Deck 13: Capital Budgeting

Question 1

Monies received in the future are less valuable than the same amount of cash received because

A) Inflation reduces the purchasing power of money and people demand more compensation to postpone consumption
B) Inflation increases the purchasing power of money and people demand less compensation to postpone consumption
C) Inflation reduces the purchasing power of money and people demand less compensation to postpone consumption
D) Inflation reduces the purchasing power of money and people demand more compensation to postpone consumption

Answer 1

A

Question 2

The present value of a cash flow is higher when the

A) Interest rate is higher and the earlier it is received
B) Interest rate is higher and the later it is received
C) Interest rate is lower and the earlier it is received
D) Interest rate is lower and the later it is received

Answer 2

C

Question 3

Which of the following cash flows has the highest present value?

A) $1000 received two years in the future when the interest rate is 4%
B) $1000 received two years in the future when the interest rate is 6%
C) $1000 received three years in the future when the interest rate is 4%
D) $1000 received three years in the future when the interest rate is 6%

Answer 3

A

Question 4

The formula to calculate the discounted value of a single payment received in the future is

A) PV = FV/(1+i)n
B) FV = PV * (1+i)n
C) PV = FV * (1-(1/(1+i)n)/i
D) FV = PV * ((1+i)n -1)/i

Question 5

The future value of a cash flow is higher when the

A) Interest rate is higher and the earlier it is received
B) Interest rate is higher and the later it is received
C) Interest rate is lower and the earlier it is received
D) Interest rate is lower and the later it is received

Question 6

Which of the following cash flows has the highest future value?

A) $1000 invested for two years in the future when the interest rate is 4%
B) $1000 invested for two years in the future when the interest rate is 6%
C) $1000 invested for three years in the future when the interest rate is 4%
D) $1000 invested for three years in the future when the interest rate is 6%

Question 7

An ordinary annuity is

A) A series of unequal payments received at the beginning of each year
B) A series of equal payments received at the beginning of each year
C) A series of unequal payments received at the end of each year
D) A series of equal payments received at the end of each year

Question 8

The formula to calculate the compounded value of a series of equal payment invested over time is

A) PV = FV/(1+i)n
B) FV = PV * (1+i)n
C) PV = FV * (1-(1/(1+i)n)/i
D) FV = PV * ((1+i)n -1)/i

Question 9

If the cost of debt is 5%, the cost of equity is 10%, and 70% of assets are financed by equity, the weighted average cost of capital is

A) 5.0%
B) 7.5%
C) 8.5%
D) 10.0%
E) None of the above

Question 10

Net present value

A) Divides investment by average cash inflow to determine if a capital expenditure should be made
B) Discounts and totals cash inflows and subtracts the investment to determine if a capital expenditure should be
C) Discounts and totals cash inflows and divides by the investment to determine if a capital expenditure should be made
D) Calculates the discount rate that equates the present value of the cash inflows with the initial investment to determine if a capital expenditure should be made

Question 11

Which of the following investment evaluation methods calculates the interest rate that equates the net cash inflows (revenues) with the present value of the outflow (the investment)?

A) Payback period
B) Net present value
C) Benefit cost ratio
D) Internal rate of return

Question 12

The decision rule for net present value when unlimited funds are available is

A) Pursue any investment with an NPV < X years
B) Pursue any investment with an NPV ≥ 0.0
C) Pursue any investment with an NPV ≥ 1.0
D) Pursue any investment with an NPV ≥ discount rate

Question 13

Assuming the cost of capital is 10.0%, which of the following results indicates an investment should be made?

A) The net present value is between 0.80 and 0.90
B) The benefit cost ratio is between 1.5 and 1.6
C) The internal rate of return is between 8.0% and 9.0%
D) The payback period is between 10 and 11 years

Question 14

Assuming the cost of capital is 10.0%, which of the following results indicates the investment should NOT be made?

A) The net present value is 0.0
B) The benefit cost ratio is 0.5
C) The internal rate of return is greater than the cost of capital
D) The payback period is three years

Question 15

Assuming the cost of capital is 10.0%, which of the following results indicates the investment should NOT be made?

A) The net present value is less than 0.0
B) The benefit cost ratio is less than 1.0
C) The internal rate of return is 8%
D) The payback period is 10 years
E) All of the above indicate the investment should not be made

Question 16

Capital investments are handled differently than operating expenditures because

A) Capital budget expenditures are high cost outlays
B) Capital investments are infrequent decisions
C) Capital investments have long lives
D) All of the above

Question 17

Which of the following is not TRUE concerning capital budgeting decisions?

A) Capital investments per input are more expensive than operating expenditures
B) Managers are equally knowledgeable of operating expenditures and capital expenditures due to the frequency each type of decision is made
C) Altering capital investments requires more time than operating expenditures
D) All of the above

Question 18

The type of capital expenditures that requires the least scrutiny is

A) Mandatory investments
B) Discretionary investments replacing existing assets
C) Discretionary investments expanding the size of current operations
D) Discretionary investments that push the organization into new products or markets

Question 19

The riskiest type of capital expenditures are

A) Mandatory investments
B) Discretionary investments replacing existing assets
C) Discretionary investments expanding the size of current operations
D) Discretionary investments that push the organization into new products or markets

Question 20

The interest rate used to discount cash received in the future is determined by inflation and time preference.

Question 21

An annuity is series of equal payments.

Question 22

An ordinary annuity is a series of equal payments received at the beginning of each year.

Question 23

Sensitivity analysis is used to estimate a variable, such as net income, given fixed estimates of other variables.

Question 24

Sensitivity analysis is used to determine how much a variable, such as net income, will change given changes in other variables.