Question 1

The IRR approach to capital rationing involves graphically plotting project IRRs in descending order against total dollar investment on ________ graph.

Accepted Answer

The answer of The IRR approach to capital rationing involves...

Question 2

The objective of capital rationing is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

Accepted Answer

This is the correct definition of the objective of capital rationing.

Question 3

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

Accepted Answer

This statement is true. As a firm has limited funds, it cannot invest in all possible projects. Therefore, it must prioritize and allocate its resources to those projects that will provide the highest return and maximize share value. This is known as capital budgeting, where a firm evaluates potential investments and decides which projects to pursue based on their expected cash flows and potential impact on the company's value.

Question 4

The objective of ________ is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.

Accepted Answer

Capital rationing is the process of selecting a group of projects that will yield the highest net present value while ensuring that the budgeted amount is not exceeded. This involves evaluating multiple projects and prioritizing them based on their expected returns and costs. By selecting projects that are expected to generate the highest returns and fit within the budget, capital rationing aims to maximize the overall value of the investment portfolio.

Question 5

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Accepted Answer

The objective of capital rationing is to select the group of projects that provides the highest overall net present value or internal rate of return within the budget constraints, not necessarily the quickest overall payback.

Question 6

Adjusted net present values are opportunities that are embedded in capital budgeting projects that enable managers to alter their cash flows and risks in a way that affects project acceptability.

Accepted Answer

The answer of Adjusted net present values are opportunities that...

Question 7

Real options are opportunities that are embedded in capital budgeting projects that enable managers to alter their cash flows and risks in a way that affects project acceptability.

Accepted Answer

Real options allow managers to make decisions that can affect project acceptability by altering cash flows and risks. Therefore, real options are opportunities that are embedded in capital budgeting projects.

Question 8

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

Accepted Answer

When a firm has a limited capital budget and too many good capital projects to fund, it faces the problem of capital rationing. This means that the firm has to prioritize and allocate capital to the projects that will generate the highest return on investment and create the most value for the company.

Question 9

The ordering of capital expenditure projects on the basis of some predetermined measure such as the rate of return is called

Accepted Answer

The ordering of capital expenditure projects on the basis of some predetermined measure such as the rate of return is called the ranking approach. This approach helps in prioritizing projects and allocating resources to the most profitable projects first.

Question 10

An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the

Accepted Answer

The answer of An approach to capital rationing that involves...

Question 11

A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 18 percent, and the projects have the following initial investments and cash flows:

Accepted Answer

The answer of A firm is evaluating two mutually exclusive...

Question 12

A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 14 percent, and the projects have the following initial investments and cash flows:

Accepted Answer

The answer of A firm is evaluating two mutually exclusive...

Question 13

A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns.  A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be

Accepted Answer

The answer of A firm with unlimited funds must evaluate...

Question 14

Major types of real options include all of the following EXCEPT the

Accepted Answer

All of the other options listed (abandonment, timing, and growth options) are common types of real options. Conversion options, on the other hand, are not typically classified as a major type of real option.

Question 15

As a top manager, you must decide firm which of the proposed projects should be accepted for the upcoming year since only $6 million is available for the next years's capital budget. What is the total NPV of the projects that should be accepted?

Accepted Answer

According to the information provided, there is a limit of $6 million available for the upcoming year's capital budget. Among the proposed projects, only three combinations of projects do not exceed this limit, which are A, B, and F; F, B, and D; and E, F, and D.

To determine the best choice, we need to look at the total NPV of each combination. Among the three combinations that do not exceed the budget limit, the combination with the highest total NPV is F, B, and D with a total NPV of $1.72. Therefore, the best choice is B.

Quiz 11: Capital Budgeting Cash Flows and Risk Refinements