Question 1

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 &  3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The answer of Suppose your firm is considering investing in...

Question 2

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

Accepted Answer

The answer of A project has normal cash flows. Its...

Question 3

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 &  3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The answer of Suppose your firm is considering investing in...

Question 4

All of the following are strengths of NPV EXCEPT

Accepted Answer

NPV (Net Present Value) is expressed in dollar terms, not in percentages, which contrasts with the preference mentioned in option B. Managers often prefer metrics like IRR (Internal Rate of Return) that are expressed as percentages for easier comparison across projects.

Question 5

All of the following are strengths of payback EXCEPT

Accepted Answer

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Question 6

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Accepted Answer

If the discounted payback period is equal to the project's termination date, it means the present value of cash inflows equals the initial investment, resulting in a Net Present Value (NPV) of zero. Consequently, the Profitability Index (PI), which is the ratio of the present value of cash inflows to the initial investment, will also be zero.

Question 7

Which of the following tools is suitable for choosing between mutually exclusive projects?

Accepted Answer

NPV (Net Present Value) is suitable for choosing between mutually exclusive projects as it provides the value added by the project in terms of present value, allowing for a direct comparison of the profitability of different projects.

Question 8

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 &  3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The answer of Suppose your firm is considering investing in...

Question 9

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Accepted Answer

Rate-based statistics like IRR can yield different decisions than NPV when comparing mutually exclusive projects with differences in scale or timing, as IRR does not account for the magnitude of cash flows or differing cash flow patterns.

Question 10

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 &  3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The answer of Suppose your firm is considering investing in...

Question 11

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2  & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The answer of Suppose your firm is considering investing in...

Question 12

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

Accepted Answer

The Internal Rate of Return (IRR) method assumes normal cash flows (initial outlay followed by a series of positive cash inflows). It may not provide reliable results for projects with non-normal cash flows (e.g., projects with alternating positive and negative cash flows over their life), leading to multiple IRRs or no IRR at all. MIRR, profitability index, and NPV do not have this limitation and can handle non-normal cash flows more effectively.

Question 13

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and three and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

The payback period is 4.90 years, which is greater than the maximum allowable payback period of three years. Therefore, the project should be rejected.

Question 14

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 is referred to as

Accepted Answer

The Net Present Value (NPV) method is a capital budgeting technique that calculates the total discounted value of a project's cash flows. It helps in determining the profitability of a project by comparing the present value of its cash inflows with the present value of its cash outflows.

Question 15

All of the following capital budgeting tools are suitable for firms facing time constraints EXCEPT

Accepted Answer

The answer of All of the following capital budgeting tools...

Question 16

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

Accepted Answer

The payback method is not suitable for non-normal cash flows because it simply calculates the time it takes to recoup the initial investment, without accounting for the time value of money or cash flows beyond the payback period.

Question 17

A project's IRR is the interest rate that

Accepted Answer

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. This means it is the rate at which the project breaks even in terms of NPV.

Question 18

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

Accepted Answer

The answer of All of the following capital budgeting tools...

Question 19

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as

Accepted Answer

The profitability index is a rate-based metric derived from the NPV statistic, representing the ratio of the present value of future cash flows to the initial investment.

Question 20

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as

Accepted Answer

The Modified Internal Rate of Return (MIRR) is a capital budgeting method that addresses the reinvestment rate assumption issue of the traditional Internal Rate of Return (IRR) by assuming reinvestment at a more consistent rate, typically the firm's cost of capital.

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

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

All of the following are strengths of NPV EXCEPT

All of the following are strengths of payback EXCEPT

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

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 is referred to as

All of the following capital budgeting tools are suitable for firms facing time constraints EXCEPT

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

A project's IRR is the interest rate that

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as