Question 1

All of the following capital budgeting tools are suitable for firms facing time constraints except ______.

Accepted Answer

NPV (Net Present Value) is not suitable for firms facing time constraints because it focuses on long-term profitability rather than the speed of recovering the initial investment.

Question 2

All of the following are strengths of NPV except _______________.

Accepted Answer

Managers may prefer using a statistic that is in percent instead of dollars, but this is not a strength of the NPV. The other options are all strengths of the NPV.

Question 3

Which of the following best describes the NPV profile?

Accepted Answer

The answer of Which of the following best describes the...

Question 4

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.

Accepted Answer

Discounted Payback is not suitable for non-normal cash flows because it does not consider the time value of money beyond the payback period.

Question 5

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.

Accepted Answer

The IRR (Internal Rate of Return) is not suitable for non-normal cash flows because it can result in multiple IRRs, making it difficult to interpret.

Question 6

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 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 Modified Internal Rate of Return (MIRR). Therefore, the correct choice is D.

Question 7

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

Accepted Answer

The payback period is the time it takes for the investment to generate cash flows to recover the initial investment cost. Here, the investment generates $100 annually for the first 4 years, totaling $400, and then $400 annually for the next 3 years. By the end of year 4, the investment has recovered $400 of the initial $750. In year 5, it generates another $400, fully recovering the initial investment and providing an excess. To find the exact payback period, calculate how much of year 5's cash flow is needed to reach $750. Since $400 in year 5 covers the remaining $350 needed ($750 - $400 from years 1-4), the payback period is 4 years plus the fraction of year 5 needed to recover the full investment. This fraction is $350 (the remaining amount to be recovered by the end of year 4) divided by $400 (the cash flow in year 5), which equals 0.875 (or 7/8) of a year. Therefore, the total payback period is 4 years + 0.875 years = 4.875 years, or approximately 4.88 years when rounded.

Question 8

Which of the following statements is correct?

Accepted Answer

Payback and discounted payback both have a weakness in that they do not account for cash flows received after the payback period. Option B is incorrect because discounted payback actually uses a more conservative reinvestment rate assumption than payback. Option C is incorrect because discounted payback does use time value of money concepts.

Question 9

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

NPV (Net Present Value) is the capital budgeting technique that helps to calculate the present value of the expected cash inflows and outflows of a project after consideration of the time value of money. It generates a decision rule that suggests accepting projects with positive NPV and rejecting projects with negative NPV. Thus, choosing a project with a higher NPV means higher profitability, making it the best choice. On the other hand, while PI (Profitability Index) and IRR (Internal Rate of Return) are also used for decision-making in capital budgeting, they do not take into account the total value of cash flows like NPV does, making them inferior choices. MIRR (Modified Internal Rate of Return) is not commonly used and is only an alternative approach to IRR.

Question 10

Which of the following statements is correct regarding the NPV profile?

Accepted Answer

The answer of Which of the following statements is correct...

Question 11

All of the following are strengths of payback except ____________________.

Accepted Answer

The answer of All of the following are strengths of...

Question 12

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

Accepted Answer

Mutually exclusive projects that exhibit differences in scale or timing can lead to different accept/reject decisions between rate-based statistics and NPV. This is because rate-based statistics, such as the internal rate of return (IRR), only consider the timing and magnitude of cash flows relative to the initial investment, while NPV considers the timing and magnitude of cash flows relative to the cost of capital. As such, if two projects are mutually exclusive and have different scales and/or timings of cash flows, the IRR may favor one project while the NPV favors the other.

Question 13

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 14

Which of the following is incorrect regarding the IRR statistic?

Accepted Answer

Statement B is incorrect. Non-normal cash flows and mutually exclusive projects are not necessary conditions for IRR to give a different accept/reject decision from NPV. In fact, in some cases, IRR may lead to multiple solutions and ambiguous decision making.

Question 15

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $100, followed by cash flows of $95, $20 and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20 and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10%.

Accepted Answer

Using a financial calculator: Project A: NPV = 6.65; IRR = 15.96%; Project B: NPV = 14.20; IRR = 15.24%; NPV is best statistic, therefore the IRR of the best project is 15.24%

Question 16

A project's IRR ____________________.

Accepted Answer

The answer of A project's IRR ____________________.
...

Question 17

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 (PI) is a decision rule and associated methodology for converting the NPV statistic into a rate-based metric.

Question 18

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

Accepted Answer

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

Question 19

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 is equal to the termination date, then the project's NPV is zero. Therefore, its PI would also be zero as it is calculated by dividing the present value of future cash flows by the initial investment. This means that the project's future cash flows will only be sufficient to recover the initial investment and not provide any excess return. The IRR would also be equal to the cost of capital, but we cannot make a definitive statement about the decision made based on NPV or IRR alone. However, we can say for sure that the project's discounted payback is greater than or equal to zero, eliminating option A as a possible answer.

Question 20

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.

Accepted Answer

Payback is a capital budgeting tool that only considers the time it takes for a project to recoup its initial investment, without considering any cash flows beyond that point. It is not suitable for non-normal cash flows that occur beyond the payback period. MIRR, Profitability Index, and NPV are all appropriate for non-normal cash flows.

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

All of the following capital budgeting tools are suitable for firms facing time constraints except ______.

All of the following are strengths of NPV except _______________.

Which of the following best describes the NPV profile?

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.

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 ______________.

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

Which of the following statements is correct?

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 ______________.

Which of the following statements is correct regarding the NPV profile?

All of the following are strengths of payback except ____________________.

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

Which of the following statements is correct?

Which of the following is incorrect regarding the IRR statistic?

A project's IRR ____________________.

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

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

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

All of the following capital budgeting tools are suitable for non-normal cash flows except ____.