Question 1

Which of the following statements is false?

Accepted Answer

The statement that the NPV will be positive if the IRR is less than the required rate of return is false. In fact, the NPV will be positive if the IRR is greater than the required rate of return.

Question 2

In capital budgeting analyses, it is possible that NPV and IRR will both involve assuming reinvestment of the project's cash flows at the same rate.

Accepted Answer

It is possible for NPV and IRR to assume the same reinvestment rate, although they may differ in their other assumptions and calculations.

Question 3

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

Accepted Answer

The answer of Assume a project has normal cash flows...

Question 4

There exists an IRR solution for each time the direction of cash flows associated with project is interrupted.

Accepted Answer

The IRR (Internal Rate of Return) is a financial metric used to evaluate the profitability of an investment. It considers the time-value of money and calculates the rate of return that makes the present value of future cash flows equal to the initial investment. The IRR assumes that the cash flows are received at regular intervals and are either positive or negative. However, if there are interruptions in the cash flows, the IRR can still be solved by treating each segment of the project as a separate investment with its own initial investment and cash flows. Therefore, there exists an IRR solution for each time the direction of cash flows associated with project is interrupted.

Question 5

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

Accepted Answer

The NPV method assumes reinvestment at the hurdle rate (required rate of return), while the IRR method assumes reinvestment at the internal rate of return, which is a project-specific rate.

Question 6

The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates changes in factors that are completely under management's control.

Accepted Answer

The post-audit process involves comparing actual results to forecasted results, but discrepancies could be due to factors beyond management's control, such as changes in the economy, consumer behavior, or competitors' actions. Therefore, the statement is false.

Question 7

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Accepted Answer

A negative NPV indicates that the discount rate used in the calculation is greater than the project's internal rate of return (IRR), meaning the present value of cash inflows is less than the initial investment.

Question 8

Which of the following capital budgeting methods might not consider the salvage value of a machine being considered for purchase?

Accepted Answer

The payback and discounted payback methods focus on how quickly an investment can be recouped without considering the salvage value of the asset. These methods primarily look at cash flows up to the point where the initial investment is recovered, ignoring any benefits or returns that occur after this payback period, including the salvage value of the machine.

Question 9

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

Accepted Answer

Effective capital budgeting helps a company plan and prioritize its asset purchases, which can ensure that assets are acquired and installed in a timely manner before they are needed. This can also lead to better quality assets being purchased, which can improve operational efficiency and productivity.

Question 10

Which of the following statements is correct?

Accepted Answer

Statement A is not always true as it depends on the discount rate used. Statement B is false as a project can only have one IRR. Statement D is also false as the projects' NPV profiles crossing at a rate greater than the cost of capital would lead to the same decision for both methods. Statement C is correct as it outlines the specific circumstances in which the two methods may disagree.

Question 11

Which of the following statements is correct?

Accepted Answer

The NPV and IRR methods differ in how the discount rate is used in the calculation. In the NPV method, the discount rate is specified and the equation is solved for NPV. In the IRR method, the discount rate is found by setting the NPV equal to zero.

Question 12

Small businesses probably make less use of the DCF capital budgeting techniques than large businesses.This may reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs of using DCF analysis outweigh the benefits of these methods for those firms.

Accepted Answer

Small businesses may not have the resources or expertise to effectively use DCF analysis, and may determine that the costs outweigh the potential benefits for their particular circumstances.

Question 13

Which of the following statements is correct?

Accepted Answer

The NPV method assumes cash flows are reinvested at the project's required rate of return, while the IRR method assumes reinvestment at the IRR itself. This difference in reinvestment assumptions can lead to different project evaluations under these two methods.

Question 14

The involves comparing the actual results with those predicted by the project's sponsors and explaining why
Any differences occur.

Accepted Answer

A post-audit is a process of evaluating the results of a project against its original plan, budget, and objectives. It involves comparing the actual results with those predicted by the project's sponsors and explaining any differences that occur. The other options (discounted payback, internal rate of return, net present value, economic value added) are methods used to evaluate the financial viability of a project but do not specifically address the issue of comparing actual results with predicted ones.

Question 15

A major disadvantage of the payback period method is it

Accepted Answer

The payback period method ignores cash flows beyond the payback period and does not account for the time value of money, making options B and C correct.

Question 16

Which of the following is not a rationale for using the NPV method in capital budgeting?

Accepted Answer

All of the statements are valid reasons for using the NPV method in capital budgeting.

Question 17

Projects A and B have the same expected lives and initial cash outflows.However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years.The two NPV profiles are given below:  Which of the following statements is correct?

Accepted Answer

The NPV profile for Project A starts high and decreases over time, while the NPV profile for Project B starts low and increases over time. This indicates that Project A has larger cash flows in the earlier years and smaller cash flows in the later years, while Project B has smaller cash flows in the earlier years and larger cash flows in the later years. Therefore, statement A is incorrect and statement B is correct. Information on the required rate of return is not needed to determine which project has larger early cash flows, so statement C is incorrect. The NPV profile graph is consistent with the statement made in the problem, so statement D is incorrect. Thus, the answer is B.

Question 18

NPV and IRR will always lead to the same accept/reject decision for mutually exclusive projects.

Accepted Answer

NPV (Net Present Value) and IRR (Internal Rate of Return) can lead to different accept/reject decisions for mutually exclusive projects because they measure profitability in different ways. NPV calculates the dollar value of the project's return, while IRR finds the rate of return at which the NPV equals zero. Differences in cash flow timing and scale of investment can cause discrepancies in their recommendations.

Question 19

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

Accepted Answer

The discount rate is used to calculate the present value of future cash flows, which are then subtracted from the initial cost of the project to arrive at the NPV. A higher discount rate means that future cash flows are being discounted at a higher rate, making them less valuable in today's dollars. As a result, the NPV will be lower with a higher discount rate.

Question 20

The present value of the expected net cash inflows for a project will most likely exceed the present value of the expected net profit after tax for the same project because

Accepted Answer

Income is reduced by non-cash charges such as depreciation, which do not affect the cash flow. This means that while depreciation reduces net income, it does not reduce the cash inflow, leading to a situation where the present value of cash inflows can be higher than the present value of net income.

Quiz 9: Capital Budgeting Techniques

Which of the following statements is false?

In capital budgeting analyses, it is possible that NPV and IRR will both involve assuming reinvestment of the project's cash flows at the same rate.

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive) . Which of the following statements is most correct?

There exists an IRR solution for each time the direction of cash flows associated with project is interrupted.

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates changes in factors that are completely under management's control.

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Which of the following capital budgeting methods might not consider the salvage value of a machine being considered for purchase?

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

The involves comparing the actual results with those predicted by the project's sponsors and explaining why Any differences occur.

A major disadvantage of the payback period method is it

Which of the following is not a rationale for using the NPV method in capital budgeting?

Projects A and B have the same expected lives and initial cash outflows.However, one project's cash flows are larger in the early years, while the other project has larger cash flows in the later years.The two NPV profiles are given below: Which of the following statements is correct?

NPV and IRR will always lead to the same accept/reject decision for mutually exclusive projects.

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

The present value of the expected net cash inflows for a project will most likely exceed the present value of the expected net profit after tax for the same project because