Question 1

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called internal rate of return.

Accepted Answer

This statement accurately describes the internal rate of return (IRR).

Question 2

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

Accepted Answer

The internal rate of return (IRR) is defined as the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Question 3

The minimum return that must be earned on a project in order to leave the firm's value unchanged is ________.
A) the internal rate of return
B) the interest rate
C) the cost of capital
D) the compound rate

Accepted Answer

The minimum return that must be earned on a project in order to leave the firm's value unchanged is the cost of capital. This is because the cost of capital represents the minimum rate of return that a company needs to earn on its investments in order to satisfy its investors and maintain its value. Therefore, any project that generates a return less than the cost of capital will result in a loss of value for the firm, and any project that generates a return greater than the cost of capital will result in an increase in value for the firm.

Question 4

If a project's IRR is greater than zero, the project should be accepted.

Accepted Answer

A project's IRR should be compared to the cost of capital or the required rate of return. If the IRR is greater than the cost of capital, then the project should be accepted. An IRR greater than zero simply means the project is expected to generate some return, but that return may still be insufficient if it is below the cost of capital.

Question 5

A firm can accept a project with a net present value of zero because ________.
A) the project would maintain the wealth of the firm's owners
B) the project would enhance the wealth of the firm's owners
C) the project would maintain the earnings of the firm
D) the project would enhance the earnings of the firm

Accepted Answer

Accepting a project with a net present value of zero would maintain the current value of the firm's owners, and therefore their wealth. It may not enhance their wealth or earnings, but it would at least maintain it.

Question 6

Which of the following is an advantage of NPV?
A) It measures the risk exposure.
B) It takes into account the time value of investors' money.
C) It is highly sensitive to the discount rates.
D) It measures how quickly a firm can breakeven.

Accepted Answer

NPV takes into account the time value of money by discounting future cash flows back to their present value. This allows investors to compare the profitability and viability of different investments over time. Option A is incorrect because while NPV considers risk, it does not directly measure it as it is not a risk measurement tool. Option C is incorrect because while discount rates are a crucial input in NPV calculations, NPV itself is not highly sensitive to them. Option D is incorrect because NPV does not measure how quickly a firm can breakeven; rather, it measures the total value of the investment over its lifetime.

Question 7

Table 10.2 
-Given the information in Table 10.2 and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?

Accepted Answer

The answer of Table 10.2 
-Given the information in Table...

Question 8

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called net present value.

Accepted Answer

The description provided refers to the Internal Rate of Return (IRR), not the Net Present Value (NPV). NPV is calculated by discounting the cash flows at a specific rate and then subtracting the initial investment.

Question 9

An internal rate of return greater than the cost of capital guarantees that the firm will earn at least its required return.

Accepted Answer

The internal rate of return (IRR) is the rate at which the present value of future cash flows of an investment equals the initial cost of the investment. If the IRR is greater than the cost of capital, it means that the investment is expected to generate a return higher than the cost of capital. This implies that the project is profitable and that the firm will earn at least its required return, therefore the statement is true.

Question 10

What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
A) $1,700,000
B) $371,764
C) $137,053
D) $6,700,000

Accepted Answer

When the cost of capital is 0 percent, the NPV is simply the sum of the cash inflows minus the initial investment. Summing the inflows gives $1,800,000 + $1,900,000 + $1,700,000 + $1,300,000 = $6,700,000. Subtracting the initial investment of $5,000,000 from this sum gives an NPV of $1,700,000.

Question 11

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?
A) -$1,494,336
B) $158,011
C) -$158,011
D) $3,505,664

Accepted Answer

To calculate the NPV of the project, we need to discount the expected cash flows at the cost of capital of 12% and subtract the initial after-tax cost. Using a financial calculator or Excel, we get:

NPV = -$5,000,000 + ($1,800,000 / 1.12) + ($1,900,000 / 1.12^2) + ($1,700,000 / 1.12^3) + ($1,300,000 / 1.12^4)
NPV = -$1,494,336

Since the NPV is negative, the project would not be a good investment at the cost of capital of 12%. Therefore, the best choice is A) -$1,494,336.

Question 12

If a project's IRR is greater than the cost of capital, the project should be rejected.

Accepted Answer

If a project's IRR is greater than the cost of capital, it means that the project is expected to generate a return higher than the cost of financing it. This is a positive sign and indicates that the project is financially attractive. Therefore, the project should be accepted and not rejected.

Question 13

What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?
A) $1,700,000
B) $371,764
C) -$137,053
D) -$4,862,947

Accepted Answer

The NPV is calculated by discounting the cash inflows at the cost of capital and subtracting the initial investment. The NPV is negative, indicating the project does not cover its cost of capital.

Question 14

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.
A) -$1,000
B) $9,000
C) $4,000
D) -$4,000

Accepted Answer

The net present value (NPV) is calculated by subtracting the initial investment from the present value of cash flows. Here, NPV = $4,000 - $5,000 = -$1,000.

Question 15

The IRR is the compounded annual rate of return that a firm will earn if it invests in a project and receives the estimated cash inflows.

Accepted Answer

The IRR is the internal rate of return, which represents the discount rate that makes the net present value (NPV) of a project's expected cash flows equal to zero. It is a measure of the project's profitability and represents the average annual rate of return over the project's lifetime.

Question 16

A firm is evaluating three capital projects. The net present values for the projects are as follows:  The firm should ________.
A) accept Projects 1 and 2, and reject Project 3
B) accept Projects 1 and 3, and reject Project 2
C) accept Project 3, and reject Projects 1 and 2
D) accept all projects

Accepted Answer

The answer of A firm is evaluating three capital projects....

Question 17

Table 10.1 
-Given the information in Table 10.1 and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?

Accepted Answer

The answer of Table 10.1 
-Given the information in Table...

Question 18

If a project's IRR is greater than 0 percent, the project should be accepted.

Accepted Answer

A project's IRR should be compared to the cost of capital or the required rate of return, not just 0 percent. If the IRR exceeds the cost of capital, then the project can be considered for acceptance.

Question 19

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?
A) 0.667
B) 2.036
C) 1.036
D) 2.739

Accepted Answer

First, we need to calculate the present value of the inflows which will be $250 for the next 3 years. Using the formula for present value of an annuity, we get:
PV = $250 x (1 - 1/1.1^3)/0.1 = $577.87

Next, we calculate the profitability index which is the present value of inflows divided by the initial cash outflow:
Profitability Index = $577.87/$600 = 0.963

Since the profitability index is less than 1, the project should be rejected as it is not expected to generate a positive net present value.

Question 20

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

Accepted Answer

This is the definition of the internal rate of return (IRR). The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular investment equal to zero.

Quiz 10: Capital Budgeting Techniques

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called internal rate of return.

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

The minimum return that must be earned on a project in order to leave the firm's value unchanged is ________.

If a project's IRR is greater than zero, the project should be accepted.

A firm can accept a project with a net present value of zero because ________.

Which of the following is an advantage of NPV?

Table 10.2 -Given the information in Table 10.2 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called net present value.

An internal rate of return greater than the cost of capital guarantees that the firm will earn at least its required return.

What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

If a project's IRR is greater than the cost of capital, the project should be rejected.

What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4?

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.

The IRR is the compounded annual rate of return that a firm will earn if it invests in a project and receives the estimated cash inflows.

A firm is evaluating three capital projects. The net present values for the projects are as follows: The firm should ________.

Table 10.1 -Given the information in Table 10.1 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

If a project's IRR is greater than 0 percent, the project should be accepted.

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent?

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.