Question 1

The internal rate of return method of capital budgeting permits a ranking of investment proposals.​

Accepted Answer

The internal rate of return (IRR) method is a capital budgeting technique that involves calculating the discount rate that makes the net present value of an investment equal to zero. This method allows for the ranking of investment proposals based on their IRRs, with higher IRRs indicating more attractive investment opportunities. Therefore, the statement is true.

Question 2

An increase in an investment's cash inflows that is not the result of an increase in earnings has no effect on the net present value of an investment.​

Accepted Answer

Net present value (NPV) calculations consider all cash inflows and outflows, not just those from earnings. Any increase in cash inflows, regardless of the source, can affect the NPV of an investment.

Question 3

The internal rate of return assumes that cash inflows are reinvested at the firm's cost of capital.​

Accepted Answer

The internal rate of return (IRR) assumes that cash inflows are reinvested at the IRR itself, not at the firm's cost of capital.

Question 4

If a firm switches from straight-line to accelerated depreciation, an investment's internal rate of return declines.

Accepted Answer

Switching from straight-line to accelerated depreciation increases depreciation expense in the early years, reducing taxable income and taxes paid, which can increase cash flow and potentially the internal rate of return (IRR).

Question 5

A decrease in the cost of an investment will increase its net present value.​

Accepted Answer

A decrease in the cost of an investment will result in a smaller investment, which reduces the amount of initial outlay and thus increases the net present value of the investment.

Question 6

The internal rate of return equates the present value of an investment's cash inflows and its cost (outflows).​

Accepted Answer

This is the correct definition of internal rate of return (IRR).

Question 7

A major difference between the net present value and internal rate of return is the interest factor.​

Accepted Answer

The net present value (NPV) calculation uses a predetermined interest rate to discount future cash flows to their present value, while the internal rate of return (IRR) calculation determines the interest rate at which the present value of expected cash inflows would equal the initial cost of the investment. Therefore, the key difference between the two is the role of the interest rate – NPV uses a specified interest rate, while IRR calculates the interest rate that makes the two cash flows equal.

Question 8

A decrease in investors' required rate of return will increase an investment's net present value.​

Accepted Answer

A decrease in the required rate of return means that investors are willing to accept lower returns, making the investment more attractive and increasing its net present value.

Question 9

An increase in investors' required return decreases an investment's internal rate of return.​

Accepted Answer

The internal rate of return (IRR) is a metric used to evaluate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. The IRR itself is not directly affected by changes in investors' required return; rather, the acceptability of an investment based on IRR changes when the required return changes. If investors' required return increases, the investment might no longer be attractive if its IRR is below the new required return, but the IRR value itself does not change due to investors' required return adjustments.

Question 10

If two investments are mutually exclusive, the firm cannot make both investments.​

Accepted Answer

If two investments are mutually exclusive, it means choosing one investment automatically excludes the possibility of choosing the other investment, hence the firm cannot make both investments.

Question 11

An increase in the cost of an investment decreases the investment's cash flows.​

Accepted Answer

An increase in the cost of an investment does not directly affect its cash flows; it affects the initial investment outlay or cost. Cash flows are determined by the investment's operational performance and revenue generation, not its initial cost.

Question 12

An increase in interest rates increases the net present value of an investment.​

Accepted Answer

An increase in interest rates decreases the net present value of an investment. This is because a higher discount rate reduces the value of future cash flows, which are being discounted to their present value.

Question 13

For a given set of cash inflows, the more an investment costs, the smaller will be its NPV​.

Accepted Answer

The NPV calculation takes into account the initial investment as a cash outflow. Therefore, the higher the investment cost, the higher the cash outflow, which decreases the net present value of the project.

Question 14

The internal rate of return equates the net present value and the cost of an investment.​

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It does not equate NPV and the cost of an investment; rather, it finds the rate at which they are equal.

Question 15

The net present value of an investment cannot be negative.​

Accepted Answer

The net present value (NPV) of an investment can be negative, indicating that the projected cash flows from the investment, discounted back to the present value, are less than the initial investment cost.

Question 16

If an investment requires the firm to carry more current assets, that increases the investment's net present value.​

Accepted Answer

Requiring a firm to carry more current assets typically increases the initial investment cost, which would decrease the net present value (NPV) as it represents an outflow of cash at the beginning of the investment.

Question 17

A high cost of capital favors investments with large initial cash inflows.​

Accepted Answer

A high cost of capital makes it more expensive to borrow money, which in turn makes it more expensive to invest in projects with large initial cash outflows. Therefore, a high cost of capital favors investments with large initial cash inflows.

