QUESTION 1

If the net present value (NPV) of a project is positive:

A.The project's discounted payback period is longer than the useful life of the project.

B.The internal rate of return is lower than the firm's required rate of return

C.The project is not acceptable.

D.Accepting the project will increase the value of the firm.

QUESTION 2

Ace Inc. is evaluating two mutually exclusive projects - Project A and Project B. The initial investment for each project is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next 5 years. Project B will generate only one cash inflows in the amount of $99,500 at the end of the 5th year ( no cash flows are generated in the first 4 years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?

A.Neither project should be purchased because neither has a positive NPV.

B.Project B should be purchased because it has a higher net present value (NPV) than project A

C.Project A should be purchased because it has a positive NPV.

D.Project A should be purchased because it has a negative NPV.

QUESTION 3

Which of the following is true about the net present value (NPV) capital budgeting technique?

A.If the net benefit computed on a present value basis that is, NPV is positive, then the asset (project) is considered an acceptable investment.

B.The NPV capital budgeting technique ignores the time value of money.

C.When projects are evaluated using the NPV formula, it shows by how much a firm's future value will decrease if a capital budgeting project is purchased.

D.The NPV calculation fails to assume a realistic reinvestment rate assumption which is implicit in the internal rate of return calculation (IRR).

QUESTION 4

If a capital budgeting project is purchased, a firm's value, and thus its stockholders' wealth, will change by the amount of the project's:

A.MIRR

B.Discounted payback period (DPB)

C.No discounted cash inflows

D.Net present value (NPV)

QUESTION 5

If a project's net present value (NPV) is positive:

A.It is not an acceptable project.

B.The firm's required rate of return is not attainable.

C.It is an acceptable investment

D.Its internal rate of return (IRR) is equal to the firm's required rate of return.

QUESTION 6

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

A.It is the discount rate that equates the present value of a project's cash outflows (or costs) with the present value of its cash inflows.

B.It is the discount rate at which the net present value of a project is negative.

C.It is the rate of return at which a project's payback period is the shortest.

D.It is the discount rate that should be used to evaluate a project with multiple cash outflows.

QUESTION 7

7. For a particular project, other things held constant, an increase in the firm's required rate of return will result in _____.

A.A decrease in the project's net present value (NPV)

B.A decrease in the project's internal rate of return (IRR).

C.A decrease in the project's discounted payback period (DPB).

D.An increase in the project's modified internal rate of return (MIRR)

QUESTION 8

The net present value (NPV) of a project is negative when the discount rate used is:

A.Equal to the project's internal rate of return (IRR).

B.Equal to the yield to maturity of the bonds issued to finance the project.

C.Greater than the project's internal rate of return (IRR).

D.Less than the project's internal rate of return.

QUESTION 9

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

A.The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR.

B.The NPV method assumes that the project's cash flows will be reinvested at the risk-free rate, whereas the IRR method assumes reinvestment at the firm's required rate of return.

C.The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the risk-free rate.

D.The NPV method assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas the IRR method assumes the cash flows are not reinvested.

QUESTION 10

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because of the MIRR technique:

A.Considers only the cash flows after the project's payback period.

B.Has a decision rule that is easier to apply than the IRR decision rule.

C.Assumes that the project's cash flows are reinvested at the firm's required rate of return,

whereas IRR assumes the cash flows are reinvested at the project's IRR.

D.Assumes that the project's cash flows are reinvested at the risk-free rate.

QUESTION 11

Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money-capital budgeting techniques, has determined that all of the projects are acceptable. If the projects are mutually exclusive, which of the following capital budgeting techniques should be used to make the purchasing decision to ensure the firm's value is maximized?

A.traditional payback period (PB)

B.the internal rate of return (IRR)

C.modified internal rate of return (MIRR)

D.net present value (NPV)

QUESTION 12

A project should be accepted if _____.

