Question 1

One weakness of the internal rate of return approach is that:

Accepted Answer

A)   it does not directly consider the timing of the cash flows from a project.
B)   it fails to provide a straightforward decision rule.
C)   it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital.
D)   None of the aboveE) None of the above
F) B) and C)

Question 2

A firm's cost of capital is:

Accepted Answer

A)   the time value of money calculated on the capital owned by a business.
B)   the average return it pays to investors for the use of their money.
C)   the cost a firm incurs while operating a business.
D)   None of the aboveE) C) and D)
F) A) and C)

Question 3

The projected cash flows for a project are:
  If the firm's cost of capital is 12%, what are the project's net present value and internal rate of return?

Accepted Answer

($7,647)
Calculator steps ($00...

Question 4

Capital rationing may involve:

Accepted Answer

A)   accepting projects with negative NPVs.
B)   rejecting projects with positive NPVs.
C)   limitations on the number of project proposals that are submitted for evaluation.
D)   allocating available capital among all project proposals with positive NPVs.E) B) and C)
F) A) and D)

Question 5

A project's ____ is the sum of the present values of all cash inflows and outflows discounted at the cost of capital.

Accepted Answer

A)   NPV
B)   IRR
C)   payback period
D)   All of the aboveE) B) and C)
F) C) and D)

Question 6

Projects are said to be mutually exclusive when undertaking one precludes doing the other(s).

Accepted Answer

A) True 
 B)False  True

Question 7

The profitability index is a variation of the ____ method.

Accepted Answer

A)   NPV
B)   IRR
C)   payback
D)   Both a & cE) All of the above
F) None of the above A

Question 8

A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.

Accepted Answer

A)   0.28 years
B)   1.4 years
C)   3.57 years
D)   17.86 yearsE) All of the above
F) A) and C)

Question 9

Although the NPV method is technically superior, the IRR method is used more frequently.

Accepted Answer

A) True 
 B)False

Question 10

The net present value (NPV)  method assumes that cash flows are reinvested at the:

Accepted Answer

A)   IRR.
B)   cost of capital.
C)   average rate it pays investors.
D)   Both b & cE) C) and D)
F) A) and B)

Question 11

The future cash flows of a stand-alone capital project follow:   Year 0123 Cash flow ($5,000) $2,000$2,000$2,000\begin{array}{lllll}	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flow } & (\$ 5,000)  & \$ 2,000 & \$ 2,000 & \$ 2,000\end{array} Year  Cash flow ​0($5,000) ​1$2,000​2$2,000​3$2,000​  With the project's approximate IRR?

Accepted Answer

A)   10%
B)   12%
C)   8%
D)   ($26)  E) A) and C)
F) A) and B)

Question 12

The easiest way to compare projects with unequal lives is by using:

Accepted Answer

A)   IRR.
B)   the replacement chain method.
C)   the equivalent annual annuity method.
D)   Either b or cE) All of the above
F) A) and B)

Question 13

A stand-alone capital project has the following cash flows.   Year 01−5 CashFlow ($100,000) $28,000\begin{array}{lll}	ext { Year } & 0 &{1-5}\	ext { CashFlow } & (\$ 100,000)  &{\$ 28,000}\end{array} Year  CashFlow ​0($100,000) ​1−5$28,000​  What is its NPV if the cost of capital is 10%?

Accepted Answer

A)   $106,142
B)   ($6,142) 
C)   $934
D)   $6,142 E) All of the above
F) None of the above

Question 14

Capital projects are said to be mutually exclusive when:

Accepted Answer

A)   the financial viability of a single project is being evaluated.
B)   two or more projects are being evaluated and doing one precludes doing another.
C)   one project is much easier to do than another.
D)   b and cE) A) and D)
F) A) and C)

Question 15

The money needed to get a project started is generally referred to as the initial outlay. It includes all cash outflows:

Accepted Answer

A)   before the start of the project and in its first year.
B)   throughout the life of the project.
C)   before or at the start of the project, generally referred to as at time zero.
D)   already spent.E) B) and C)
F) A) and B)

Question 16

A stand-alone capital project has the following projected cash flows:   Year 0123 Cash flow ($4,000) $1,500$1,200$2,395\begin{array}{lllll}	ext { Year } & 0 & 1 & 2 & 3 \	ext { Cash flow } & (\$ 4,000)  & \$ 1,500 & \$1,200 & \$ 2,395\end{array} Year  Cash flow ​0($4,000) ​1$1,500​2$1,200​3$2,395​  If the firm's cost of capital is 14%, which of the following statements is true?