Question 18

A decrease in interest rates decreases the net present value of an investment.​

Accepted Answer

A decrease in interest rates increases the net present value of an investment, as it reduces the discount rate applied to future cash flows, making them more valuable today.

Question 19

If the cost of capital exceeds the internal rate of return, the firm should not make the investment.​

Accepted Answer

If the cost of capital exceeds the internal rate of return (IRR), it means the investment will not generate a return sufficient to cover the cost of the capital used to fund it, making it financially unwise for the firm to proceed with the investment.

Question 20

The net present value assumes that cash inflows are reinvested at the net present value.​

Accepted Answer

The net present value (NPV) assumes that cash inflows are reinvested at the project's discount rate, not at the NPV itself.

Quiz 22: Capital Budgeting

The internal rate of return method of capital budgeting permits a ranking of investment proposals.

An increase in an investment's cash inflows that is not the result of an increase in earnings has no effect on the net present value of an investment.

The internal rate of return assumes that cash inflows are reinvested at the firm's cost of capital.

If a firm switches from straight-line to accelerated depreciation, an investment's internal rate of return declines.

A decrease in the cost of an investment will increase its net present value.

The internal rate of return equates the present value of an investment's cash inflows and its cost (outflows).

A major difference between the net present value and internal rate of return is the interest factor.

A decrease in investors' required rate of return will increase an investment's net present value.

An increase in investors' required return decreases an investment's internal rate of return.

If two investments are mutually exclusive, the firm cannot make both investments.

An increase in the cost of an investment decreases the investment's cash flows.

An increase in interest rates increases the net present value of an investment.

For a given set of cash inflows, the more an investment costs, the smaller will be its NPV.

The internal rate of return equates the net present value and the cost of an investment.

The net present value of an investment cannot be negative.

If an investment requires the firm to carry more current assets, that increases the investment's net present value.

A high cost of capital favors investments with large initial cash inflows.

A decrease in interest rates decreases the net present value of an investment.

If the cost of capital exceeds the internal rate of return, the firm should not make the investment.

The net present value assumes that cash inflows are reinvested at the net present value.

Quiz 22: Capital Budgeting

The internal rate of return method of capital budgeting permits a ranking of investment proposals.​

An increase in an investment's cash inflows that is not the result of an increase in earnings has no effect on the net present value of an investment.​

The internal rate of return assumes that cash inflows are reinvested at the firm's cost of capital.​

If a firm switches from straight-line to accelerated depreciation, an investment's internal rate of return declines.

A decrease in the cost of an investment will increase its net present value.​

The internal rate of return equates the present value of an investment's cash inflows and its cost (outflows).​

A major difference between the net present value and internal rate of return is the interest factor.​

A decrease in investors' required rate of return will increase an investment's net present value.​

An increase in investors' required return decreases an investment's internal rate of return.​

If two investments are mutually exclusive, the firm cannot make both investments.​

An increase in the cost of an investment decreases the investment's cash flows.​

An increase in interest rates increases the net present value of an investment.​

For a given set of cash inflows, the more an investment costs, the smaller will be its NPV​.

The internal rate of return equates the net present value and the cost of an investment.​

The net present value of an investment cannot be negative.​

If an investment requires the firm to carry more current assets, that increases the investment's net present value.​

A high cost of capital favors investments with large initial cash inflows.​

A decrease in interest rates decreases the net present value of an investment.​

If the cost of capital exceeds the internal rate of return, the firm should not make the investment.​

The net present value assumes that cash inflows are reinvested at the net present value.​

The internal rate of return method of capital budgeting permits a ranking of investment proposals.

An increase in an investment's cash inflows that is not the result of an increase in earnings has no effect on the net present value of an investment.

The internal rate of return assumes that cash inflows are reinvested at the firm's cost of capital.

A decrease in the cost of an investment will increase its net present value.

The internal rate of return equates the present value of an investment's cash inflows and its cost (outflows).

A major difference between the net present value and internal rate of return is the interest factor.

A decrease in investors' required rate of return will increase an investment's net present value.

An increase in investors' required return decreases an investment's internal rate of return.

If two investments are mutually exclusive, the firm cannot make both investments.

An increase in the cost of an investment decreases the investment's cash flows.

An increase in interest rates increases the net present value of an investment.

For a given set of cash inflows, the more an investment costs, the smaller will be its NPV.

The internal rate of return equates the net present value and the cost of an investment.

The net present value of an investment cannot be negative.

If an investment requires the firm to carry more current assets, that increases the investment's net present value.

A high cost of capital favors investments with large initial cash inflows.

A decrease in interest rates decreases the net present value of an investment.

If the cost of capital exceeds the internal rate of return, the firm should not make the investment.

The net present value assumes that cash inflows are reinvested at the net present value.