Question 1

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Accepted Answer

A)  Payback 
B)  Discounted payback 
C)  Net present value 
D)  Profitability index

Question 2

Suppose your firm is considering two mutually exclusive,required projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 8 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and three years,respectively.  Use the PI decision rule to evaluate these projects; which one(s)should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 3

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 10 percent,and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years,respectively.Use the MIRR decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  MIRR = 11.59 percent; accept the project 
B)  MIRR = 9.21 percent; reject the project 
C)  MIRR = 7.19 percent; reject the project 
D)  MIRR = 10.58 percent; accept the project

Question 4

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

Accepted Answer

A)  2.49 years, accept 
B)  2.98 years, accept 
C)  3.49 years, reject 
D)  4.98 years, reject

Question 5

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J

Accepted Answer

The answer of Compute the MIRR statistic for Project J...

Question 6

The least-used capital budgeting technique in industry is:

Accepted Answer

A)  NPV. 
B)  IRR. 
C)  P\payback. 
D)  MIRR.

Question 7

We accept projects with a positive NPV because it means that:

Accepted Answer

A)  we have recovered all our costs. 
B)  we are creating wealth for shareholders. 
C)  the project's expected return exceeds the cost of capital. 
D)  all of the options.

Question 8

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

Accepted Answer

A)  3.45 years, reject 
B)  3.86 years, reject 
C)  3.45 years, accept 
D)  3.86 years, accept

Question 9

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

Accepted Answer

A)  The project has only one negative cash flow. 
B)  The project's MIRR is less than 15 percent but greater than 10 percent. 
C)  The project's discounted payback is less than the project's payback. 
D)  The project's NPV > 0.

Question 10

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Accepted Answer

A)  −0.0977 percent, reject 
B)  −9.77 percent, reject 
C)  −24.41 percent, reject 
D)  24.41 percent, accept

Question 11

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Accepted Answer

A)  MIRR. 
B)  profitability index. 
C)  payback. 
D)  NPV.

Question 12

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years.At what rate is the NPV equal to zero?

Accepted Answer

A)  30.10 percent 
B)  29.83 percent 
C)  22.47 percent 
D)  31.38 percent

Question 13

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

Accepted Answer

A)  −$639.96 
B)  $360.04 
C)  $392.44 
D)  $486.29

Question 14

Suppose your firm is considering two mutually exclusive,required projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 10 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years,respectively.  Use the IRR decision rule to evaluate these projects; which one(s)should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 15

All of the following are strengths of NPV EXCEPT:

Accepted Answer

A)  it works equally well for independent and mutually exclusive projects. 
B)  managers have a preference for using a statistic that is in percent instead of dollars. 
C)  it uses a conservative reinvestment rate assumption. 
D)  these are all strengths of the NPV statistic.

Question 16

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Accepted Answer

A)  MIRR. 
B)  profitability index. 
C)  IRR. 
D)  NPV.

Question 17

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects,one would choose:

Accepted Answer

A)  either project if they both are more than managers' maximum payback period. 
B)  neither project if they both are less than managers' maximum payback period. 
C)  the project that pays back the soonest. 
D)  the project that pays back the soonest if it is equal to or less than managers' maximum payback period.

Question 18

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years.What is the IRR of this financial asset?

Accepted Answer

A)  33.26 percent 
B)  34.98 percent 
C)  35.93 percent 
D)  36.72 percent

Question 19

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.  Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  12.00 percent, reject 
B)  31.21 percent, accept 
C)  54.22 percent, accept 
D)  80.67 percent, accept

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J

The least-used capital budgeting technique in industry is:

We accept projects with a positive NPV because it means that:

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years.At what rate is the NPV equal to zero?

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

All of the following are strengths of NPV EXCEPT:

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects,one would choose:

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years.What is the IRR of this financial asset?