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Exam 10: Capital Budgeting Techniques

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Question 31

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

A) True
B) False

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Question 32

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An annuity is ________.

A) a mix of cash flows in conventional and nonconventional
B) a stream of perpetual cash flows
C) a series of constantly growing cash flows
D) a series of equal annual cash flows

E) A) and D)
F) B) and D)

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Question 33

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Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques,because ________.

If net present value of a project is greater than zero,the firm will earn a return greater than its cost of capital.The acceptance of such a project would enhance the wealth of the firm's owners.

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $2,000 each year for the next three years is 0.5 years.

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 ________.

If the NPV is greater than the initial investment,a project should be rejected.

What is the payback period for Tangshan Mining company's new project if 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,$700,000 in year 3,and $1,800,000 in year 4?

Which of the following capital budgeting techniques ignores the time value of money?

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have multiple IRRs; this problem does not occur with the NPV approach.

A nonconventional cash flow pattern associated with capital investment projects consists of an initial ________.

Net present value profiles are most useful when selecting among mutually exclusive projects.

A $60,000 outlay for a new machine with a usable life of 15 years is called ________.

By measuring how quickly a firm recovers its initial investment,the payback period gives implicit consideration to the time value of money and ignores the timing of cash flows.

Unlike the net present value criteria,the internal rate of return approach assumes a reinvestment rate equal to ________.

The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure,such as the rate of return.

The financial decision makers find NPV more intuitive because it measures benefits relative to the amount invested.

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

If a firm is subject to capital rationing,it has only a fixed number of dollars available for capital expenditures and numerous projects compete for these dollars.