CH 10 Finance

A $60,000 outlay for a new machine with a usable life of 15 years is called A) capital expenditure. B) operating expenditure. C) replacement expenditure. D) none of the above

A

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________. A) -$1,000 B) $0 C) $1,000 D) $1.25

A

A firm is evaluating three capital projects. The net present values for the projects are as follows: The firm should A) accept Projects 1 and 2 and reject Project 3. B) accept Projects 1 and 3 and reject Project 2. C) accept Project 1 and reject Projects 2 and 3. D) reject all projects

A

A firm would accept a project with a net present value of zero because A) the project would maintain the wealth of the firm's owners. B) the project would enhance the wealth of the firm's owners. C) the return on the project would be positive. D) the return on the project would be zero

A

A non-conventional cash flow pattern associated with capital investment projects consists of an initial A) outflow followed by a series of both cash inflows and outflows. B) inflow followed by a series of both cash inflows and outflows. C) outflow followed by a series of inflows. D) inflow followed by a series of outflows

A

Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? A) Project X. B) Project Y. C) Neither. D) Not enough information to tell

A

Evaluate the following projects using the payback method assuming a rule of 3 years for payback. Year Project A Project B 0 -10,000 -10,000 1 4,000 4,000 2 4,000 3,000 3 4,000 2,000 4 0 1,000,000 A) Project A can be accepted because the payback period is 2.5 years but Project B can not be accepted because it's payback period is longer than 3 years. B) Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B. C) Project B should be accepted because you get more money paid back in the long run. D) Both projects can be accepted because the payback is less than 3 years

A

On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all the following reasons EXCEPT A) that it measures the benefits relative to the amount invested. B) for the reasonableness of the reinvestment rate assumption. C) that there may be multiple solutions for an IRR computation. D) that it maximizes shareholder wealth

A

Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4? A) Yes. B) No. C) It depends. D) None of the above

A

The most common motive for adding fixed assets to the firm is A) expansion. B) replacement. C) renewal. D) transformation

A

The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is A) the reinvestment rate assumption regarding intermediate cash flows. B) that neither method explicitly considers the time value of money. C) the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of capital. D) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal rate of return

A

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4? A) 5.83% B) 9.67% C) 11.44% D) None of the above

A

What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? A) $1,700,000 B) $371,764 C) $137,053 D) None of the above

A

What is the NPV for the following project if its cost of capital is 12 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4? A) $(1,494,336) B) $1,494,336 C) $158,011 D) Two of the above

A

Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4? A) NPV. B) IRR. C) Payback. D) Two of the above

A

Which of the following capital budgeting techniques ignores the time value of money? A) Payback. B) Net present value. C) Internal rate of return. D) Two of the above

A

A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows: The firm should A) accept Project 2 and reject Projects 1 and 3. B) accept Projects 2 and 3 and reject Project 1. C) accept Project 1 and reject Projects 2 and 3. D) accept Project 3 and reject Projects 1 and 2

B

Comparing net present value and internal rate of return A) always results in the same ranking of projects. B) always results in the same accept/reject decision. C) may give different accept/reject decisions. D) is only necessary on mutually exclusive projects

B

Examples of sophisticated capital budgeting techniques include all of the following EXCEPT A) internal rate of return. B) payback period. C) annualized net present value. D) net present value

B

In comparing the internal rate of return and net present value methods of evaluation, A) internal rate of return is theoretically superior, but financial managers prefer net present value. B) net present value is theoretically superior, but financial managers prefer to use internal rate of return. C) financial managers prefer net present value, because it is presented as a rate of return. D) financial managers prefer net present value, because it measures benefits relative to the amount invested

B

Many firms use the payback method as a guideline in capital investment decisions. Reasons they do so include all of the following EXCEPT A) it gives an implicit consideration to the timing of cash flows. B) it recognizes cash flows which occur after the payback period. C) it is a measure of risk exposure. D) it is easy to calculate

B

Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called A) independent projects. B) mutually exclusive projects. C) replacement projects. D) none of the above

B

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4? A) Yes. B) No. C) It depends. D) None of the above

B

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because A) it explicitly considers the time value of money. B) it can be viewed as a measure of risk exposure because of its focus on liquidity. C) the determination of the required payback period for a project is an objectively determined criteria. D) none of the above

B

Sophisticated capital budgeting techniques do not A) examine the size of the initial outlay. B) use net profits as a measure of return. C) explicitly consider the time value of money. D) take into account an unconventional cash flow pattern

B

The ________ is the compound annual rate of return that the firm will earn if it invests in the project and receives the given cash inflows. A) discount rate B) internal rate of return C) opportunity cost D) cost of capital

B

The cash flows of any project having a conventional pattern include all of the basic components EXCEPT A) initial investment. B) operating cash outflows. C) operating cash inflows. D) terminal cash flow

B

The final step in the capital budgeting process is A) implementation. B) follow-up. C) re-evaluation. D) education

