FIN202 Chapter 10

37. The firm's decision will be to A) accept both projects because they are independent projects. B) accept both projects because they are contingent projects. C) pick the one that adds the most value because they are mutually exclusive projects. D) pick neither project.

A

49. Advantages of the payback method include the following. A) The technique is simple for managers to compute and interpret. B) It is a good measure of liquidity risk. C) Both a and b, D) None of the above.

C

55. Which one of the following cash flow patterns is NOT an unconventional cash flow pattern? A) A positive initial cash flow is followed by negative future cash flows. B) Future cash flows from a project could include both positive and negative cash flows. C) A negative initial cash flow is followed by positive future cash flows. D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

C

38. If both projects are positive-NPV projects, then the firm should A) accept both projects because they are independent projects. B) select the higher NPV project because they are mutually exclusive. C) accept both projects because they are contingent projects. D) Not enough information is given to make a decision.

A

39. The cost of capital is A) the minimum return that a capital budgeting project must earn for it to be accepted. B) the maximum return a project can earn. C) the return that a previous project for the firm had earned. D) none of the above.

A

40. Capital rationing implies that A) the firm does not have enough resources to fund all of the available projects. B) funding needs equal funding resources. C) the available capital will be allocated equally to all available projects. D) none of the above.

A

51. Which one of the following statements about IRR is NOT true? A) The IRR is the discount rate that makes the NPV greater than zero. B) The IRR is a discounted cash flow method. C) The IRR is an expected rate of return. D) None of the above.

A

32. Which of the following are aspects of independent projects? A) Their cash flows are related. B) Their cash flows are unrelated. C) Selecting one would automatically eliminate accepting the other. D) None of the above.

B

35. Two projects are considered to be contingent projects if A) selecting one would automatically eliminate accepting the other. B) the acceptance of one project is dependent on the acceptance of the other. C) rejection of one project does not eliminate the selection of the other. D) None of the above.

B

41. Capital rationing implies that A) funding resources exceed funding needs. B) funding needs exceed funding resources. C) funding needs equal funding resources. D) none of the above.

B

42. Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project has no impact on shareholder wealth. C) Accepting a negative-NPV project decreases shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

B

46. To accept a capital project when using NPV, A) the project NPV should be less than zero. B) the project NPV should be greater than zero. C) both a and b. D) none of the above.

B

48. Which one of the following statements about the discounted payback method is NOT true? A) The discounted payback method represents the number of years it takes a project to recover its initial investment. B) The discounted payback method calls for the project to be accepted if the payback period is greater than a target period. C) The discount payback method is a risk indicator. D) The expected cash flows from the project are discounted at the cost of capital.

B

52. The internal rate of return is A) the discount rate that makes the NPV greater than zero. B) the discount rate that makes the NPV equal to zero. C) the discount rate that makes the NPV less than zero. D) both a and c.

B

88. Which of the following is true about the Net Present Value method? A) The NPV does not utilize time value of money concepts. B) The NPV assumes that all cash flows are reinvested at the firm's discount rate (the firm's cost of capital). C) The NPV allows projects to be ranked by rate of return. D) The NPV is a rate of return that is acceptable to the firm.

B

31. Which of the following is NOT true about capital budgeting. A) It involves identifying projects that will add to the firm's value. B) It involves large capital investments. C) The large capital investments can be reversed at any time. D) It allows the firm's management to analyze potential business opportunities and decide on which ones to undertake.

C

33. Two projects are considered to be independent if A) selecting one would have no bearing on accepting the other. B) their cash flows are unrelated. C) Both a and b. D) None of the above.

C

34. Two projects are considered to be mutually exclusive if A) the projects perform the same function. B) selecting one would automatically eliminate accepting the other. C) Both a and b. D) None of the above.

C

36. Contingent projects would imply that A) the acceptance of one project is dependent on the acceptance of the other. B) the projects can be either mandatory or optional. C) Both a and b. D) None of the above.

C

43. Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project decreases shareholder wealth. C) Accepting a zero NPV project has a negative impact on shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

C

44. In computing the NPV of a capital budgeting project, one should NOT A) estimate the cost of the project. B) discount the future cash flows over the project's expected life. C) ignore the salvage value. D) make a decision based on the project's NPV.

C

47. Which ONE of the following statements about the payback method is true? A) The payback method is consistent with the goal of shareholder wealth maximization B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return. C) There is no economic rational that links the payback method to shareholder wealth maximization. D) None of the above statements are true.

C

45. The net present value A) uses the discounted cash flow valuation technique. B) will provide a direct measure of how much the firm value will change because of the capital project. C) is consistent with shareholder wealth maximization goal. D) all of the above.

D

50. Disadvantages of the payback method include the following. A) It ignores the time value of money. B) It is inconsistent with the goal of maximizing shareholder wealth. C) It ignores cash flows beyond the payback period. D) All of the above.

D

53. When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if A) the projects are independent. B) the cash flow pattern is conventional. C) the projects are mutually exclusive. D) both a and b.

D

54. In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if A) the projects are independent. B) the cash flows pattern is unconventional. C) the projects are mutually exclusive. D) both b and c.

D