1. Since the focus of capital budgeting is cash flows, changes in non-cash accounts such as depreciation and working capital would not be relevant to the analysis. A. True B. False

2. Relevant financial data for projects are best described as (dont miss this one)

A. EBDT. B. incremental cash flows. C. incremental profits. D. accounting cash flows.

3. The best method to value common stock is:

a. book value b. liquidation value

c. present value of dividends d. accounting profits model

4. In the context of capital budgeting, risk refers to

A. the degree of variability of the cash inflows.

B. the degree of variability of the initial investment.

C. the chance that the profitability index will be greater than one.

D. the chance that the internal rate of return will exceed the cost of capital.

5. The future value of an annuity due is always worth more than the future value of an otherwise identical ordinary annuity.

a. True b. False

6. 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. A. True B. False

7. Which of the following would increase the NPV of a project being considered?

A. A decrease in the cost of capital (discount rate).

B. The sale of the machine at a capital gain rather than book value.

C. An initial required decrease in Accounts Payable.

D. All above.

8. Sensitivity analysis is a statistically based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.

A. True B. False

9. One advantage of the MIRR method is that it is the most theoretically correct method.

A. True B. False

10. If the NPV is a positive $50,000 and the discount rate is 12%, the IRR is

A. greater than 12% B. less than 12% C. 12% D. only Boudreaux knows

11. The underlying cause of conflicts in ranking for projects by IRR and NPV methods is

A. that neither method explicitly considers the time value of money.

B. the assumption made by IRR method that intermediate cash flows are reinvested at the cost of capital

C. the reinvestment rate assumption regarding cash flows

D. the projects are independent and have a Scale Effect

12. Comparing NPV and IRR analysis

A. always result in a conflict when evaluating independent projects

B. always result in a conflict when evaluating mutually exclusive projects

C. always result in the same ranking of projects

D. may result in a conflict with mutually exclusive projects

13. The risk of an asset can be measured by its covariance, which is found by subtracting the worst outcome from the best outcome and squaring the results.

a. True b. False

14. A project has an initial investment of $1,000,000 and a profitability index of 1.21. The NPV of the project is

A. $210,000. B. $121,000. C. $631,000. D. -$120,050. E. none.

15. _____ measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the change in one of the project's cash flow assumptions.

A. Certainty equivalents B. Risk-adjusted discount rates

C. Sensitivity analysis D. Multiple regression analysis

16. An increase in sales and or profits means there is also an increase in cash on the balance sheet.

a. True b. False

17. Capital budgeting calculations and analysis for the most part only involves the finance and accounting executives and therefore other business disciplines do not really need to have a knowledge of this theoretical business investment process.

a. True b. False

18. The present value of an annuity due for $1,000 deposits, 10% interest for 10 years is (omit pennies):

a. $10,000 b. $6,145

c. $6,759 d. none

19. The goal of the Executives of the firm should be to maximize income, minimize expenses and make the firm a great corporate citizen that is generous to the public.

A. True B. False

20. Project post-audit reviews are rarely of practical value because capital investments are sunk, irreversible costs.

A. True B. False

21. What is the approximate yield to maturity for a $1000 par value bond selling for $850 that matures in 14 years and pays 10 percent coupon interest rate?

a. 7.5 percent c. 9.6 percent

b. 8.9 percent d. 12.3 percent

22. Book value per share is of greater concern to the financial manager than the market value.

a. True b. False

23. The most important advantage of the RADR approach is that it is the most theoretical correct method for risk analysis.

A. True B. False

24. Systematic risk is caused by all but the following:

a. Inflation b. Wars

c. A Company Strike d. Interest rates

25. One advantage of the IRR approach is that it can never provide the wrong project selection for mutually exclusive projects. A. True B. False