B

Unlike the net present value criteria, the internal rate of return approach assumes an interest rate equal to A) the relevant cost of capital. B) the project's internal rate of return. C) the project's opportunity cost. D) the market's interest rate

B

What is the payback period for Tangshan Mining company's new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4? A) 4.33 years B) 3.33 years C) 2.33 years D) None of the above

B

When evaluating projects using internal rate of return, A) projects having lower early-year cash flows tend to be preferred at higher discount rates. B) projects having higher early-year cash flows tend to be preferred at higher discount rates. C) projects having higher early-year cash flows tend to be preferred at lower discount rates. D) the discount rate and magnitude of cash flows do not affect internal rate of return

B

________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization. A) Recapitalizing assets B) Capital budgeting C) Ratio analysis D) Restructuring debt

B

________ projects do not compete with each other; the acceptance of one ________ the others from consideration. A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; does not eliminate

B

Unsophisticated capital budgeting techniques do not A) examine the size of the initial outlay. B) use net profits as a measure of return. C) explicitly consider the time value of money. D) take into account an unconventional cash flow pattern

C

A capital expenditure is all of the following EXCEPT A) an outlay made for the earning assets of the firm. B) expected to produce benefits over a period of time greater than one year. C) an outlay for current asset expansion. D) commonly used to expand the level of operations

C

A conventional cash flow pattern associated with capital investment projects consists of an initial A) outflow followed by a broken cash series. B) inflow followed by a broken series. C) outflow followed by a series of inflows. D) inflow followed by a series of outflows

C

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is A) 1.5 years. B) 2 years. C) 3.3 years. D) 4 years

C

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should A) accept both if the cost of capital is at most 15 percent. B) accept only Z if the cost of capital is at most 15 percent. C) accept only X if the cost of capital is at most 15 percent. D) none of the above

C

All of the following are steps in the capital budgeting process EXCEPT A) implementation. B) follow-up. C) transformation. D) decision-making

C

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent? A) Project X. B) Project Y. C) Neither. D) Not enough information to tell

C

Fixed assets that provide the basis for the firm's profit and value are often called A) tangible assets. B) non-current assets. C) earning assets. D) book assets

C

The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criteria is called A) the ranking approach. B) an independent investment. C) the accept-reject approach. D) a mutually exclusive investment

C

The minimum return that must be earned on a project in order to leave the firm's value unchanged is A) the internal rate of return. B) the interest rate. C) the cost of capital. D) the compound rate

C

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? A) 15.57% B) 0.00% C) 13.57% D) None of the above

C

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? A) $1,700,000 B) $371,764 C) ($137,053) D) None of the above

C

When the net present value is negative, the internal rate of return is ________ the cost of capital. A) greater than B) greater than or equal to C) less than D) equal to

C

Which of the following statements is false? A) If the payback period is less than the maximum acceptable payback period, accept the project. B) If the payback period is greater than the maximum acceptable payback period, reject the project. C) If the payback period is less than the maximum acceptable payback period, reject the project D) Two of the above

C

Which pattern of cash flow stream is the most difficult to use when evaluating projects? A) Mixed stream. B) Conventional flow. C) Nonconventional flow. D) Annuity

C

________ projects have the same function; the acceptance of one ________ the others from consideration. A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; does not eliminate

C

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is A) 1 year. B) 2 years. C) between 1 and 2 years. D) between 2 and 3 years

D

A firm with limited dollars available for capital expenditures is subject to A) capital dependency. B) mutually exclusive projects. C) working capital constraints. D) capital rationing

D

All of the following are motives for capital budgeting expenditures EXCEPT A) expansion. B) replacement. C) renewal. D) invention

D

All of the following are weaknesses of the payback period EXCEPT A) a disregard for cash flows after the payback period. B) only an implicit consideration of the timing of cash flows. C) the difficulty of specifying the appropriate payback period. D) it uses cash flows, not accounting profits.

D

Payback is considered an unsophisticated capital budgeting because it A) gives explicit consideration to the timing of cash flows and therefore the time value of money. B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate. C) gives explicit consideration to the timing of cash flows and therefore the time value of money. D) none of the above

D

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment. A) payback period B) average rate of return C) cost of capital D) internal rate of return

D

The ________ measures the amount of time it takes the firm to recover its initial investment. A) average rate of return B) internal rate of return C) net present value D) payback period

D

The first step in the capital budgeting process is A) review and analysis. B) implementation. C) decision-making. D) proposal generation

D

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when A) the NPV is greater than the crossover point. B) the NPV is less than the crossover point. C) the cost of capital is to the right of the crossover point. D) the cost of capital is to the left of the crossover point

D

Which of the following statements is false? A) If the payback period is greater than the maximum acceptable payback period, accept the project. B) If the payback period is less than the maximum acceptable payback period, reject the project. C) If the payback period is greater than the maximum acceptable payback period, reject the project. D) Two of the above

D

________ is a series of equal annual cash flows. A) A mixed stream B) A conventional C) A non-conventional D) An annuity

D