A.its traditional payback period is greater than the expected number of years to recover the original investment

B.its internal rate of return (IRR) exceeds the firm's required rate of return

C.it yields multiple internal rates of return

D.in addition to cash inflows, the project generates multiple cash outflows during its life

QUESTION 13

A project's terminal value is the _____.

A.present value of all the cash outflows, including the initial cost of investment

B.cash inflow that is generated in the last year of the project

C.a sum of the future values of the cash inflows compounded at the firm's required rate of return

D.a sum of the cash inflows after full recovery of the initial investment in the project

QUESTION 14

Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a project's true profitability than the internal rate of return (IRR) measure

A.The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at its internal rate of return (IRR), which is generally correct.

B.The modified internal rate of return (MIRR) assumes that the terminal value of the project is the profit it generates, which is generally correct.

C.The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at the firm's required rate of return, which is a better assumption than the IRR assumption that the cash flows are reinvested at its IRR.

D.The modified internal rate of return assumes that the future value of the project's cash outflows is equal to its terminal value, which is always correct.

QUESTION 15

The traditional payback period technique that is used in capital budgeting analyses:

A.Is the simplest and oldest formal method used to evaluate capital budgeting projects.

B.Directly accounts for the time value of money.

C.Considers the discounted value of cash flows beyond the project's payback period.

D.Always results in maximizing the value of the firm when used to evaluate mutually exclusive projects.

QUESTION 16

Which of the following statements about the opportunity cost associated with a capital budgeting project is correct?

A.A project's opportunity cost is a cash outlay that the firm has already paid; therefore, it should not be included in a capital budgeting analysis.

B.The terms sunk cost and opportunity cost generally are used interchangeably.

C.A project's opportunity cost is the return (cash flow) that will not be earned (generated) if funds are invested in a particular capital budgeting project.

D.A project's opportunity cost is not a relevant cash flow, therefore it should not be included in the capital budgeting analysis.

QUESTION 17

Hill Top Lumber Company is considering building a Sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base located on the west coast. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining the Sawmill's initial investment outlay?

A.Last year, Hill Top spent $75,000 preparing a feasibility study on whether the project should be pursued further; that is, whether the firm should conduct a complete capital budgeting analysis, which is extremely costly.

B.Hill Top estimates that the new sawmill will generate $3 million of new business each year it operates.

C.To raise the funds needed to build the Sawmill, Hill Top must issue new bonds.

D.It will cost Hill Top $3 million to clear the land on which the Sawmill will be built

QUESTION 18

Which of the following should be included in the computation of an expansion project's terminal cash flow?

A.Any change in net working capital that was recognized at the time the project was purchased

B.The project's externalities

C.The initial cost (purchase price) of the project

D.The opportunity cost of the project

QUESTION 19

Which of the following statements is correct?

A.A firm has estimated that it will save $40,000 in utility expenses annually if it replaces an old machine with a new, more technologically advanced machine. The $40,000 is a relevant cash flow that should be included in the computation of the machine's supplemental operating cash flows.

B.Inflation does not need to be considered in capital budgeting analyses.

C.The tax deduction associated with a project's depreciation expense is not a relevant cash flow in capital budgeting analyses.

D.The sunk costs associated with a project are relevant cash flows that should be included in capital budgeting analyses.

QUESTION 20

When evaluating the cash flows associated with a capital budgeting project, the shipping and installation costs associated with the purchase of an asset are included in the computation of the:

A.Initial investment outlay, because these expenses are part of the project's depreciable basis.

B.Incremental operating cash flows, because shipping and installation costs represent expenses that must be written off annually over the life of the project.

C.Terminal cash flows, because these expenses are not paid until the end of the project's life.

D.Sunk costs, because these expenses do not affect any cash flows associated with purchasing the project.

QUESTION 21

Stonewood Manufacturing is evaluating whether to replace one of its existing machines with a new, more technologically advanced one. Which of the following statements concerning a replacement decision analysis is correct?

A.When computing the supplemental operating cash flows associated with the purchase of the new machine, only the after-tax cash flows that the new machine is expected to generate each year should be included in the computation.