Accepted Answer

A)   the IRR is greater than the cost of capital and the project should be undertaken
B)   the project should be rejected because the IRR is 12%, which is less than the project's cost of capital
C)   the IRR is less than 12% and the project should be undertaken
D)   the NPV of the project is positive and the project should be undertaken E) None of the above
F) All of the above

Question 17

The objective in solving capital rationing problems is to:

Accepted Answer

A)   accept all projects with a PI greater than 1.1.
B)   maximize the average IRR of the projects that are accepted.
C)   maximize the total NPV of the projects that are accepted.
D)   minimize the firm's cost of capital.E) None of the above
F) B) and C)

Question 18

Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in year 2, $5,000 in year 3, and $3,000 in year 4. Should Sigma purchase this digger if its cost of capital is 12 percent?

Accepted Answer

A)   Yes, NPV = $3,176
B)   Yes, NPV = $5,084
C)   Yes, NPV = $16,605
D)   Yes, NPV= $19,084E) B) and C)
F) All of the above

Question 19

In addition to justifying how capital dollars are spent, capital budgeting provides a basis for choosing among alternative capital projects.

Accepted Answer

A) True 
 B)False

Question 20

An outlay of $180,000 is expected to yield the following cash flows: Year Net Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the NPV?

Accepted Answer

A)   $8,505
B)   $5,070
C)   $3,525
D)   $2,982E) A) and B)
F) A) and C) D

Exam 10: Capital Budgeting

One weakness of the internal rate of return approach is that:

Correct AnswerverifiedShow Answer

A firm's cost of capital is:

Correct AnswerverifiedShow Answer

The projected cash flows for a project are: If the firm's cost of capital is 12%, what are the project's net present value and internal rate of return?

Correct Answerverified($7,647)Calculator steps ($00...View AnswerShow Answer

Capital rationing may involve:

Correct AnswerverifiedShow Answer

A project's ____ is the sum of the present values of all cash inflows and outflows discounted at the cost of capital.

Correct AnswerverifiedShow Answer

Projects are said to be mutually exclusive when undertaking one precludes doing the other(s).

Correct AnswerverifiedTrue

The profitability index is a variation of the ____ method.

Correct AnswerverifiedA

A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.

Correct AnswerverifiedShow Answer

Although the NPV method is technically superior, the IRR method is used more frequently.

Correct AnswerverifiedShow Answer

The net present value (NPV) method assumes that cash flows are reinvested at the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The easiest way to compare projects with unequal lives is by using:

Correct AnswerverifiedShow Answer

A stand-alone capital project has the following cash flows. Year 01−5 CashFlow ($100,000) $28,000\begin{array}{lll}\text { Year } & 0 &{1-5}\\\text { CashFlow } & (\$ 100,000) &{\$ 28,000}\end{array} Year CashFlow ​0($100,000) ​1−5$28,000​ What is its NPV if the cost of capital is 10%?

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Capital projects are said to be mutually exclusive when:

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The money needed to get a project started is generally referred to as the initial outlay. It includes all cash outflows:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The objective in solving capital rationing problems is to:

Correct AnswerverifiedShow Answer

Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in year 2, $5,000 in year 3, and $3,000 in year 4. Should Sigma purchase this digger if its cost of capital is 12 percent?

Correct AnswerverifiedShow Answer

In addition to justifying how capital dollars are spent, capital budgeting provides a basis for choosing among alternative capital projects.

Correct AnswerverifiedShow Answer

An outlay of $180,000 is expected to yield the following cash flows: Year Net Cash Flow 1 75,000 2 55,000 3 60,000 4 25,000 5 15,000 6 10,000 The cost of capital is 12 percent. What is the NPV?

Correct AnswerverifiedD

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A stand-alone capital project has the following cash flows. $\begin{array}{lll}\text { Year } & 0 &{1-5}\\\text { CashFlow } & (\$ 100,000) &{\$ 28,000}\end{array}$ What is its NPV if the cost of capital is 10%?

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