. 
B)  the discount rate that equates the present value of the cash inflows with the present value of the cash outflows. 
C)  the discount rate that makes NPV negative and the PI greater than one. 
D)  the rate of return that makes the NPV positive.

Question 14

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 15

A one-sign-reversal project should be accepted if it

Accepted Answer

A)  generates an internal rate of return that is higher than the profitability index. 
B)  produces an internal rate of return that is greater than the firm's discount rate. 
C)  results in an internal rate of return that is above a project's equivalent annual annuity. 
D)  results in a modified internal rate of return that is higher than the internal rate of return.

Question 16

A significant disadvantage of the payback period is that it

Accepted Answer

A)  is complicated to explain. 
B)  increases firm risk. 
C)  does not properly consider the time value of money. 
D)  provides a measure of liquidity.

Question 17

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

Accepted Answer

A) True 
 B)False

Question 18

The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal).

Accepted Answer

A) True 
 B)False

Question 19

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

Accepted Answer

A) True 
 B)False

Question 20

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

Accepted Answer

The answer of D&B Contracting plans to purchase a new...

Exam 10: Capital-Budgeting Techniques and Practice

Consider a project with the following information: Initial outlay = $1,500 Compute the profitability index if the company's discount rate is 10%.

For the net present value (NPV) criteria,a project is acceptable if NPV is ,while for the profitability index a project is acceptable if PI is .

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments,

The disadvantage of the IRR method is that

If two projects are mutually exclusive,then the IRR is more important than the NPV in deciding the project that should be chosen.

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

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.

The internal rate of return is

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

A one-sign-reversal project should be accepted if it

A significant disadvantage of the payback period is that it

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal).

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

Exam 10: Capital-Budgeting Techniques and Practice

Consider a project with the following information: Initial outlay = $1,500 Compute the profitability index if the company's discount rate is 10%.

For the net present value (NPV) criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments,

The disadvantage of the IRR method is that

If two projects are mutually exclusive,then the IRR is more important than the NPV in deciding the project that should be chosen.

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

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.

The internal rate of return is

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

A one-sign-reversal project should be accepted if it

A significant disadvantage of the payback period is that it

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal).

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

For the net present value (NPV) criteria,a project is acceptable if NPV is ,while for the profitability index a project is acceptable if PI is .