Question 1

Two projects being considered are mutually exclusive and have the following projected cash flows:  At what rate (approximately)  do the NPV profiles of Projects A and B cross?

Accepted Answer

A)   6.5%
B)   11.5%
C)   16.5%
D)   20.0%
E)   The NPV profiles of these two projects do not cross.F) A) and B)
G) A) and C)

Question 2

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Accepted Answer

A) True 
 B)False

Question 3

The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero.Also, the NPV of X is greater than the NPV of Y at the required rate of return.If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data.Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

Accepted Answer

A) True 
 B)False

Question 4

In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

Accepted Answer

A)   The project with the higher NPV may not always be the project with the higher IRR.
B)   The project with the higher NPV may not always be the project with the higher MIRR.
C)   The project with the higher IRR may not always be the project with the higher MIRR.
D)   All of the above answers are correct.
E)   Answers a and c are both correct.F) A) and E)
G) B) and D)

Question 5

The importance of capital budgeting decisions is due to all of the following factors except for:

Accepted Answer

A)   the impact of a capital budgeting decision is long term; the firm loses some decision-making flexibility when capital projects are purchased.
B)   effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased.
C)   the acquisition of fixed assets typically involves substantial expenditures, and before a firm spends a large amount of money, it must have the funds available.
D)   capital budgeting techniques overcome the problems with error in forecasts for asset requirements and projected sales, we will still be able to determine if we should fund the project.
E)   all of the above are factors that make capital budgeting important.F) A) and B)
G) B) and D)

Question 6

The advantage of the payback period over other capital budgeting techniques is that

Accepted Answer

A)   it is the simplest and oldest formal model to evaluate capital budgeting model.
B)   it directly accounts for the time value of money.
C)   it ignores cash flows beyond the payback period.
D)   it always leads to decisions that maximise the value of the firm.
E)   it incorporates risk into the discount rate used to solve the payback period.F) A) and B)
G) A) and D)

Question 7

If a project's NPV exceeds the project's IRR, then the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 8

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

Accepted Answer

A) True 
 B)False

Question 9

Other things held constant, an increase in the required rate of return will result in a decrease of a project's IRR.

Accepted Answer

A) True 
 B)False

Question 10

You have recently accepted a one-year employment term by a firm.The firm has given you the option of receiving your salary as a lump sum value of R30,000 at the end of the year or as 12 monthly payments of R2,400 starting one month after you start work.If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.)  Choose the best answer.

Accepted Answer

A)   The lump sum payment, since it has the larger future value.
B)   Monthly payments, since you do not have to wait so long to receive your money.
C)   Either one, since they have the same present value.
D)   The lump sum payment, since it has the larger present value.
E)   Monthly payments, since it has the larger present value.F) C) and D)
G) A) and E)

Question 11

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive) .Which of the following statements is most correct?

Accepted Answer

A)   All else equal, a project's IRR increases as the required rate of return declines.
B)   All else equal, a project's NPV increases as the required rate of return declines.
C)   All else equal, a project's IRR is unaffected by changes in the required rate of return.
D)   Answers a and b are both correct.
E)   Answers b and c are both correct.F) A) and E)
G) B) and D)

Question 12

Using the discounted payback method, a project should be accepted when the discounted payback is greater than the projects expected life.

Accepted Answer

A) True 
 B)False

Question 13

Two fellow financial analysts are evaluating a project with the following net cash flows:  One analyst says that the project has an IRR of between 12 and 13%.The other analyst calculates an IRR of just under 800%, but fears his calculator's battery is low and may have caused an error.You agree to settle the dispute by analysing the project cash flows.Which statement best describes the IRR for this project?

