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Capital Budgeting
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Questions in this quiz (45)
1The payback period is the amount of time, rounded to the nearest year, which is required for a firm to recover the cost of a new asset.
- ATrue
- BFalse
2Net present value is considered a sophisticated capital budgeting technique since it gives consideration to the time value of money.
- ATrue
- BFalse
3The internal rate of return is the discount rate that equates the present value of the cash inflows of a project with its initial investment.
- ATrue
- BFalse
4If the NPV of a project is zero, the IRR of that project will always be less than the firm's cost of capital.
- ATrue
- BFalse
5The goal of the firm should be to use its budget to generate the highest possible internal rate of return for its cash inflows.
- ATrue
- BFalse
6The NPV assumes that periodic cash inflows are invested at a rate equal to the firm's cost of capital.
- ATrue
- BFalse
7A net present value profile is a graphical presentation of the NPV at various discount rates.
- ATrue
- BFalse
8In reference to capital budgeting, risk is the chance that a project has a high degree of variability in the initial investment.
- ATrue
- BFalse
9For conventional projects, the NPV and the IRR will always produce the same accept-reject decision.
- ATrue
- BFalse
10The break-even cash inflow is the minimum level of cash inflow associated with a project to be acceptable.
- ATrue
- BFalse
11The internal rate of return assumes that the periodic cash flows associated with a project will be reinvested at the project's IRR.
- ATrue
- BFalse
12For stand-alone projects, the PI will always give the same accept/reject decision as NPV.
- ATrue
- BFalse
13One of the weaknesses of the payback approach is that it assumes cash flows are reinvested at an interest rate which is generally too high.
- ATrue
- BFalse
14One of the weaknesses of the IRR approach is multiple IRRs.
- ATrue
- BFalse
15Theoretically, NPV is superior to all of the other decision methods.
- ATrue
- BFalse
16One of the disadvantages of the payback methods (either regular or discounted) is that it considers all cash flows throughout the entire life of a project.
- ATrue
- BFalse
17Assuming that the total cash flows are equal, the NPV of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the NPV of a project whose cash flows come in more slowly.
- ATrue
- BFalse
18Other things held constant, an increase in the cost of capital discount rate will result in a decrease of a project's IRR.
- ATrue
- BFalse
19The modified IRR (MIRR) always lead to the same capital budgeting decisions as the NPV methods.
- ATrue
- BFalse
20If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the form will select X rather than Y if has a NVP > 0.
- ATrue
- BFalse
21The ______ is the exact amount of time it takes the firm to recover its initial investment.
- Ainternal rate of return
- Bnet present value
- Cpayback period
- Dcertainty equivalent
22A firm is evaluating a proposal which has an initial investment of $45,000 and has cash flows of $5,000 in year 1, $20,000 in year 2, $15,000 in year 3, and $10,000 in year 4. The payback period of the project is ____.
- A3.5 years
- B3 years
- C4 years
- D2.5 years
23All of the following are examples of sophisticated capital budgeting techniques EXCEPT
- Anet present value
- Bannualized net present value
- Cinternal rate of return
- Dpayback period
24The _____ is the discount rate that equates the present value of the cash inflows with the initial investment.
- Acost of capital
- Binternal rate of return
- Caverage rate of return
- Dopportunity cost
25A firm with a cost of capital of 11% is evaluating four capital projects. The internal rate of return are as follows:
Project / IRR
1 13%
2 10%
3 11%
4 15%
The firm should- Aaccept 4 and 1, and reject 2 and 3
- Baccept 4, 1, and 3 and reject 2
- Caccept 4 and reject 1,2,3
- Daccept 3 and reject 1,2, and 4
26The _____ is the minimum amount of return that must be earned on a project in order to leave the firm's value unchanged.
- Ainternal rate of return
- Bcompound rate
- Cdiscount rate
- Drisk free interest rate
27Project Initial Investment IRR NPV
1 $100,000 17% $50,000.00
2 $200,000 15% $10,000.00
3 $125,000 14% $30,000.00
4 $100,000 11% $(2,500.00)
5 $75,000 19% $25,000.00
Using the internal rate of return approach to ranking projects, which projects should the firm accept?- A1,2,3, and 5
- B1,2, and 5
- C1,2, and 3
- D1,2,3,4, and 5
28Project Initial Investment IRR NPV
1 $100,000 17% $50,000.00
2 $200,000 15% $10,000.00
3 $125,000 14% $30,000.00
4 $100,000 11% $(2,500.00)
5 $75,000 19% $25,000.00
Using the net present value approach to ranking projects, which should be accepted?- A1,2,3,4, and 5
- B1,2, and 3
- C1,2,3, and 5
- D1,2, and 5
29A firm is evaluating an investment proposal which has an initial investment of $8,000 and a discounted cash flow valued at $6,000. The net present value of the investment is _____.
