Finance Chapter 13
Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI? A. The discounted payback will be greater than zero. B. It will have a PI and NPV of zero. C. The NPV and IRR will yield the same decision. D. The IRR will just equal the cost of capital.
B. It will have a PI and NPV of zero.
Neither payback period nor discounted payback period techniques for evaluating capital projects account for A. time value of money. B. market rates of return. C. cash flows that occur after payback. D. cash flows that occur during payback.
C. cash flows that occur after payback.
A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return. A. discounted payback B. net present value C. internal rate of return D. profitability index
C. internal rate of return
A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
C. modified internal rate of return
These are groups or pairs of projects where you can accept one but not all. A. dependent B. independent C. mutually exclusive D. mutually dependent
C. mutually exclusive
The benchmark for the Profitability Index, PI, is the A. cost of capital B. managers' maximum number of years C. zero or anything larger than zero D. zero or anything less than zero
C. zero or anything larger than zero
Which of the following statements is correct? A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. B. Discounted payback uses a more aggressive reinvestment rate assumption than payback. C. Neither payback nor discounted payback uses time value of money concepts. D. None of these statements is correct.
A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
All of the following capital budgeting tools are suitable for firms facing time constraints except ______. A. NPV B. Payback C. Discounted payback D. All of these answers are suitable for firms facing time constraints.
A. NPV
Which of the following statements is correct regarding the NPV profile? A. The IRR appears as the intersection of the NPV profile with the x-axis. B. The IRR appears at the crossover point or where the two profiles intersect. C. NPV profiles for independent projects with normal cash flows will intersect. D. All of these statements are correct.
A. The IRR appears as the intersection of the NPV profile with the x-axis.
A project's IRR ____________________. A. is the average rate of return necessary to pay back the project's capital providers B. will change with the cost of capital C. is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity D. All of these answers are correct.
A. is the average rate of return necessary to pay back the project's capital providers
This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors. A. payback B. internal rate of return. C. net present value D. profitability index
A. payback
This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. payback B. internal rate of return C. net present value D. profitability index
A. payback
The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. time or resource constraints. B. a labor union. C. the election of a new board of directors. D. a major investment.
A. time or resource constraints.
Which of the following is incorrect regarding the IRR statistic? A. For independent projects, IRR will give the same accept/reject decision as NPV. B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive. C. To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero. D. None of these statements is incorrect.
B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
All of the following are strengths of NPV except _______________. A. It works equally well for independent and mutually exclusive projects B. Managers have a preference for using a statistic that is in percent instead of dollars C. It uses a conservative reinvestment rate assumption D. These are all strengths of the NPV statistic
B. Managers have a preference for using a statistic that is in percent instead of dollars
A decision rule and associated methodology for converting the NPV statistic into a rate- based metric is referred to as _______________________. A. NPV B. Profitability Index C. MIRR D. Discounted Payback
B. Profitability Index
Which of the following statements is correct? A. Discounted payback solves all the shortcomings of payback. B. The reinvestment rate of NPV and MIRR is the same. C. The MIRR and IRR have the same reinvestment rate. D. All of these are correct statements.
B. The reinvestment rate of NPV and MIRR is the same.
The Net Present Value decision technique uses a statistic denominated in A. years. B. currency. C. a percentage. D. time lines.
B. currency.
This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates. A. payback B. discounted payback C. net present value D. profitability index
B. discounted payback
A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows. A. discounted payback B. net present value C. internal rate of return D. profitability index
B. net present value
A graph of a project's ______ is a function of cost of capital. A. discounted payback B. net present value C. modified internal rate of return D. profitability index
B. net present value
Which of the following best describes the NPV profile? A. A graph of a project's NPV as a function of possible IRRs. B. A graph of a project's NPV over time. C. A graph of a project's NPV as a function of possible capital costs. D. None of these statements is correct.
C. A graph of a project's NPV as a function of possible capital costs.
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Discounted Payback D. NPV
C. Discounted Payback
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. IRR D. NPV
C. IRR
All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRR B. Profitability Index C. Payback D. NPV
C. Payback
Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return? A. Internal Rate of Return, IRR B. Modified Internal Rate of Return, MIRR C. Profitability Index, PI D. Net Present Value, NPV
C. Profitability Index, PI
A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as ______________. A. IRR B. EAR C. NPV D. MIRR
D. MIRR
Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV? A. Independent projects that are evaluated at a high cost of capital. B. Mutually exclusive projects that are evaluated at a low cost of capital. C. Any projects that exhibit differences in scale or timing. D. Mutually exclusive projects that exhibit differences in scale or timing.
D. Mutually exclusive projects that exhibit differences in scale or timing.
Which of the following tools is suitable for choosing between mutually exclusive projects? A. Profitability Index B. IRR C. MIRR D. NPV
D. NPV
All of the following are strengths of payback except ____________________. A. Its benchmark is not determined by a relevant external constraint B. It incorporates the time value of money C. It uses a conservative reinvestment rate D. None of these
D. None of these
A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Given this, the project must have: A. only one negative cash flow. B. a PI that is negative. C. a discounted payback period that is shorter than its payback period. D. an NPV that is greater than zero.
D. an NPV that is greater than zero.
All capital budgeting techniques A. render the same investment decision. B. use the same measurement units. C. include all crucial information. D. exclude some crucial information.
D. exclude some crucial information.
Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? A. payback period B. discounted payback period C. modified internal rate of return D. net present value
D. net present value
These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive. A. expected cash flows B. time line cash flows C. non-normal cash flows D. normal cash flows
D. normal cash flows
When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose A. either project if they both are more than managers' maximum payback period. B. neither project if they both are less than managers' maximum payback period. C. the project that pays back the soonest. D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
D. the project that pays back the soonest if it is equal to or less than managers' maximum payback period.