Question 1

Of the capital budgeting techniques discussed,which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?
A) Payback period
B) Discounted payback period
C) Modified internal rate of return
D) Net present value

Accepted Answer

Net present value (NPV) can handle both normal and non-normal cash flows, as well as both independent and mutually exclusive projects. NPV calculates the present value of future cash flows, taking into account the time value of money and the required rate of return. It compares the present value of cash inflows to the present value of cash outflows, and a project is accepted if the NPV is positive.

Question 2

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects,one would choose:
A) either project if they both are more than managers' maximum payback period.
B) neither project if they both are less than managers' maximum payback period.
C) the project that pays back the soonest.
D) the project that pays back the soonest if it is equal to or less than managers' maximum payback period.

Accepted Answer

The payback period method focuses on the time it takes for a project to pay back its initial investment. If two projects are mutually exclusive, meaning only one can be chosen, the one with the shortest payback period is preferred if it meets the manager's maximum payback period. Therefore, the best choice is D - the project that pays back the soonest if it is equal to or less than the manager's maximum payback period.

Question 3

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent. 
A) −$639.96
B) $360.04
C) $392.44
D) $486.29

Accepted Answer

Using the financial calculator: NPV = 392.44
−1,000 CFO
75 CF1, 1 F1
100 CF2, 2 F2
0 CF3, 1 F3
2,000 CF4, 1 F4
9 I

Question 4

Which of the following is a capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return,IRR,decision rule?
A) Discounted payback
B) Net present value
C) Modified internal rate of return
D) Profitability index

Accepted Answer

The technique described in the question is Modified Internal Rate of Return (MIRR), which is calculated by assuming a consistent reinvestment rate for cash inflows and outflows. MIRR is a useful capital budgeting technique because it avoids some of the problems with traditional Internal Rate of Return (IRR) calculations, such as multiple rates of return for non-normal cash flow streams. Discounted payback and net present value are other capital budgeting techniques, but they don't involve consistent reinvestment assumptions. Profitability index is a measure of how much value a project creates per dollar invested, and doesn't involve measuring the consistency of reinvestment rates.

Question 5

The benchmark for the profitability index (PI)is the:
A) cost of capital.
B) managers' maximum number of years.
C) zero or anything larger than zero.
D) zero or anything less than zero.

Accepted Answer

The benchmark for the profitability index (PI) is zero or anything larger than zero. A PI greater than 0 indicates that the project's present value of future cash flows exceeds the initial investment, suggesting it is a profitable venture.

Question 6

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?
A) Payback
B) Discounted payback
C) Net present value
D) Profitability index

Accepted Answer

Discounted payback is the technique that evaluates how long it will take for a firm to recover its investment in a project, considering the time value of money by discounting the cash flows at a market interest rate. Unlike the simple payback method, which does not account for the time value of money, discounted payback provides a more accurate reflection of a project's profitability and risk by incorporating the cost of capital.

Question 7

The net present value decision technique uses a statistic denominated in:
A) years.
B) currency.
C) a percentage.
D) time lines.

Accepted Answer

Net present value (NPV) is a financial technique that compares the present value of cash inflows with the present value of cash outflows. It uses specific discount rate or cost of capital to bring future cash flows to present value. The result of this calculation is a monetary value in the same currency as the cash flows being evaluated, making option B the correct answer.

Question 8

A graph of a project's ________ is a function of cost of capital.
A) internal rate of return
B) net present value
C) modified internal rate of return
D) all choices are a function of cost of capital

Accepted Answer

The answer of A graph of a project's ________ is...

Question 9

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?
A) Expected cash flows
B) Time line cash flows
C) Non-normal cash flows
D) Normal cash flows

Accepted Answer

Normal cash flows consist of an initial investment (or series of investments) that are negative, followed by a series of positive returns. This pattern is typical for many investment scenarios where the initial outlay is followed by benefits over time.

Question 10

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?
A) Payback
B) Internal rate of return
C) Net present value
D) Profitability index

Accepted Answer

The payback method is particularly useful when firms face time constraints in repaying investors because it focuses on the length of time it takes for a capital project to pay for itself, rather than on the project's overall profitability. By determining how long it will take for the initial investment to be recouped, managers can identify projects that generate cash flows more quickly and prioritize them over longer-term projects. This allows firms to quickly pay back their investors and free up capital for other uses.

Question 11

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:
A) time or resource constraints.
B) a labor union.
C) the election of a new board of directors.
D) a major investment.

