Question 1 The process of selecting among potential major corporate investments is called capital budgeting. True False

Question 2 The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm. True False

Question 3 When two projects are mutually exclusive, accepting one project implicitly eliminates the other. True False

Question 4 Accepting a positive-NPV project increases shareholder wealth. True False

Question 5 The payback period is useful because it takes into account all expected future cash flows. True False

Question 6 The difference between the present value of an investment and its cost is the: net present value; internal rate of return; payback period; profitability index.

Question 7 The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: net present value; internal rate of return; payback period; profitability index.

Question 8 The discount rate that makes the net present value of an investment exactly equal to zero is called the: external rate of return; internal rate of return; profitability index; equalizer.

Question 9 An investment is acceptable if its IRR: is exactly equal to its net present value (NPV); is exactly equal to zero; is exactly equal to 100%; exceeds the required rate of return.

Question 10 The payback period rule accepts all investment projects in which the payback period for the cash flows is: greater than one; greater than the cutoff point; less than the cutoff point; positive.

Question 11 Riggs, Inc. management is planning to spend $650,000 on a new marketing campaign. They estimate this will result in additional cash flows of $325,000 over the next three years. If the cost of capital is 17.5 percent, what is the NPV of this investment?

Question 12 Kingston, Inc. management is considering purchasing a new machine at a cost of $2,500,000. They expect this equipment to produce cash flows of $850,000 over the next five years. The new machine can be salvaged for $100,000 at the end of five years. If the cost of capital is 15 percent, what is the NPV of this investment?

Question 13 Kingston, Inc. management is considering purchasing a new machine at a cost of $4,250,000. They expect this equipment to produce cash flows of $1,250,000 over the next five years. The machine can be sold for $120,291 at the end of five years. What is the IRR of this investment?

Question 14 Morningside Bakeries has recently purchased equipment at a cost of $1,050,000. The firm expectes to generate cash flows of $500,000 from this equipment over the next four years. What is the payback period for this project?