Ch 9 Quiz

Which of the following cash flow patterns would produce multiple internal rates of return (IRRs) for a project?

A project requires a large cash payment today, it generates cash inflows for the next four years, a large cash payment must be paid in Year 5, and then cash inflows are generated for the remainder of the project's life.

Which of the following statements is true about capital budgeting analysis?

A project should be purchased if its net present value (NPV) is positive.

Which of the following is true about the net present value (NPV) capital budgeting technique?

If the net benefit computed on a present value basis—that is, NPV—is positive, then the asset (project) is considered an acceptable investment.

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

It is the discount rate that equates the present value of a project's cash outflows (or costs) with the present value of its cash inflows.

If a project's net present value (NPV) is positive,:

Its initial investment is recovered on a present value basis prior to the end of the project's useful life.

Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net present value (NPV) method and the internal rate of return (IRR) method?

The NPV method assumes that the project's cash flows will be reinvested at the firm's required rate of return, whereas the IRR method assumes reinvestment at the project's IRR.

Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a project's true profitability than the internal rate of return (IRR) measure?

The modified internal rate of return (MIRR) assumes that the project's cash flows are reinvested at the firm's required rate of return, which is a better assumption than the IRR assumption that the cash flows are reinvested at its IRR.

Which of the following statements is correct?

The net present value (NPV) technique and internal rate of return (IRR) technique can lead to conflicting investment decisions when mutually exclusive projects are being evaluated.

Which of the following statements is correct?

The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to the firm's shareholders of purchasing a capital budgeting project.

If the net present value (NPV) of a project is positive,:

accepting the project will increase the value of the firm.

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:

assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas IRR assumes the cash flows are reinvested at the project's IRR.

In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the discounted payback period (DPB) technique is that the DPB:

considers the time value of money.

The net present value (NPV) of a project is negative when the discount rate used is:

greater than the project's internal rate of return (IRR).

Everything else equal, a project that has a long traditional payback period (PB) _____.

has greater implied risk than a project that has a shorter PB

The present value of the expected net cash flows of all the projects undertaken by a firm will most likely exceed the present value of the firm's expected net profit after tax, because:

income is reduced by depreciation and other non-cash charges, whereas cash flows are not.

Which of the following capital budgeting assumes that any cash flows generated by a project can be reinvested at its internal rate of return (IRR)?

internal rate of return (IRR) method

The traditional payback period technique that is used in capital budgeting analyses:

is the simplest and oldest formal method used to evaluate capital budgeting projects.

If a project's net present value (NPV) is positive,:

it is an acceptable investment.

If a capital budgeting project has a negative net present value (NPV),

its discounted payback period (DPB) is greater than the project's economic life.

A project should be accepted if _____.

its internal rate of return (IRR) exceeds the firm's required rate of return

With the improvement in the technology and understanding of discounting techniques, both the net present value (NPV) technique and internal rate of return (IRR) technique used in capital budgeting analyses have become more popular because these techniques provide decisions that help the firm to _____.

maximize its value

If a capital budgeting project is purchased, a firm's value, and thus its stockholders' wealth, will change by the amount of the project's _____.

net present value (NPV)

Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money capital budgeting techniques, has determined that all of the projects are acceptable. If the projects are mutually exclusive, which of the following capital budgeting techniques should be used to make the purchasing decision to ensure the firm's value is maximized?

net present value (NPV)

Which of the following capital budgeting techniques makes the assumption that the project's cash flows are reinvested at the firms required rate of return?

net present value (NPV)

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to generate $5,000 per year for three years. If the firm's required rate of return is 10 percent, what is the project's terminal value?

$16,550

A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five years. If the project's traditional payback period (PB) is 3.6 years, what is its initial cost?

$180

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12 percent.

$2,389.66

Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 in both Year 1 and Year 2, $35,000 in both Year 3 and Year 4, and $40,000 in Year 5. The investment will cost the firm $100,000 today, and the firm's required rate of return is 10 percent. What is the net present value (NPV) for this investment?

$27,104.46

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)?

12.87%

The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years, and produces after-tax cash flows equal to $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's internal rate of return (IRR)?

18%

Project A, which costs of $1,000 to purchase, will generate net cash inflows equal to $500 at the end of each of the next three years. The project's required rate of return is 10 percent. What are the project's internal rate of return (IRR) and modified internal rate of return (MIRR)?

23.4%; 18.3%

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

3%

Seattle Inc. identified an investment opportunity that requires an initial cash outflow of $150,000. Seattle's required rate of return is 10 percent. The investment will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. Assume the cash flows occur evenly during the year. What is the traditional payback period for this investment?

4.86 years

Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time value of money. Which of the following statements is correct?

All of the capital budgeting techniques the company uses should provide the same accept/reject decisions.

Two firms, Tangerine Inc. and Cyan Inc. analyzed the same capital budgeting project. Tangerine Inc. determined that the project's internal rate of return (IRR) is 9 percent. Cyan Inc. used the net present value (NPV) method to evaluate the project and determined that it is not acceptable. Given this information, which of the following statements is correct?

Cyan Inc.'s required rate of return is greater than 9 percent.

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for each project is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $99,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?

Project B should be purchased because it has a higher net present value (NPV) than Project A.

Suppose a capital budgeting project generates its largest cash flows in the early years of its life(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project must be correct?

The net present value of the project is not as sensitive to changes in the firm's required rate of return as the net present value of a project that generates large cash flows later in its life.

1. Which of the following statements best describes the post-audit function in the capital budgeting process?

The post-audit involves comparing the actual results of previous capital budgeting decisions with the forecasted results to identify and explain any differences.

Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project that requires an initial investment of $170,000. The project will generate a $60,750 cash inflow at the year-end of each of the next four years. According to this information, which of the following statements is correct?

The project is acceptable because its net present value is positive.

Suppose a firm uses both the net present value (NPV) technique and the internal rate of return (IRR) technique to evaluate two mutually exclusive capital budgeting projects. If a ranking conflict exists between NPV and IRR, which of the following criteria should be used to make the final investment decision?

The project with the higher net present value (NPV) should be purchased.

Which of the following statements is correct?

To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero.

Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

Traditional payback period (PB)

For a particular project, other things held constant, an increase in the firm's required rate of return will result in _____.

a decrease in the project's net present value (NPV)

Modified internal rate of return (MIRR) is the discount rate that forces the present value of a project's terminal value to equal the _____.

present value of its cash outflows

The modified internal rate of return (MIRR) is the discount rate that forces the ______.

present value of the project's terminal value to equal the present value of its costs (cash outflows)

The internal rate of return (IRR) technique assumes that cash flows are reinvested at the _____.

project's internal rate of return (IRR)

A project's terminal value is the _____.

sum of the future values of the cash inflows compounded at the firm's required rate of return

The ultimate purpose of a capital budget is to forecast _____.

the funds required to purchase fixed assets for future projects

If a project's discounted payback period is less than its useful life, _____.

the present value of its future cash flows exceeds its initial cost

A project's net present value is equal to:

the present value of the expected future cash inflows minus the present value of all the cash outflows.