Accepted Answer

If a firm is facing time or resource constraints, it may not be able to utilize the net present value decision technique as effectively. In such cases, other measures such as payback period or internal rate of return may be more useful. The other options listed (labor union, election of a new board of directors, major investment) do not necessarily affect the relevance of the net present value decision technique.

Question 12

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?
A) Discounted payback
B) Net present value
C) Internal rate of return
D) Profitability index

Accepted Answer

Internal rate of return (IRR) is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return. It allows for the comparison of different projects with varying cash flows and provides a percentage return that can be compared to the cost of capital. Neither discounted payback nor profitability index uses expected geometric average of a project's rate of return, and while net present value does provide a metric, it is not based on the expected geometric average.

Question 13

All capital budgeting techniques:
A) render the same investment decision.
B) use the same measurement units.
C) include all crucial information.
D) exclude some crucial information.

Accepted Answer

Capital budgeting techniques often exclude some crucial information, such as intangible benefits or external factors, which can affect the overall evaluation of an investment project. Each technique has its own focus and limitations, and they do not necessarily render the same decision or use the same measurement units.

Question 14

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?
A) Payback
B) Internal rate of return
C) Net present value
D) Profitability index

Accepted Answer

The payback technique measures the length of time it will take for a firm to earn back its initial investment in a capital project. It is a simple and quick method for evaluating projects, but it does not consider the time value of money or the project's profitability beyond the payback period.

Question 15

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project),rather than the gross return?
A) Internal rate of return (IRR)
B) Modified internal rate of return (MIRR)
C) Profitability index (PI)
D) Net present value (NPV)

Accepted Answer

The answer of Which rate-based decision statistic measures the excess...

Question 16

Which of these describe groups or pairs of projects where you can accept one but not all?
A) Dependent
B) Independent
C) Mutually exclusive
D) Mutually dependent

Accepted Answer

Mutually exclusive projects are those where selecting one project eliminates the possibility of selecting the other project(s). In contrast, dependent or mutually dependent projects may have interdependencies and require one or more other projects to be completed first, but it is possible to accept all of them. Independent projects can be accepted or rejected separately without affecting each other.

Question 17

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:
A) time value of money.
B) market rates of return.
C) cash flows that occur after payback.
D) cash flows that occur during payback.

Accepted Answer

The payback period and discounted payback period techniques do not consider cash flows that occur after the payback period has been reached. This means they ignore any benefits or returns that occur beyond the point where the initial investment has been recovered.

Question 18

Which of these is 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?
A) Discounted payback
B) Net present value
C) Internal rate of return
D) Profitability index

Accepted Answer

Net present value (NPV) is 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. NPV calculates the present value of all expected future cash flows (both positive and negative) using a discount rate, subtracts the initial investment, and compares the result to zero. If the NPV is positive, the project is expected to generate a return that exceeds the required rate of return and should be accepted. If the NPV is negative, the project is expected to generate a return that falls short of the required rate of return and should be rejected.

Question 19

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. 
A) $12.93
B) $14.22
C) $62.07
D) $136.90

Accepted Answer

We can calculate the NPV of the cash flows using the formula:

NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + ... + CFn/(1+r)n

where CF0 is the initial cash flow (negative for an investment), CF1-2 are the cash flows in years 1 and 2, and r is the cost of capital (10%).

Plugging in the values, we get:

NPV = -100 + 60/(1+0.10) + 90/(1+0.10)2 + 120/(1+0.10)3 
= -100 + 54.55 + 74.38 + 85.54 
= $14.22

Since the NPV is positive, we would accept the project.

Question 20

Rate-based statistics represent summary cash flows,and these summaries tend to lose which two important details?
A) The investment size and cash inflows that occur after the rather arbitrary testing period
B) The investment size and the cash inflows that occur before the testing period
C) The investment size and the cash outflows that occur before the testing period
D) The investment size and the cash inflows that occur during the testing period

Accepted Answer

The answer of Rate-based statistics represent summary cash flows,and these...

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

Of the capital budgeting techniques discussed,which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects,one would choose:

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

Which of the following is a capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return,IRR,decision rule?

The benchmark for the profitability index (PI) is the:

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

The net present value decision technique uses a statistic denominated in:

A graph of a project's ________ is a function of cost of capital.

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?

All capital budgeting techniques:

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project) ,rather than the gross return?

Which of these describe groups or pairs of projects where you can accept one but not all?

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Which of these is 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?

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Rate-based statistics represent summary cash flows,and these summaries tend to lose which two important details?