Question 1

Given the following net cash flows,determine the IRR of the project:

Accepted Answer

A)   36%
B)   32%
C)   28%
D)   24%
E)   20%F) C) and E)
G) B) and C)

Question 2

When Richard evaluated a capital budgeting project-a new machine needed to manufacture inventory-using his firm's required rate of return,he discovered that the project's net present value (NPV) is negative.Based on this information,which of the following must be correct?

Accepted Answer

A)   The project's internal rate of return is also negative.
B)   The project's discounted payback period is greater than its economic life.
C)   As long as the new machine's initial investment outlay is fairly low, the firm should purchase if it is used to replace an older machine that is required to produce inventory.
D)   The project's traditional payback period must be greater than the maximum payback period that the firm has established.
E)   Two or more of these scenarios must be correct.F) A) and E)
G) A) and D)

Question 3

An investment project has an initial cost,and then generates inflows of $50 a year for the next five years.The project has a payback period of 3.6 years.What is the project's internal rate of return?

Accepted Answer

A)   11.18%
B)   12.05%
C)   13.47%
D)   14.66%
E)   15.89%F) All of the above
G) A) and E)

Question 4

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 5

Conflicts between two mutually exclusive projects,where the NPV method chooses one project but the IRR method chooses the other,should generally be resolved in favor of the project with the higher NPV.

Accepted Answer

A) True 
 B)False

Question 6

In comparing two mutually exclusive projects of equal size and equal life,which of the following statements is most correct?

Accepted Answer

A)   The project with the higher NPV may not always be the project with the higher IRR.
B)   The project with the higher NPV may not always be the project with the higher MIRR.
C)   The project with the higher IRR may not always be the project with the higher MIRR.
D)   All of the above answers are correct.
E)   Answers a and c are both correct.F) A) and D)
G) All of the above

Question 7

The modified IRR (MIRR) is normally

Accepted Answer

A)   Less than the regular IRR if IRR > r.
B)   Greater than the regular IRR if IRR > r.
C)   Equal to the regular IRR if IRR = r.
D)   Answers a and c are both correct.
E)   Answers b and c are both correct.F) C) and E)
G) C) and D)

Question 8

Project S has a pattern of high cash flows in its early life,while Project L has a longer life,with large cash flows late in its life.At the current required rate of return,normal Projects S and L have identical NPVs.Now suppose interest rates and money costs generally decline.Other things held constant,this change will cause L to become preferred to S.

Accepted Answer

A) True 
 B)False

Question 9

The IRR of normal Project X is greater than the IRR of normal Project Y,and both IRRs are greater than zero.Also,the NPV of X is greater than the NPV of Y at the required rate of return.If the two projects are mutually exclusive,Project X should definitely be selected,and the investment made,provided we have confidence in the data.Put another way,it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

A) True 
 B)False

Question 10

The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding,that is,by selling stock or bonds.

Accepted Answer

A) True 
 B)False

Question 11

Union Atlantic Corporation,which has a required rate of return equal to 14 percent,is evaluating a capital budgeting project that has the following characteristics:  Union Atlantic's capital budgeting manager has determined that the project's net present value is $7,008.According to this information,which of the following statements is correct?

Accepted Answer

A)   The project's internal rate of return (IRR)  must be greater than 14 percent.
B)   The project's discounted payback must be less that its economic life.
C)   The project should be purchased by Union Atlantic.
D)   All of these statements are correct.
E)   None of these statements is correct.F) A) and D)
G) All of the above

Question 12

Which of the following statements is false?

Accepted Answer

A)   The NPV will be positive if the IRR is less than the required rate of return.
B)   If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
C)   When IRR = k (the required rate of return) , NPV = 0.
D)   The IRR can be positive even if the NPV is negative.
E)   The NPV method is not affected by the multiple IRR problem.F) B) and E)
G) C) and E)

Question 13

The advantage of the payback period over other capital budgeting techniques is that

Accepted Answer

A)   it is the simplest and oldest formal model to evaluate capital budgeting model.
B)   it directly accounts for the time value of money.
C)   it ignores cash flows beyond the payback period.
D)   it always leads to decisions that maximize the value of the firm.
E)   it incorporates risk into the discount rate used to solve the payback period.F) A) and D)
G) All of the above

Question 14

Michigan Mattress Company is considering the purchase of land and the construction of a new plant.The land,which would be bought immediately (at t = 0) ,has a cost of $100,000 and the building,which would be erected at the end of the first year (t = 1) ,would cost $500,000.It is estimated that the firm's after-tax cash flow will be increased by $100,000 starting at the end of the second year,and that this incremental flow would increase at a 10 percent rate annually over the next 10 years.What is the approximate payback period?

Accepted Answer

A)   2 years
B)   4 years
C)   6 years
D)   8 years
E)   10 yearsF) A) and B)
G) A) and C)

Exam 9: Capital Budgeting Techniques

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Correct Answer
verified

Correct Answer
verified

Conflicts between two mutually exclusive projects,where the NPV method chooses one project but the IRR method chooses the other,should generally be resolved in favor of the project with the higher NPV.

Correct Answer
verified

The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding,that is,by selling stock or bonds.

Correct Answer
verified

Correct Answer
verified

When Richard evaluated a capital budgeting project-a new machine needed to manufacture inventory-using his firm's required rate of return,he discovered that the project's net present value (NPV) is negative.Based on this information,which of the following must be correct?

Correct Answer
verified

An investment project has an initial cost,and then generates inflows of $50 a year for the next five years.The project has a payback period of 3.6 years.What is the project's internal rate of return?

Correct Answer
verified

Given the following net cash flows,determine the IRR of the project:

Correct Answer
verified

The modified IRR (MIRR) is normally

Correct Answer
verified

The advantage of the payback period over other capital budgeting techniques is that

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

Correct Answer
verified

Correct Answer
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In comparing two mutually exclusive projects of equal size and equal life,which of the following statements is most correct?

Correct Answer
verified

Exam 9: Capital Budgeting Techniques

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Conflicts between two mutually exclusive projects,where the NPV method chooses one project but the IRR method chooses the other,should generally be resolved in favor of the project with the higher NPV.

Correct AnswerverifiedShow Answer

The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding,that is,by selling stock or bonds.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When Richard evaluated a capital budgeting project-a new machine needed to manufacture inventory-using his firm's required rate of return,he discovered that the project's net present value (NPV) is negative.Based on this information,which of the following must be correct?

Correct AnswerverifiedShow Answer

An investment project has an initial cost,and then generates inflows of $50 a year for the next five years.The project has a payback period of 3.6 years.What is the project's internal rate of return?

Correct AnswerverifiedShow Answer

Given the following net cash flows,determine the IRR of the project:

Correct AnswerverifiedShow Answer

The modified IRR (MIRR) is normally

Correct AnswerverifiedShow Answer

The advantage of the payback period over other capital budgeting techniques is that

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In comparing two mutually exclusive projects of equal size and equal life,which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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