Deck 17: Capital Budgeting Analysis

Question 1

The development stage requires estimating relevant cash inflows and outflows.

Answer 1

True

Question 2

The typical capital budgeting project involves a large up-front cash outlay, followed by a series of smaller net cash outflows.

Answer 2

False

Question 3

The net present value of an investment is the present value of a project's future cash flows.

Answer 3

False

Question 4

Projects with negative net present values will lead to a decrease in the value of the firm.

Question 5

MOGS is a review of a firm's internal strengths and weaknesses, and its external opportunities and threats.

Question 6

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

Question 7

A capital budgeting project's cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts.

Question 8

Capital budgeting is the process of identifying, evaluating, and implementing a firm's investment opportunities.

Question 9

The net present value of an investment is the present value of a project's future cash flows minus its initial cost.

Question 10

The selection stage involves applying the appropriate capital budgeting techniques to help make a final decision.

Question 11

The majority of capital budgeting projects are short-lived projects.

Question 12

Capital budgeting decisions can only involve mutually exclusive projects.

Question 13

Information generation develops three types of data: internal financial data, external economic and political data, and non-financial data.

Question 14

Sound capital budgeting decisions require a variety of information including internal financial data, external economic and political data, and non-financial data.

Question 15

Mutually exclusive projects are projects that are not in direct competition with one another.

Question 16

The identification stage requires estimating relevant cash inflows and outflows.

Question 17

Independent projects are not in direct competition with one another.

Question 18

Project budgeting is the process of identifying, evaluating, and implementing a firm's investment opportunities.

Question 19

The profitability of a firm is affected to the greatest extent by its management's success in making capital budget investment decisions.

Question 20

The identification stage in capital budgeting involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion.

Question 21

A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost, but also all financing costs.

Question 22

The final step in the capital budgeting process is

A) implementation
B) selection
C) follow-up
D) development

Question 23

All of the following are considered stages in the capital budgeting process EXCEPT:

A) invention
B) development
C) implementation
D) selection

Question 24

The stage in the capital budgeting process in which implemented projects are periodically reviewed is called the _____________ stage.

A) follow-up.
B) selection.
C) identification.
D) implementation.

Question 25

A firm's cost of capital is the discount rate used in the evaluation of capital budgeting projects using payback and IRR.

Question 26

To calculate the net present value in Excel, you use the "=PV()" function.

Question 27

Which of the following is not considered a stage in the capital budgeting process?

A) development
B) production
C) implementation
D) selection

Question 28

The capital-budgeting process starts with which one of the following stages:

A) development
B) identification
C) implementation
D) selection

Question 29

The first step in the capital budgeting process is

A) implementation
B) selection
C) follow-up
D) identification

Question 30

The stage in the capital budgeting process that requires estimating relevant cash inflows and outflows and discussing the pros and cons of each project is called the _____________ stage.

A) follow-up.
B) selection.
C) identification.
D) development.

Question 31

The stage in the capital budgeting process that involves applying the appropriate capital budgeting techniques to help make a final accept or reject decision is called the _____________ stage.

A) follow-up.
B) selection.
C) identification.
D) development.

Question 32

The stage in the capital budgeting process that involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion is called the _____________ stage.

A) follow-up.
B) selection.
C) identification.
D) development.

Question 33

The capital budgeting process consists of all of the following stages except:

A) follow-up.
B) selection.
C) reversing.
D) development.

Question 34

The capital budgeting process consists of all of the following stages except:

A) follow-up.
B) selection.
C) refurbishing.
D) development.

Question 35

The development stage involves discussing the pros and cons of each project.

Question 36

The development stage requires asking what the strategic impact will be of not doing the project.

Question 37

The stage in the capital budgeting process in which projects that are accepted must be executed in a timely fashion is called the _____________ stage.

A) follow-up.
B) selection.
C) identification.
D) implementation.

Question 38

In a capital budgeting context, a project's required rate of return is called the yield to maturity.

Question 39

Stages of the capital budgeting include all of the following EXCEPT:

A) follow-up.
B) selection.
C) identification.
D) processing

Question 40

A higher-risk project needs to be evaluated using a lower required rate of return.

Question 41

The profitability index is also sometimes referred to as the benefit/cost ratio.

Question 42

Modern internal rate of return (MIRR) solves some of the problems presented by IRR.

Question 43

The profitability index measures the present value of benefits received for each dollar invested.

Question 44

A firm's cost of capital is discount rate used in the evaluation of capital budgeting projects using NPV and IRR.

Question 45

MIRR rankings of mutually exclusive projects with comparably sized initial investments will agree with the NPV rankings of those projects.

Question 46

In Excel, you find the IRR using the "=IRR()" function.

Question 47

The internal rate of return is the return that caused the net present value to be zero.

Question 48

The net present value and internal rate of return methods will always agree on whether a project enhances or harms shareholder wealth.

Question 49

When applied to the analysis of independent projects, NPV and IRR never provide conflicting accept or reject decisions.

Question 50

Excel calculates NPV exactly the same way as it is calculated in the textbook.

Question 51

In Excel, you find the IRR using the net present value function with a discount rate of zero.

Question 52

An NPV profile is a table used to select the appropriate discount rate to use in calculating the NPV.

Question 53

The internal rate of return measures the return on the project's initial cost.

Question 54

It is possible for a set of financial data to have more than one IRR value.

Question 55

In Excel, you find the IRR using the "=IRR()" function with a discount rate of zero.

Question 56

The profitability index is calculated by subtracting the net investment from the present value of the cash flows.

Question 57

MIRR and IRR will always agree on their rankings of projects.

Question 58

A NPV profile shows how NPV varies given alternative IRRs.

Question 59

In Excel, finding the MIRR ranking for a project is a multi-step process.

Question 60

In Excel, you find the MIRR ranking for a project using the "=MIRR()" function.

Question 61

A profitability index of two means that the project returns a value of $2 for every $1 invested.

Question 62

Projects with smaller initial investments may have higher PIs and IRRs, but their small size may appear to make them less attractive from an NPV perspective.

Question 63

A project with a lower IRR or PI may add more to shareholder value than another mutually exclusive project if the projects have different cash flow patterns, time horizons, or sizes.

Question 64

Payback explicitly considers the time value of money.

Question 65

The net present value, internal rate of return and payback period methods always agree on which project would enhance shareholder wealth and which would diminish it.

Question 66

The stand-alone principle focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.

Question 67

The NPV, IRR, and PI always agree on which projects would enhance shareholder wealth and which would diminish it.

Question 68

Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty.

Question 69

Incremental cash flows represents a project's cash flows summed together with the firm's other cash flows to get a total firm view of the project.

Question 70

A sunk cost is a project-related expense that is dependent upon whether or not the project is undertaken.

Question 71

The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm's tax rate.

Question 72

Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0.

Question 73

A profitability index of two means that the project returns a present value of $2 for every $1 invested.

Question 74

Enhancement occurs when a project robs cash flow from the firm's existing line of business.

Question 75

Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project's initial investment.

Question 76

One weakness of the payback period method is that all cash flows beyond the payback period are ignored.

Question 77

Projects favored using payback techniques will be ranked the same using net present value.

Question 78

Cannibalization occurs when a project robs cash flow from the firm's existing line of business.

Question 79

The stand-alone principle suggests that a project must be viewed separately from the rest of the firm.

Question 80

The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account.