Question 1

Which of these describe groups or pairs of projects where you can accept one but not all?

Accepted Answer

Mutually exclusive projects are those where the acceptance of one project excludes the acceptance of another. This is because the projects compete for the same resources or because their objectives conflict, making it impossible or impractical to undertake both.

Question 2

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

Accepted Answer

The payback period and discounted payback period techniques do not consider cash flows that occur after the payback period has been reached. They focus on how quickly the initial investment can be recovered, ignoring any benefits or returns that occur beyond that point.

Question 3

When choosing a capital budgeting technique(s) to use, which of the following sub-choices is affected?

Accepted Answer

All of the sub-choices are affected when choosing a capital budgeting technique(s) to use.

Question 4

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Accepted Answer

Discounted payback is the technique that evaluates how long it will take for a firm to recover its investment in a project, considering the time value of money by discounting the cash flows at a market interest rate. Unlike the simple payback method, which does not account for the time value of money, discounted payback provides a more accurate reflection of the project's profitability and risk by incorporating the cost of capital.

Question 5

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

Accepted Answer

The answer of Which rate-based decision statistic measures the excess...

Question 6

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

Accepted Answer

The payback period method focuses on how quickly the initial investment can be recovered. Therefore, among mutually exclusive projects, the one with the shortest payback period that is also within the manager's acceptable timeframe (equal to or less than the manager's maximum payback period) would be chosen. This ensures both a quick return and adherence to the company's investment criteria.

Question 7

The net present value decision technique uses a statistic denominated in

Accepted Answer

The net present value (NPV) decision technique calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It is denominated in currency units (such as dollars, euros, etc.), as it represents the net value or profitability of an investment in monetary terms.

Question 8

Which of the following statements regarding discounted payback (DPB) is/are not true?

Accepted Answer

Both statements A and B are not true regarding discounted payback (DPB). Statement A is true for the traditional payback period method, not DPB, because DPB does consider the time value of money and discounts the cash flows accordingly, but it still ignores cash flows after the payback period. Statement B inaccurately describes DPB; it does not add interest to the initial investment but rather discounts future cash flows to present value to determine how quickly the initial investment is recovered.

Question 9

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Accepted Answer

Net present value (NPV) is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows.

Question 10

________ is a decision making process that includes the cost of capital calculation?

Accepted Answer

The answer of ________ is a decision making process that...

Question 11

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Accepted Answer

The payback method focuses on how quickly the initial investment can be recovered, making it particularly useful for evaluating projects under time constraints for repaying investors. It does not account for the time value of money or cash flows beyond the payback period, but it provides a simple measure of liquidity risk associated with a project.

Question 12

Which capital budgeting technique step in the decision process is not used to evaluate a group of independent projects?

Accepted Answer

The runoff between mutually exclusive projects (choice B) is not used to evaluate a group of independent projects. This step is specific to situations where only one project can be chosen from a set of competing alternatives, not when evaluating multiple projects that can all be accepted if they meet the investment criteria.

Question 13

The benchmark for the profitability index (PI) is the

Accepted Answer

The benchmark for the profitability index (PI) is zero or anything larger than zero. A PI greater than 0 indicates that the project's present value of future cash flows exceeds the initial investment, suggesting it is a profitable venture.

Question 14

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing

Accepted Answer

The net present value (NPV) technique might not be the sole relevant measure when a firm faces time or resource constraints because these constraints can limit the number of projects a firm can undertake, regardless of the projects' NPVs.

Question 15

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Accepted Answer

Normal cash flows consist of an initial investment (or series of investments) that are negative, followed by a series of positive returns or cash inflows. This pattern is typical for many investment scenarios where the initial outlay is followed by benefits over time.

Question 16

Which of the following statements regarding payback (PB) is/are true?

Accepted Answer

Both statements A and B accurately describe aspects of the payback period method. Statement A explains the calculation process, while statement B describes its purpose and application in capital budgeting.

Question 17

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

Accepted Answer

Net present value (NPV) works well with both normal and non-normal cash flows and is applicable to both independent and mutually exclusive projects, as it considers the time value of money and provides a direct measure of the added value from the project.

Question 18

All capital budgeting techniques

Accepted Answer

Capital budgeting techniques often exclude some crucial information, such as qualitative factors or externalities, which might affect the investment decision.

Question 19

Rate-based statistics represent summary cash flows, and these summaries tend to lose which two important details?

Accepted Answer

Rate-based statistics often summarize cash flows over a specific period, potentially overlooking the investment size and any cash inflows that occur after the designated testing period.

Question 20

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?

Accepted Answer

The payback period is a capital budgeting technique that calculates the time required to recoup the initial investment in a project, without accounting for the time value of money.

Quiz 13: Weighing Net Present Value and Other Capital Budgeting Criteria