Question 1

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 is a relative measure and allows for easy comparison of different projects with different initial investments and cash flows. The end result of the computation is a percentage, not dollars.

Question 2

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 3

Discounted cash flow methods focus on operating income.

Accepted Answer

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Question 4

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 What is the net present value for...

Question 5

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

The method described in the question is the process of calculating the net present value (NPV) by discounting all future cash inflows and outflows to their present value using the required rate of return. Therefore, the best choice is C, net present value.

Question 6

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

Accepted Answer

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Question 7

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...

Question 8

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 NPV indicates that the project is expected to generate more cash inflows than outflows over the project's life, resulting in a net gain for the company. However, qualitative factors, such as ethical concerns or environmental impact, may outweigh the financial benefit of the investment and lead the company to reject the project.

Question 9

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 exceeds the hurdle rate, not if it is less than the hurdle rate.

Question 10

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

Accepted Answer

If the internal rate of return is less than the hurdle rate (which is the minimum rate of return required by an investor), it means the project is not generating enough return to justify the investment. This ultimately leads to a negative net present value of the project, which means the project is not feasible in financial terms.

Question 11

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 Brown Corporation recently purchased a new machine...

Question 12

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 different rates of return for each year of the project, whereas the internal rate of return method assumes the same rate of return each year. Therefore, the net present value method is more suitable in situations where the required rate of return may vary over time.

Question 13

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 statement regarding the net present value method.

Question 14

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, it means the project has a net present value of zero. The discount rate that causes this to happen is called the internal rate of return (IRR). Therefore, the correct choice is option B.

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 can be reinvested at the same rate as the IRR, which may lead to incorrect decisions when comparing projects with different lives or initial investments.

Question 16

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

The answer of Discounted cash flow measures the cash inflows...

Question 17

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 answer of An advantage of the internal rate of...

Question 18

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 19

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

The answer of Discounted cash flow methods measure all the...

Question 20

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 (opportunity) cost of capital refers to the minimum rate of return that an investment should earn in order for it to be considered profitable or worthwhile. This is also known as the required rate of return.

Quiz 20: Capital Budgeting: Methods of Investment Analysis

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

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.

Discounted cash flow methods focus on operating income.

What is the net present value for the Wet Water Company's new drill?

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