1. Which of the following criteria should be used to choose a project if there is a conflict between two mutually exclusive projects?
2. A. The project whose discounted payback period is longer than its traditional payback period should be chosen.
3. B. The project with a higher net present value (NPV) should be chosen.
4. C. The project whose internal rate of return is higher than its modified internal rate of return should be chosen.
5. D. The project whose payback period is equal to the expected years required to recover the original investment should be chosen.
9. 5 points

Question 2

1. Depreciation must be considered when evaluating the incremental operating cash flows associated with a capital budgeting project because:
2. A. depreciation is a cash flow that doesn't change.
3. B. depreciation has an impact on the taxes paid by the firm, which is a cash flow.
4. C. it represents a tax-deductible cash expense.
5. D. the firm has a cash outflow equal to the depreciation expense each year.
6. E. depreciation is a sunk cost.
9. 5 points

Question 3

1. The greater the variability of the possible returns on an investment, _____.
3. A. the lower the beta of the investment
4. B. the lesser the expected return
5. C. the lower the standard deviation of the investment
6. D. the riskier the investment
7. E. the higher the actual return on the investment
10. 5 points

Question 4

1. Which of the following statements is correct?
3. A. A relatively risky future cash outflow should be evaluated using a relatively high discount rate.
4. B. If a firm evaluates all projects using the same required rate of return to determine NPVs, then the riskiness of the firm as measured by its beta will probably decline over time.
5. C. If a firm's managers want to maximize the value of the stock, they should concentrate exclusively on the projects' market, or beta, risk.
6. D. Project risk estimation is independent of the beta coefficient.
7. E. If a firm has a beta that is less than 1.0, say 0.9, this would suggest that its assets' returns are negatively correlated with the returns of most other firms' assets.
10. 5 points

Question 5

1. Diversifiable risk includes _____.
2. A. interest rate risk
3. B. business risk
4. C. maturity risk
5. D. political risk
6. E. liquidity risk
9. 5 points

Question 6

1. The primary function of the capital budget is to forecast _____.
2. A. the target payback periods of the projects undertaken by a firm
3. B. the funds required for future projects
4. C. the discounted cash inflow from various projects
5. D. the terminal value of the cash flows from different projects
6. E. the projects' multiple internal rates of return
9. 5 points

Question 7

1. Other things held constant, if the investors become less risk averse, the new security market line (SML) would _____.
2. A. not be affected
3. B. shift down
4. C. shift up
5. D. have a steeper slope
6. E. have a less steep slope
9. 5 points

Question 8

1. Diversification refers to the _____.
2. A. reduction of the systematic risk of an individual investment, measured by its beta coefficient, by combining it with other investments in a portfolio
3. B. reduction of the stand-alone risk of an individual investment, measured by the standard deviation of its returns, by combining it with other investments in a portfolio
4. C. reduction of the stand-alone risk of an individual investment, measured by its beta coefficient, by combining it with other investments in a portfolio
5. D. reduction of the systematic risk of an individual investment, measured by the standard deviation of its returns, by combining it with other investments in a portfolio
6. E. reduction of the unsystematic risk of an individual investment, measured by its coefficient of variation, by combining it with other investments in a portfolio
9. 5 points

Question 9

1. _____ is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country.
2. A. Political risk
3. B. Beta risk
4. C. Pure play risk
5. D. Exchange rate risk
6. E. Market risk
9. 5 points

Question 10

1. If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
2. A. If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
3. B. If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.
4. C. If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
5. D. If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
6. E. If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
9. 5 points

Question 11

1. Which of the following rules is essential for successful cash flow estimates, and ultimately, to successful capital budgeting?
2. A. Inflation is considered while estimating incremental cash flows.
3. B. Shipping and installation costs are included in cash flow estimation.
4. C. Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
5. D. Only incremental cash flows are relevant to the accept/reject decision.
6. E. The return on invested capital is the only relevant cash flow.
9. 5 points

Question 12

1. A project's net present value is equal to:
2. A. the present value of the expected future cash flows minus the present value of all the cash outflows.
3. B. the present value of all the cash inflows after the full recovery of the initial investment.
4. C. the present value of the last cash inflow.
5. D. the present value of all the expected future cash outflows.
6. E. the present value of the cash outflows plus the present value of cash inflows.
9. 5 points

Question 13

1. A project should be accepted if _____.
2. A. its internal rate of return (IRR) exceeds the required rate of return
3. B. it involves multiple cash inflows and cash outflows during the life of the project
4. C. it yields multiple internal rates of return
5. D. its undiscounted cash flows are more than the discounted cash flows
6. E. its payback period is more than the expected number of years to recover the original investment
9. 5 points

Question 14

1. Which of the following is a measure of the extent to which the returns on a given stock move with the stock market?
2. A. Beta coefficient
3. B. Correlation coefficient
4. C. Probability distribution of expected returns
5. D. Standard deviation
6. E. Coefficient of variation
9. 5 points

Question 15

1. The larger the standard deviation of returns of an investment, _____.
2. A. greater is the chance that the realized return will differ significantly from the expected return
3. B. lesser is the chance that the realized return will be negative
4. C. lesser is the chance that the realized return will differ significantly from the expected return
5. D. greater is the chance that the investment will outperform the market
6. E. greater is the chance that the realized return will be negative
9. 5 points

Question 16

1. When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.
2. A. sunk costs
3. B. initial investment outlay
4. C. externalities
5. D. feasibility study cost
6. E. opportunity costs
9. 5 points

Question 17

1. Which of the following statements is true about capital budgeting analysis?
2. A. A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs).
3. B. The payback period method should be used for capital budgeting decisions if there is a conflict in the project rankings as per the NPV method and the IRR method.
4. C. Higher discount rates are used for computing the net present values (NPVs) of riskier cash flows.
5. D. The net present value (NPV) method should be used to evaluate independent projects, and the internal rate of return (IRR) method for mutually exclusive projects.
6. E. The payback period method should be used for capital budgeting decisions if the project has multiple cash outflows.
9. 5 points

Question 18

1. With the improvement in the technology and understanding of discounting techniques, both NPV and IRR methods of capital budgeting became more popular because _____.
2. A. these techniques provide correct decisions with respect to the maximization of the initial capital investment
3. B. these techniques provide correct decisions with respect to the maximization of the required rate of return
4. C. these techniques provide correct decisions with respect to value maximization
5. D. these techniques provide correct decisions with respect to the minimization of the number of IRRs for every project
6. E. these techniques provide correct decisions with respect to payback period minimization
9. 5 points

Question 19

1. If the NPV of a project is positive, it means that:
2. A. the project's discounted payback period is less than its payback period.
3. B. accepting the project increases the value of the firm.
4. C. the project's discounted payback period is longer than the useful life of the project.
5. D. the internal rate of return is lower than the discount rate used.
6. E. the project is not acceptable on a risk adjusted basis.
9. 5 points

Question 20

The chance of receiving an actual return that differs from the one that is expected is called _____.

A.payoff

B.karma

C.probability distribution

D.risk

E.beta