Accepted Answer

A)   There is a single IRR of approximately 12.7 percent.
B)   This project has no IRR, because the NPV profile does not cross the X axis.
C)   There are multiple IRRs of approximately 12.7 percent and 787 percent.
D)   This project has two imaginary IRRs.
E)   There are an infinite number of IRRs between 12.5 percent and 790 percent that can define the IRR for this project.F) B) and E)
G) None of the above

Question 14

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Accepted Answer

A) True 
 B)False

Question 15

Benefits of the post-audit include all of the following except

Accepted Answer

A)   when decision makers are forced to compare their projections to actual outcomes, there is a tendency to improve.
B)   conscious or unconscious biases are removed.
C)   negative NPV projects are identified before they begin.
D)   forecasts are improved.
E)   all of the above are benefits of the post-audit.F) A) and D)
G) A) and C)

Question 16

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Accepted Answer

A)   Equal to the internal rate of return.
B)   Too high.
C)   Greater than the internal rate of return.
D)   Too low.
E)   Less than the internal rate of return.F) A) and D)
G) B) and C)

Question 17

Tuna Inc., a large tuna canning firm operating out of Walvis Bay, Namibia, has a new automated production line project it is considering.The project has a cost of R275,000 and is expected to provide after-tax annual cash flows of R73,306 for eight years.The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach.You have calculated a required rate of return for the firm of 12 percent.What is the project's MIRR?

Accepted Answer

A)   15.0%
B)   14.0%
C)   12.0%
D)   16.0%
E)   17.0%F) B) and D)
G) All of the above

Question 18

Which of the following statements is correct?

Accepted Answer

A)   The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.
B)   The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the IRR.
C)   The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate.
D)   The NPV method does not consider the inflation premium.
E)   The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period.F) A) and E)
G) B) and E)

Question 19

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is false?

Accepted Answer

A)   The NPV will be positive if the IRR is less than the required rate of return.
B)   If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
C)   When IRR = k (the required rate of return) , NPV = 0.
D)   The IRR can be positive even if the NPV is negative.
E)   The NPV method is not affected by the multiple IRR problem.F) C) and D)
G) None of the above

Exam 9: Capital Budgeting Techniques

Correct Answer
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Benefits of the post-audit include all of the following except

Correct Answer
verified

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Correct Answer
verified

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Correct Answer
verified

Other things held constant, an increase in the required rate of return will result in a decrease of a project's IRR.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

The importance of capital budgeting decisions is due to all of the following factors except for:

Correct Answer
verified

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

Correct Answer
verified

Two projects being considered are mutually exclusive and have the following projected cash flows: At what rate (approximately) do the NPV profiles of Projects A and B cross?

Correct Answer
verified

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Correct Answer
verified

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Correct Answer
verified

Using the discounted payback method, a project should be accepted when the discounted payback is greater than the projects expected life.

Correct Answer
verified

If a project's NPV exceeds the project's IRR, then the project should be accepted.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

The advantage of the payback period over other capital budgeting techniques is that

Correct Answer
verified

In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

Correct Answer
verified

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive) .Which of the following statements is most correct?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Exam 9: Capital Budgeting Techniques

Correct AnswerverifiedShow Answer

Benefits of the post-audit include all of the following except

Correct AnswerverifiedShow Answer

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal), we can conclude that the firm will select X rather than Y if X has a NPV > 0.

Correct AnswerverifiedShow Answer

One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk.

Correct AnswerverifiedShow Answer

Other things held constant, an increase in the required rate of return will result in a decrease of a project's IRR.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

The importance of capital budgeting decisions is due to all of the following factors except for:

Correct AnswerverifiedShow Answer

Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.

Correct AnswerverifiedShow Answer

Two projects being considered are mutually exclusive and have the following projected cash flows: At what rate (approximately) do the NPV profiles of Projects A and B cross?

Correct AnswerverifiedShow Answer

The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Correct AnswerverifiedShow Answer

If the calculated NPV is negative, then which of the following must be true? The discount rate used is

Correct AnswerverifiedShow Answer

Using the discounted payback method, a project should be accepted when the discounted payback is greater than the projects expected life.

Correct AnswerverifiedShow Answer

If a project's NPV exceeds the project's IRR, then the project should be accepted.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The advantage of the payback period over other capital budgeting techniques is that

Correct AnswerverifiedShow Answer

In comparing two mutually exclusive projects of equal size and equal life, which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Assume a project has normal cash flows (i.e., initial cash flow is negative, and all other cash flows are positive) .Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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