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Capital Budgeting

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Quiz on Capital Budgeting, created by lseyer436 on 16/11/2015.
lseyer436
Quiz by lseyer436, updated more than 1 year ago
lseyer436
Created by lseyer436 about 9 years ago
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Question 1

Question
The payback period is the amount of time, rounded to the nearest year, which is required for a firm to recover the cost of a new asset.
Answer
  • True
  • False

Question 2

Question
Net present value is considered a sophisticated capital budgeting technique since it gives consideration to the time value of money.
Answer
  • True
  • False

Question 3

Question
The internal rate of return is the discount rate that equates the present value of the cash inflows of a project with its initial investment.
Answer
  • True
  • False

Question 4

Question
If the NPV of a project is zero, the IRR of that project will always be less than the firm's cost of capital.
Answer
  • True
  • False

Question 5

Question
The goal of the firm should be to use its budget to generate the highest possible internal rate of return for its cash inflows.
Answer
  • True
  • False

Question 6

Question
The NPV assumes that periodic cash inflows are invested at a rate equal to the firm's cost of capital.
Answer
  • True
  • False

Question 7

Question
A net present value profile is a graphical presentation of the NPV at various discount rates.
Answer
  • True
  • False

Question 8

Question
In reference to capital budgeting, risk is the chance that a project has a high degree of variability in the initial investment.
Answer
  • True
  • False

Question 9

Question
For conventional projects, the NPV and the IRR will always produce the same accept-reject decision.
Answer
  • True
  • False

Question 10

Question
The break-even cash inflow is the minimum level of cash inflow associated with a project to be acceptable.
Answer
  • True
  • False

Question 11

Question
The internal rate of return assumes that the periodic cash flows associated with a project will be reinvested at the project's IRR.
Answer
  • True
  • False

Question 12

Question
For stand-alone projects, the PI will always give the same accept/reject decision as NPV.
Answer
  • True
  • False

Question 13

Question
One of the weaknesses of the payback approach is that it assumes cash flows are reinvested at an interest rate which is generally too high.
Answer
  • True
  • False

Question 14

Question
One of the weaknesses of the IRR approach is multiple IRRs.
Answer
  • True
  • False

Question 15

Question
Theoretically, NPV is superior to all of the other decision methods.
Answer
  • True
  • False

Question 16

Question
One of the disadvantages of the payback methods (either regular or discounted) is that it considers all cash flows throughout the entire life of a project.
Answer
  • True
  • False

Question 17

Question
Assuming that the total cash flows are equal, the NPV of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the NPV of a project whose cash flows come in more slowly.
Answer
  • True
  • False

Question 18

Question
Other things held constant, an increase in the cost of capital discount rate will result in a decrease of a project's IRR.
Answer
  • True
  • False

Question 19

Question
The modified IRR (MIRR) always lead to the same capital budgeting decisions as the NPV methods.
Answer
  • True
  • False

Question 20

Question
If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the form will select X rather than Y if has a NVP > 0.
Answer
  • True
  • False

Question 21

Question
The ______ is the exact amount of time it takes the firm to recover its initial investment.
Answer
  • internal rate of return
  • net present value
  • payback period
  • certainty equivalent

Question 22

Question
A firm is evaluating a proposal which has an initial investment of $45,000 and has cash flows of $5,000 in year 1, $20,000 in year 2, $15,000 in year 3, and $10,000 in year 4. The payback period of the project is ____.
Answer
  • 3.5 years
  • 3 years
  • 4 years
  • 2.5 years

Question 23

Question
All of the following are examples of sophisticated capital budgeting techniques EXCEPT
Answer
  • net present value
  • annualized net present value
  • internal rate of return
  • payback period

Question 24

Question
The _____ is the discount rate that equates the present value of the cash inflows with the initial investment.
Answer
  • cost of capital
  • internal rate of return
  • average rate of return
  • opportunity cost

Question 25

Question
A firm with a cost of capital of 11% is evaluating four capital projects. The internal rate of return are as follows: Project / IRR 1 13% 2 10% 3 11% 4 15% The firm should
Answer
  • accept 4 and 1, and reject 2 and 3
  • accept 4, 1, and 3 and reject 2
  • accept 4 and reject 1,2,3
  • accept 3 and reject 1,2, and 4

Question 26

Question
The _____ is the minimum amount of return that must be earned on a project in order to leave the firm's value unchanged.
Answer
  • internal rate of return
  • compound rate
  • discount rate
  • risk free interest rate

Question 27

Question
Project Initial Investment IRR NPV 1 $100,000 17% $50,000.00 2 $200,000 15% $10,000.00 3 $125,000 14% $30,000.00 4 $100,000 11% $(2,500.00) 5 $75,000 19% $25,000.00 Using the internal rate of return approach to ranking projects, which projects should the firm accept?
Answer
  • 1,2,3, and 5
  • 1,2, and 5
  • 1,2, and 3
  • 1,2,3,4, and 5

