Ch.9 PQ

Which of the following statements is true of a project with net present value (NPV) of zero?

An NPV of zero signifies that the project's required rate of return is equal to its internal rate of return.

Which of the following is required to compute the internal rate of return (IRR) of a project?

The cash inflows and cash outflows for the project

Which of the following statements is true of the discounted payback period method?

The discounted payback period uses present value of cash flows to compute payback period.

Identify a limitation of the internal rate of return (IRR) method of capital budgeting.

The internal rate of return (IRR) can give multiple internal rates of returns (IRRs) for one project.

Which of the following is a limitation of the net present value (NPV) method over the internal rate of return (IRR) method of capital budgeting?

The net present value (NPV) method contains no information about the amount of capital at risk.

Which of the following statements is true of a project with a negative net present value (NPV)?

The project's required rate of return would exceed the internal rate of return (IRR).

Which of the following statements is true of the internal rate of return (IRR) method?

Using the IRR method could lead to investment decisions that increase wealth but do not maximize it.

The recovery of a project's initial investment on a present value basis prior to the end of the project's useful life results in _____.

a positive net present value (NPV)

Which of the following statements is true of a project with larger early cash inflows?

A project with larger early cash inflows provides more funds for reinvestment in the early years.

Which of the following statements is true of a required rate of return?

A required rate of return is the discount rate that the IRR must exceed for a project to be considered acceptable.

Which of the following capital budgeting methods is used if the projects being evaluated have multiple internal rates of return?

Modified internal rate of return method

Which of the following capital budgeting techniques has experienced the greatest increase in usage by firms since the 1970s?

Net present value

Which of the following methods determines the acceptability of a project based on the greatest value addition to the firm?

Net present value (NPV) method

Which of the following methods gives a direct measure of the dollar benefit on a present value basis to the firm's shareholders?

Net present value (NPV) method

When computing a project's modified internal rate of return (MIRR), its terminal value is determined by computing the _____.

future value of the expected cash inflows

The point where the NPV profile on a graph that shows the net present values for a project at various discount rates crosses the X-axis indicates a project's _____.

internal rate of return

If two projects are of equal size and have the same life, then the _____ and the _____ will always lead to the same project selection decision.

net present value (NPV), modified internal rate of return (MIRR)

To compute a project's traditional payback period (PB), the _____ cash flows that it is expected to generate during its life are used; to compute a project's discounted payback period (DPB), the _____ of the cash flows that it is expected to generate during its life are used.

unadjusted; present value

Alpha Inc. is evaluating three independent projects for investment—Project A, Project B, and Project C using the net present value (NPV) approach. The net present value (NPV) of Project A is $11,250, Project B is $31,650, and Project C is -$4,500. Assume that Alpha has sufficient capital to invest in all the projects. An efficient financial manager will take the capital budgeting decision in such a manner that the shareholders' wealth will increase by _____.

$42,900

Capital budget is an outline of

planned expenditures on fixed assets

The value of a firm increases if _____.

the present value of the cash inflows of a project is greater than its cost

If two mutually exclusive capital budgeting projects have positive NPVs, then _____.

the project with the highest NPV should be purchased

Azure Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial cash outflow is $20,000 for each project. Project A results in cash inflows of $12,500 every year for two years. Project B results in cash inflows of $26,000 in the second year. The required rate of return of Azure Inc. is 10 percent. Based on the net present value approach, Azure Inc. should invest in:

Project A only

As per the _____ method of capital budgeting, it is better to recover the cost of (investment in) a project sooner rather than later.

payback period

The length of time required to recover the original cost of an investment is known as the investment's _____.

payback period

A capital budgeting project should be accepted if its NPV is

positive after discounting all the cash inflows and outflows for the project

A(n) _____ is the discount rate that forces the present value of a project's expected cash flows to equal its initial cost—that is, the rate where the project's net present value equals zero.

project's internal rate of return

A project's traditional payback period is defined as the expected number of years required to _____.

recover the original investment

The future value of the cash inflows is called the _____.

terminal value

The net present value (NPV) method assumes that _____.

the cash flows from a project can be reinvested at the firm's required rate of return

In evaluating independent projects, if a project is acceptable using the internal rate of return (IRR) method, then _____.

the net present value (NPV) method will also show that it is acceptable