Question 1

The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following is a typical capital budgeting decision?

Accepted Answer

A)  Purchase of office supplies
B)  Granting credit to a new customer
C)  Replacement of manufacturing equipment with more modern and efficient equipment
D)  Financing the firm with more long-term debt and less equity C

Question 3

Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by incremental cash inflows in the next 3 years of $15,000,$20,000,and $30,000? Assume a discount rate of 10%.

Accepted Answer

A)  NPV = - $30,000 + $15,000(1.10) 1 + $20,000(1.10) 2 + $30,000(1.10) 3
B)  NPV = - $30,000 + $15,000/(1.10) 1 + $20,000/(1.10) 2 + $30,000/(1.10) 3
C)  NPV = - $30,000 + $15,000/(1.01) .10 + $20,000/(1.02) .10 + $30,000/(1.03) .10
D)  NPV = - $30,000 + $15,000/(1.1) .10 + $20,000(1.2) .10 + $30,000(1.3) .10  B

Question 4

Currently,most firms use NPV and IRR as their primary capital-budgeting technique.

Accepted Answer

A) True 
 B)False

Question 5

WKW,Inc.is analyzing a project that requires an initial investment of $10,000,followed by cash inflows of $1,000 in Year 1,$4,000 in Year 2,and $15,000 in Year 3.The cost of capital is 10%.What is the profitability index of the project?

Accepted Answer

A)  1.04
B)  1.55
C)  1.78
D)  1.97

Question 6

Manheim Candles is considering a project with the following incremental cash flows.Assume a discount rate of 10%.
Year Cash Flow
0 ($20,000)
1 0
2 $30,000
3 $30,000
Calculate the project's MIRR.(Round to the nearest whole percentage. )

Accepted Answer

A)  31%
B)  47%
C)  53%
D)  61%

Question 7

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

Accepted Answer

A)  $4,000
B)  $7,000
C)  $6,152.51
D)  $7,806.49

Question 8

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?

Accepted Answer

The answer of What is the NPV of a $45,000...

Question 9

Frazier Fudge has a project with an initial outlay of $40,000,followed by three years of annual incremental cash flows of $35,000.At the end of the third year,equipment will be sold producing additional cash flow of $10,000.Assuming a cost of capital of 10%,calculate the MIRR of the project.

Accepted Answer

A)  46.5%
B)  51.3%
C)  62.9%
D)  74.7%

Question 10

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate increases from 10% to 16%

Accepted Answer

A)  Project T should be chosen.
B)  Both projects should be rejected.
C)  H and T are equally attractive.
D)  The project rankings will change.

Question 11

Which of the following techniques will always produce a single rate of return estimate?

Accepted Answer

A)  IRR
B)  MIRR
C)  PI
D)  Discounted payback

Question 12

We compute the profitability index of a capital-budgeting proposal by

Accepted Answer

A)  multiplying the IRR by the cost of capital.
B)  dividing the present value of the annual after-tax cash flows by the cost of capital.
C)  dividing the present value of the annual after-tax cash flows by the cost of the project.
D)  multiplying the cash inflow by the IRR.

Question 13

Consider a project with the following cash flows:
After-Tax After-Tax
Accounting Cash Flow
Year Profits from Operations
1 $799 $750
2 $150 $1,000
3 $200 $1,200
Initial outlay = $1,500
Terminal cash flow = 0
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 14

The primary objective of all capital budgeting decisions is to increase the size of the firm.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following are typical consequences of good capital budgeting decisions?

Accepted Answer

A)  The firm increases in value.
B)  The firm gains knowledge and experience that may be useful in future decisions.
C)  Good capital budgeting decisions help a company define its core competencies.
D)  All of the above.

Question 16

The payback method focuses primarily on the length of time required to recover the cost of the investment rather than estimating the total value the project will add to the firm.

Accepted Answer

A) True 
 B)False

Question 17

Errors in capital budgeting decisions

Accepted Answer

A)  tend to average out over time.
B)  decrease the firm's value.
C)  are diminished because the time value of money makes future cash flows less important.
D)  are easily reversed.

Question 18

Which of the following would be considered a capital budgeting decision?

Accepted Answer

A)  Walmart purchases inventory for resale to customers.
B)  Apple sells bonds and uses the proceeds to repurchase stock.
C)  Goldman Sachs obtains short-term loans to finance day to day operations.
D)  Pfizer develops a new therapy and brings it to market.

Question 19

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000,$40,000,and $30,000.Which of the following will not change if the required rate of return is increased from 10% to 12%.

Accepted Answer

A)  The net present value.
B)  The internal rate of return.
C)  The profitability index.
D)  The modified internal rate of return.

Question 20

Although discounted cash flow decision techniques have become widely accepted,their use depends to some degree on the size of the project and where within the firm the decision is being made.

Accepted Answer

A) True 
 B)False

Exam 11: Investment Decision Criteria

The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.

Which of the following is a typical capital budgeting decision?

Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by incremental cash inflows in the next 3 years of $15,000,$20,000,and $30,000? Assume a discount rate of 10%.

Currently,most firms use NPV and IRR as their primary capital-budgeting technique.

WKW,Inc.is analyzing a project that requires an initial investment of $10,000,followed by cash inflows of $1,000 in Year 1,$4,000 in Year 2,and $15,000 in Year 3.The cost of capital is 10%.What is the profitability index of the project?

Manheim Candles is considering a project with the following incremental cash flows.Assume a discount rate of 10%. Year Cash Flow 0 ($20,000) 1 0 2 $30,000 3 $30,000 Calculate the project's MIRR.(Round to the nearest whole percentage. )

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?

Frazier Fudge has a project with an initial outlay of $40,000,followed by three years of annual incremental cash flows of $35,000.At the end of the third year,equipment will be sold producing additional cash flow of $10,000.Assuming a cost of capital of 10%,calculate the MIRR of the project.

Which of the following techniques will always produce a single rate of return estimate?

We compute the profitability index of a capital-budgeting proposal by

Consider a project with the following cash flows: After-Tax After-Tax Accounting Cash Flow Year Profits from Operations 1 $799 $750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the company's discount rate is 10%.

The primary objective of all capital budgeting decisions is to increase the size of the firm.

Which of the following are typical consequences of good capital budgeting decisions?

The payback method focuses primarily on the length of time required to recover the cost of the investment rather than estimating the total value the project will add to the firm.

Errors in capital budgeting decisions

Which of the following would be considered a capital budgeting decision?

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000,$40,000,and $30,000.Which of the following will not change if the required rate of return is increased from 10% to 12%.

Although discounted cash flow decision techniques have become widely accepted,their use depends to some degree on the size of the project and where within the firm the decision is being made.