Question 28

Question
Project Initial Investment IRR NPV 1 $100,000 17% $50,000.00 2 $200,000 15% $10,000.00 3 $125,000 14% $30,000.00 4 $100,000 11% $(2,500.00) 5 $75,000 19% $25,000.00 Using the net present value approach to ranking projects, which should be accepted?
Answer
  • 1,2,3,4, and 5
  • 1,2, and 3
  • 1,2,3, and 5
  • 1,2, and 5

Question 29

Question
A firm is evaluating an investment proposal which has an initial investment of $8,000 and a discounted cash flow valued at $6,000. The net present value of the investment is _____.
Answer
  • 0
  • -$2,000
  • $2,000
  • $6,000

Question 30

Question
Comparing net present value and internal rate of return analysis _____.
Answer
  • always results in the same ranking of projects
  • always results in the same accept/reject decision
  • may result in differing ranking
  • both b and c are correct

Question 31

Question
Unlike the IRR criteria, the NPV approach assumes an interest rate equal to the _____.
Answer
  • market interest rate
  • project's internal rate of return
  • risk free rate of return
  • firm's cost of capital

Question 32

Question
Year Cash Inflow 1 $50,000 2 $65,000 3 $90,000 A firm has undertaken a project with an initial investment of $100,000. The firm's cost of capital is 14%. What is the NPV for the project?
Answer
  • $50,000
  • $32,486
  • $54,622
  • $76,549

Question 33

Question
Year Cash Inflow 1 $50,000 2 $65,000 3 $90,000 A firm has undertaken a project with an initial investment of $100,000. The firm's cost of capital is 14%. What is the IRR for the project?
Answer
  • 41%
  • 46%
  • 32%
  • 22%

Question 34

Question
Initial investment: $75,000 Cost of capital: 14% Risk free rate: 6% Year Cash Inflow Certainty Equivalent 1 $30,000 0.9 2 $35,000 0.8 3 $40,000 0.75 The certain cash inflow for year 1 is_____.
Answer
  • $31,800
  • $30,000
  • 0
  • $27,000

Question 35

Question
Initial investment: $75,000 Cost of capital: 14% Risk free rate: 6% Year Cash Inflow Certainty Equivalent 1 $30,000 0.9 2 $35,000 0.8 3 $40,000 0.75 Using the certainty equivalent method, the net present value for the project is _____.
Answer
  • $5,246
  • $581
  • $18,036
  • - $2,700

Question 36

Question
The objective of _____ is to select the group of projects that provide the highest overall net present value and does not require more dollars than are budgeted.
Answer
  • scenario analysis
  • simulation
  • capital rationing
  • sensitivity analysis

Question 37

Question
Mutually exclusive Cost of Capital 10% Project A Project B Length of cash inflows 5 7 NPV $12,000 $14000 What is the annualized net present value of project a and project b?
Answer
  • $3,165 and $2,876
  • $2,378 and $1,850
  • $2,986 and $4,197
  • $4,174 and $4,915

Question 38

Question
A project that has a coefficient of variation of zero is considered _____.
Answer
  • slightly risky
  • a bad investment
  • very risky
  • risk free

Question 39

Question
An increase in the risk adjusted discount rate will result in _____.
Answer
  • no change to the NPV
  • a decrease in the NPV
  • an increase in the NPV
  • an increase in the IRR

Question 40

Question
The amount by which the required discount rate exceeds the risk free rate is called the _____.
Answer
  • risk equivalent
  • risk premium
  • excess risk
  • market risk function

Question 41

Question
A major disadvantage of the payback period method is that it _____.
Answer
  • is useless as a risk indicator
  • ignores cash flows beyond the payback period
  • both
  • neither

Question 42

Question
If the NPV is negative, then which of the following must be true? The discount rate used is
Answer
  • equal to the internal rate of return
  • too high
  • greater than the IRR
  • too low

Question 43

Question
The internal rate of return of a capital investment
Answer
  • changes when the cost of capital changes
  • must exceed the cost of capital in order for the firm to accept the investment
  • is equal to the annual net cash flows divided by the project cost
  • is similar to the yield common stock

Question 44

Question
An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of 20 years. Find the internal rate of return to the nearest whole percentage point.
Answer
  • 9%
  • 7%
  • 5%
  • 3%

Question 45

Question
You are considering the purchase of an investment that would pay you $5,000 per years 1-5, $3,000 per years 6-8, and $2,000 per year for years 9 and 10. if you require a 14% rate of return, and the cash flows occur at the end of each year, then how much should you be willing to pay for this investment?
Answer
  • $15,819.27
  • $21,937.26
  • $32,415.85
  • $52,815.71
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