1. Which of the following statements concerning the principles underlying the capital budgeting process is most accurate?

a. The net income for a project is essential for making a correct capital budgeting decision

b. Cash flows should be based on opportunity costs

c. Financing costs should be reflected in a project's incremental cash flows

2. Which of the following statements about the payback period method is least accurate? The payback period:

a. Provides a rough measure of a project's liquidity

b. Is the number of years it takes to recover the original cost of the investment

c. Considers all cash flows throughout the entire life of a project

3. Which of the following statements about NPV and IRR is least accurate?

a. The IRR is the discount rate that equates the present value of the cash inflows with the present value of outflows

b. For mutually exclusive projects, if the NPV method and the IRR method give conflicting rankings, the analyst should use the IRRs to select the project.

c. The NPV method assumes that cash flows will be reinvested at the cost of capital, while IRR rankings implicitly assume that cash flows are reinvested at the IRR

4. Which of the following statements is least accurate? The discounted payback period:

a. Is generally shorter than the regular payback

b. Frequently ignores terminal values

c. Is the time it takes for the present value of the project's cash inflows to equal the initial cost of the investment

5. Which of the following statements about NPV and IRR is least accurate?

a. The NPV will be positive if the IRR is less than the cost of capital

b. The IRR can be positive even if the NPV is negative

c. When the IRR is equal to the cost of capital, the NPV will be zero

6. Jacob Inc. is investing 400 million pesos in new industrial equipment. The present value of the future after-tax cash flows resulting from the equipment is 700 million pesos. Jacob currently has 200 million shares of common stock outstanding, with a current market price of P38 per share. Assuming that this project is new information and is independent of other expectations about the company, what is the theoretical effect of the new equipment on Jacob's stock price? The stock price will:

a. Decrease to $33.50

b. Increase to $37.50

c. Increase to $39.50