- A0
- B-$2,000
- C$2,000
- D$6,000
30Comparing net present value and internal rate of return analysis _____.
- Aalways results in the same ranking of projects
- Balways results in the same accept/reject decision
- Cmay result in differing ranking
- Dboth b and c are correct
31Unlike the IRR criteria, the NPV approach assumes an interest rate equal to the _____.
- Amarket interest rate
- Bproject's internal rate of return
- Crisk free rate of return
- Dfirm's cost of capital
32Year Cash Inflow
1 $50,000
2 $65,000
3 $90,000
A firm has undertaken a project with an initial investment of $100,000. The firm's cost of capital is 14%. What is the NPV for the project?- A$50,000
- B$32,486
- C$54,622
- D$76,549
33Year Cash Inflow
1 $50,000
2 $65,000
3 $90,000
A firm has undertaken a project with an initial investment of $100,000. The firm's cost of capital is 14%. What is the IRR for the project?- A41%
- B46%
- C32%
- D22%
34Initial investment: $75,000
Cost of capital: 14%
Risk free rate: 6%
Year Cash Inflow Certainty Equivalent
1 $30,000 0.9
2 $35,000 0.8
3 $40,000 0.75
The certain cash inflow for year 1 is_____.- A$31,800
- B$30,000
- C0
- D$27,000
35Initial investment: $75,000
Cost of capital: 14%
Risk free rate: 6%
Year Cash Inflow Certainty Equivalent
1 $30,000 0.9
2 $35,000 0.8
3 $40,000 0.75
Using the certainty equivalent method, the net present value for the project is _____.- A$5,246
- B$581
- C$18,036
- D- $2,700
36The objective of _____ is to select the group of projects that provide the highest overall net present value and does not require more dollars than are budgeted.
- Ascenario analysis
- Bsimulation
- Ccapital rationing
- Dsensitivity analysis
37Mutually exclusive
Cost of Capital 10%
Project A Project B
Length of cash inflows 5 7
NPV $12,000 $14000
What is the annualized net present value of project a and project b?- A$3,165 and $2,876
- B$2,378 and $1,850
- C$2,986 and $4,197
- D$4,174 and $4,915
38A project that has a coefficient of variation of zero is considered _____.
- Aslightly risky
- Ba bad investment
- Cvery risky
- Drisk free
39An increase in the risk adjusted discount rate will result in _____.
- Ano change to the NPV
- Ba decrease in the NPV
- Can increase in the NPV
- Dan increase in the IRR
40The amount by which the required discount rate exceeds the risk free rate is called the _____.
- Arisk equivalent
- Brisk premium
- Cexcess risk
- Dmarket risk function
41A major disadvantage of the payback period method is that it _____.
- Ais useless as a risk indicator
- Bignores cash flows beyond the payback period
- Cboth
- Dneither
42If the NPV is negative, then which of the following must be true? The discount rate used is
- Aequal to the internal rate of return
- Btoo high
- Cgreater than the IRR
- Dtoo low
43The internal rate of return of a capital investment
- Achanges when the cost of capital changes
- Bmust exceed the cost of capital in order for the firm to accept the investment
- Cis equal to the annual net cash flows divided by the project cost
- Dis similar to the yield common stock
44An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of 20 years. Find the internal rate of return to the nearest whole percentage point.
- A9%
- B7%
- C5%
- D3%
45You are considering the purchase of an investment that would pay you $5,000 per years 1-5, $3,000 per years 6-8, and $2,000 per year for years 9 and 10. if you require a 14% rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
- A$15,819.27
- B$21,937.26
- C$32,415.85
- D$52,815.71
Information
- Description
- Quiz on Capital Budgeting, created by lseyer436 on 16/11/2015.
- Author
- lseyer436
- Language
- English
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