Question 1

Which of the following statements is correct?

Accepted Answer

Option B correctly describes the differences between the NPV and IRR methods. Option A is incorrect because discounted payback may actually be longer than regular payback if the discount rate is high. Option C is incorrect because a NPV/IRR conflict can still occur even if the required rate of return is less than the crossover rate. Option D is incorrect because the project with the flatter NPV profile is likely to be the smaller project. Option E is incorrect because a high required rate of return may actually favor smaller, shorter-term projects over larger, longer-term ones.

Question 2

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

Accepted Answer

The post-audit involves comparing actual results with predicted results and explaining any differences, which is precisely what is asked in the question. The other options (discounted payback, internal rate of return, net present value, economic value added) deal with different methods of financial analysis and do not involve comparing actual results with predicted results.

Question 3

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 4

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 5

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 use DCF capital budgeting techniques as much as large businesses due to a lack of knowledge or because the costs may outweigh the benefits.

Question 6

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

This is correct. The NPV method assumes that all cash flows can be reinvested at the required rate of return, while the IRR method assumes that all cash flows can be reinvested at the project's IRR.

Question 7

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

From the given NPV profile graph, we can see that Project B has larger cash flows in the later years, as it has a higher NPV in the later years compared to Project A. Therefore, option B is correct. Option A is incorrect as the graph shows that Project A has larger cash flows in the early years. Option C is incorrect as the given information is sufficient to determine which project has larger early cash flows. Option D is incorrect as the NPV profile graph is consistent with the information given in the problem. Therefore, the correct answer is option B.

Question 8

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

Accepted Answer

The statement is incorrect. A post-audit involves comparing actual results to forecasted results to identify factors that were outside of management's control and could not be accounted for in the forecast. Any discrepancies may indicate a need for adjustments to the forecasting process.

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 allows for strategic planning and decision-making to ensure that assets are purchased at the right time and with the right specifications, ultimately saving the company money and increasing efficiency.

Question 10

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 11

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

A higher discount rate means that future cash flows are being discounted more, which decreases their present value and therefore lowers the overall NPV.

Question 12

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 13

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

Both methods assume reinvestment of cash flows at the project's required rate of return, which is typically the cost of capital or hurdle rate.

Question 14

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

Accepted Answer

All of the given choices are rationales for using the NPV method in capital budgeting.

Question 15

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 16

Which of the following statements is correct?

Accepted Answer

The statement A is incorrect as the discounted payback is generally longer than the regular payback. Statement B is incorrect as multiple rates of return can only occur in non-normal situations. Statement D is incorrect as the correct statement is that the projects' NPV profiles cross at a rate greater than the firm's cost of capital. Statement C is the correct statement as it describes the situations where conflicting accept/reject decisions can occur with the NPV and IRR methods.

Question 17

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

Depreciation is a non-cash expense that reduces taxable income but does not affect cash flow. Therefore, cash flow is higher than net income when depreciation is considered.

Question 18

Which of the following statements is false?

Accepted Answer

The statement "The NPV will be positive if the IRR is less than the required rate of return" is false. In fact, if the IRR is less than the required rate of return (k), the NPV will be negative. The correct statement is that the NPV will be positive if the IRR is greater than the required rate of return. Therefore, A is the best choice.

Question 19

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 directly account for the time value of money. However, it can still be useful as a risk indicator, especially when used in conjunction with other methods such as net present value or internal rate of return. Therefore, only answer choices B and C are correct.

Question 20

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...

Quiz 9: Capital Budgeting Techniques

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.

Which of the following statements is correct?

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

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.

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?

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

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.

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

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

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

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.

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

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

Which of the following statements is correct?

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

Which of the following statements is false?

A major disadvantage of the payback period method is it

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?