Question 1

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

Accepted Answer

The answer of A capital budgeting project is accepted if...

Question 2

If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative.

Accepted Answer

This is because the internal rate of return is the discount rate at which the net present value of the cash inflows equals the net present value of the cash outflows. If the internal rate of return is less than the hurdle rate, it means that the project's cash inflows are not sufficient to cover the expected rate of return demanded by investors, resulting in a negative net present value.

Question 3

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

Accepted Answer

This is a correct explanation of the net present value method.

Question 4

If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that
A)qualitative factors outweigh the benefit of the investment.
B)an alternative project has a lower NPV.
C)the net initial investment cannot be recovered.
D)the return is greater than that required by the company.
E)quantitative factors outweigh the benefit of the investment.

Accepted Answer

A positive net present value indicates that the project will generate more cash inflows than outflows over its lifetime. Therefore, if the project is not accepted, it suggests that the decision was influenced by qualitative factors such as organizational goals, strategic fit, or ethical considerations.

Question 5

An advantage of the internal rate of return method is that it can be used when the required rate of return varies over the life of the project.

Accepted Answer

The internal rate of return (IRR) assumes a constant required rate of return over the life of the project, making it unsuitable for projects with varying rates.

Question 6

The net present value method can on occasion indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate of return.

Accepted Answer

The answer of The net present value method can on...

Question 7

When the present value of expected cash inflows from a project equals the present value of expected cash outflows of a project, the discount rate is the
A)universal rate.
B)internal rate of return.
C)required rate.
D)net present value rate.
E)inflation rate.

Accepted Answer

When the present value of expected cash inflows equals the present value of expected cash outflows, the project is said to have a net present value of zero. The discount rate that makes the net present value zero is called the internal rate of return (IRR). Therefore, the correct answer is B.

Question 8

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

Accepted Answer

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment, project, or company. DCF measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison. This is done by discounting the future cash flows back to the present day using a discount rate. The discount rate is typically the weighted average cost of capital (WACC) for the project or company.

Question 9

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-Brown Corporation recently purchased a new machine for $339,013.20.The new equipment has a useful life of 10 years.Net cash flows will be $60,000 per year, end of year payments.What is the internal rate of return?
A)10 percent
B)12 percent
C)14 percent
D)16 percent
E)18 percent

Accepted Answer

The answer of Use the information below to answer the...

Question 10

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Accepted Answer

Discounted cash flow methods account for the time value of money by discounting future cash flows to their present value, rather than assuming they occur at equal intervals.

Question 11

The discount rate, hurdle rate, or (opportunity)cost of capital all refer to the
A)required rate of return.
B)internal rate of return.
C)net present value.
D)discounted cash flow.
E)payback period.

Accepted Answer

The discount rate, hurdle rate, or cost of capital is the minimum rate of return required by an investor to undertake an investment project. It is also referred to as the required rate of return.

Question 12

The primary advantage of the internal rate of return method is that the end result of the computation is in dollars instead of percentages.

Accepted Answer

The primary advantage of the internal rate of return method is that it considers the time value of money and provides a single value to indicate the profitability of an investment. However, the end result of the computation is in the form of a percentage, not dollars.

Question 13

A capital budgeting project will have a positive net present value if its return is less than the hurdle rate.

Accepted Answer

A capital budgeting project will have a positive net present value if its return is greater than the hurdle rate.

Question 14

The required rate of return is the minimum acceptable percentage return on an investment and is set by the suppliers of investment funds.

Accepted Answer

The answer of The required rate of return is the...

Question 15

The internal rate of return method may result in erroneous decisions when used to compare mutually exclusive projects with unequal lives or unequal levels of initial investment.

Accepted Answer

The internal rate of return method assumes that cash flows are reinvested at the same internal rate of return, and may result in erroneous decisions when used to compare mutually exclusive projects with unequal lives or unequal levels of initial investment. It is recommended to use the modified internal rate of return method or the net present value method in these situations.

Question 16

Discounted cash flow methods focus on operating income.

Accepted Answer

The answer of Discounted cash flow methods focus on operating...

Question 17

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-What is the net present value for the Wet Water Company's new drill?
A)$96,000
B)$1,722.83
C)$12,651.05
D)$23,579.26
E)$34,507.48

Accepted Answer

The answer of Use the information below to answer the...

Question 18

When all future cash inflows and outflows are discounted to the present using the required rate of return, the method used is
A)capital budgeting.
B)discounted cash flow.
C)net present value.
D)required rate of return.
E)payback method.

Accepted Answer

When calculating the present value of future cash inflows and outflows using the required rate of return, the method used is known as net present value (NPV) analysis. NPV is a commonly used capital budgeting technique that measures the potential profitability of an investment by comparing the present value of expected cash inflows to the present value of expected cash outflows. The required rate of return is often used as the discount rate in NPV analysis to account for the time value of money and the risks associated with the investment.

Question 19

The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project.

Accepted Answer

The net present value method takes into account the time value of money and discounts all cash flows to their present value based on a required rate of return. This means that the organization can have varying rates of return each year and it will still accurately reflect the project's profitability. The internal rate of return method assumes that the same rate of return is required each year of the project, which may not always be the case.

Question 20

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-In what range is the internal rate of return for the Wet Water Company's new drill?
A)8 percent to 12 percent
B)12 percent to 16 percent
C)16 percent to 20 percent
D)20 percent to 24%
E)greater than 24%

Accepted Answer

The answer of Use the information below to answer the...

Quiz 20: Capital Budgeting: Methods of Investment Analysis

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative.

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that

An advantage of the internal rate of return method is that it can be used when the required rate of return varies over the life of the project.

The net present value method can on occasion indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate of return.

When the present value of expected cash inflows from a project equals the present value of expected cash outflows of a project, the discount rate is the

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

The discount rate, hurdle rate, or (opportunity) cost of capital all refer to the

The primary advantage of the internal rate of return method is that the end result of the computation is in dollars instead of percentages.

A capital budgeting project will have a positive net present value if its return is less than the hurdle rate.

The required rate of return is the minimum acceptable percentage return on an investment and is set by the suppliers of investment funds.

The internal rate of return method may result in erroneous decisions when used to compare mutually exclusive projects with unequal lives or unequal levels of initial investment.

Discounted cash flow methods focus on operating income.

When all future cash inflows and outflows are discounted to the present using the required rate of return, the method used is

The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project.