Chapter 9 Multiple Choice

A: A firm that only accepts projects for which the IRR equals its required return will not create value for the owners E: One advantage of the payback rule is that it is easy to understand

1. Which of the following statements are true? Select one or more correct answers. A. A firm that only accepts projects for which the IRR equals its required return will not create value for the owners. B. The IRR rule ignores the time value of money. C. For conventional projects, the profitability index is the present value of a project's future net income divided by the initial cost. D. According to Descartes' rule, conventional projects could have more than one IRR. E. One advantage of the payback rule is that it is easy to understand. F. None of these statements is true.

B: All capital budgeting rules begin with estimating a project's expected cash flows C: A project's projected cash flows reflect the net of the inflows and outflows at each point in time

10. Which of the following statements are true? Select one or more correct answers. A. If a conventional project has a negative NPV, it may still be accepted under the IRR rule. B. All capital budgeting rules begin with estimating a project's expected cash flows. C. A project's projected cash flows reflect the net of the inflows and outflows at each point in time. D. The NPV is the most commonly used capital budgeting tool used by treasury departments. E. NPV profiles are smoothly declining monotonic functions. F. None of these rules is biased towards liquidity.

E: For projects with multiple cash flows, you must use trial-and-error to solve for a crossover point

11. Which of the following about the crossover point are true? Select one or more correct answers. A. The crossover point is the NPV that sets the IRRs of two mutually exclusive projects to be equal. B. When the discount rate is smaller than the crossover point, the NPV and IRR rules agree. C. The NPV and IRR rule will conflict when the company faces mutually exclusive projects. D. Even if projects have multiple IRRs, there is only one crossover point. E. For projects with multiple cash flows, you must use trial-and-error to solve for a crossover point. F. None of these statements is true.

B: The profitability index adjusts for the time value of money D: For a conventional project, NPV is the difference between the project's cost and the present value of its expected future cash flows

2. Which of the following statements are true? Select one or more correct answers. A. For projects with conventional cash flows, the nominal payback period is longer than that of discounted payback. B. The profitability index adjusts for the time value of money. C. The crossover point is where two mutually exclusive projects have the same IRRs. D. For a conventional project, NPV is the difference between the project's cost and the present value of its expected future cash flows. E. The profitability index is the capital budgeting tool of choice when dealing with mutually exclusive projects. F. None of these statements is true.

A: There can be multiple PIs if the cash flows are unconventional C: The crossover point is the rate or return that sets two mutually exclusive projects' NPVs equal to zero D: Both the IRR and the profitability index account for scale

3. Which of the following statements are false? Only select "All are true" if you think none of the statements are false. A. There can be multiple PIs if the cash flows are unconventional. B. The preset limit for discounted payback is arbitrary. C. The crossover point is the rate or return that sets two mutually exclusive projects' NPVs equal to zero. D. Both the IRR and the profitability index account for scale. E. Because economic agents view risk as an economic bad, capital budgeting rules should take risk into account. F. All are true.

F: None of these statements are true

4. Which of the following statements are true? Select one or more correct answers. A. The payback rule is biased against liquidity. B. Like NPV, the profitability index ignores the scale of a project. C. For a conventional project with a given preset limit, if it pays back on a discounted basis, it need not pay back on a nominal one. D. A disadvantage of the IRR rule is that it complicated and difficult to interpret intuitively. E. A disadvantage of the profitability index is that it only works for conventional projects, where the initial cost shows up in the denominator. F. None of these statements is true.

A: Treasury uses PI to rank positive NPV projects on a value creation per dollar basis when funds are limited

5. Which of the following statements are true? Select one or more correct answers. A. Treasury uses PI to rank positive NPV projects on a value creation per dollar basis when funds are limited. B. A conventional project with an extremely large initial outflow can result in multiple IRRs. C. The IRR rule states that a company should accept projects that have an IRR greater than zero. D. You must be careful when faced with mutually exclusive projects because the NPV and IRR rules will conflict. E. For conventional projects, the discounted payback period will be less than that of nominal payback. F. None of these statements is true.

B: Mutually exclusive projects will have a crossover point

6. Which of the following statements are false? Only select "All are true" if you think none of the statements are false. A. If the PI is one then the discount rate is the IRR. B. Mutually exclusive projects will have a crossover point. C. Descarte's rule states that there could be as many IRRs as there are cash flow sign changes. D. The NPV rule means that a company should accept projects that cost less than they are worth. E. The IRR and PI share a common disadvantage; they both ignore the scale of the project. F. All are true.

A: When faced with mutually exclusive projects, the profitability index is the "go to" rule B: IRR provides an indication of how much value a project is expected to create or destroy C: When allocating scarce capital, firms should invest in the lowest PIs first then invest in successively higher PIs. D: Nominal payback ignores the time value of money and does not adjust for risk. E: Conflicts between the NPV and IRR rules will occur when the projects' NPV profiles have a crossover point

7. Which of the following statements are false? Only select "All are true" if you think none of the statements are false. A. When faced with mutually exclusive projects, the profitability index is the "go to" rule. B. IRR provides an indication of how much value a project is expected to create or destroy. C. When allocating scarce capital, firms should invest in the lowest PI,s first then invest in successively higher PIs. D. Nominal payback ignores the time value of money and does not adjust for risk. E. Conflicts between the NPV and IRR rules will occur when the projects' NPV profiles have a crossover point. F. All are true.

A: Payback D: Discounted payback

8. Which of the following capital budgeting rules are biased towards liquidity? Select one or more correct answers. A. payback. B. net present value C. profitability index D. discounted payback E. internal rate of return F. None of these rules is biased towards liquidity.

A: The rule adjusts for the time value of money C: The rule adjusts for risk D: The rule takes opportunity costs into account E: The rule provides information about whether or not the project creates value of the firm

9. Which of the following are important criteria for capital budgeting rules? Select one or more correct answers. A. The rule adjusts for the time value of money. B. The rule is intuitive. C. The rule adjusts for risk. D. The rule takes opportunity costs into account. E. The rule provides information about whether or not the project creates value of the firm. F. None of these rules is an important criterion.