B.The net cash flow from the sale of the old machine should be included as part of the new machine's initial investment outlay.

C.The annual depreciation expense associated with the new machine should be included in the computation of the new machine's terminal cash flow.

D.If the old machine is sold for a loss when it is replaced, the loss is treated as a cash outflow in the computation of the new machine's initial investment outlay.

QUESTION 22

To expand sales, Sandine Corporation is evaluating whether to purchase a machine to manufacture a new product line. Which of the following statements is correct concerning an expansion analysis like the one Sandine faces?

A.The machine's annual depreciation expenses will be deducted from the firm's net income to calculate its supplemental operating cash flows.

B.The new machine will be acceptable as long as the sum of its net cash flows is positive.

C.The shipping and installation costs associated with purchasing the new machine are included in the computation of its initial investment outlay.

D.The salvage value of the new machine should be included in the computation of its initial investment outlay.

QUESTION 23

A firm is evaluating a new machine to replace one of its existing, older machines. If the old machine is replaced, the change in the annual depreciation expense will be $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is correct?

A.The depreciation expense does not affect the calculation of the supplemental operating cash flows, so it should not be considered in the analysis of the machine.

B.The depreciation expense can be added to the machine's after-tax net operating income to determine its supplemental operating cash flows.

C.The depreciation expense should be added to the machine's initial investment outla

D.The depreciation expense is included in the computation of the machine's terminal cash flows.

QUESTION 24

Which of the following provides a measure of systematic risk?

A.Sensitivity analysis

B.Net present value analysis

C.Beta coefficient

D.Monte Carlo simulation

QUESTION 25

A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:

A.Increase the required rate of return that is used to evaluate the asset to reflect its higher risk.

B.Increase the internal rate of return (IRR) used to evaluate the asset to reflect its higher risk.

C.Increase the asset's net present value (NPV) to reflect its higher risk.

D.Reject the asset because its acceptance would clearly decrease the value of the firm.

QUESTION 26

When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?

A.Most firms do not consider risk when making capital budgeting decisions; that is, they ignore it.

B.Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.

C.Most firms decrease the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.

D.Most firms use the same required rate of return to evaluate all capital budgeting projects, because the risk associated with an individual capital budgeting project is not important when determining the overall riskiness of the firm.

QUESTION 27

If a capital budgeting project has a higher corporate risk than the average risk contained in the firm's portfolio of assets, it generally has a:

A.Lower political risk.

B.Greater beta risk.

C.Lower project risk.

D.Lower exchange rate risk.

QUESTION 28

Monte Carlo simulation:

A.Can be used to estimate a project's market risk, but cannot be used to determine its net present value (NPV).

B.Uses the probability distributions of variables as inputs to estimate the project's net present value (NPV).

C.Produces an expected net present value (NPV), an internal rate of return (IRR), and a measure of the project's risk for different scenarios.

D.Calculates net present value (NPV) for a change in one key variable.

QUESTION 29

Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?

A.If the beta coefficient of a capital budgeting project is greater than the firm's beta coefficient, the required rate of return used to evaluate the project should be less than the firm's existing required rate of return.

B.If the beta coefficient of a capital budgeting project is less than the firm's beta coefficient, the required rate of return used to evaluate the project should be greater than the firm's existing required rate of return.

C.If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's beta coefficient will decrease if the project is purchased.

D.If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased.

QUESTION 30

Which of the following statements is correct?

A.Capital budgeting projects with fairly risky cash flows should be evaluated using relatively high discount rates (required rates of return).

B.If managers want to maximize the firm's stock value, they should not be concerned with risk when making capital budgeting decisions.

C.If a firm evaluates all capital budgeting projects using its existing required rate of return, its overall risk, as measured by its beta coefficient, probably will decline over time.

D.If a firm has a beta coefficient that is less than 1.0, its existing required rate of return will be negatively correlated with the returns on most of the capital budgeting projects it evaluates in the future.