FINN 10

What is the NPV for a project if its cost of capital is 0 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? A) $1,700,000 B) $371,764 C) $137,053 D) $6,700,000

A) $1,700,000

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________. A) -$1,000 B) $9,000 C) $4,000 D) -$4,000

A) -$1,000

What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4? A) -$1,494,336 B) $158,011 C) -$158,011 D) $3,505,664

A) -$1,494,336

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4? A) 5.83% B) 9.67% C) 11.44% D) 6.85%

A) 5.83%

Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent? A) Project X, since it has a higher NPV than Project Y B) Project Y, since it has a higher NPV than Project X C) Project X, since it has a lower NPV than Project Y D) Project Y, since it has a lower NPV than Project X

A) Project X, since it has a higher NPV than Project Y

Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? A) Yes, since the payback period of the project is less than the maximum acceptable payback period. B) No, since the payback period of the project is more than the maximum acceptable payback period. C) Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure. D) No, since the risk exposure of the project is more than the maximum acceptable risk exposure.

A) Yes, since the payback period of the project is less than the maximum acceptable payback period.

A $60,000 outlay for a new machine with a usable life of 15 years is called ________. A) capital expenditure B) financing expenditure C) replacement expenditure D) operating expenditure

A) capital expenditure

The basic motive for capital expenditure is to ________. A) expand operations B) replace current assets C) renew current assets D) improve leverage

A) expand operations

One of the primary motives for adding fixed assets to a firm is ________. A) expansion B) replacement C) renewal D) transformation

A) expansion

Which capital budgeting method is most useful for evaluating a project that has an initial after-tax cost of $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3, and $2,300,000 in year 4? A) net present value B) internal rate of return C) payback D) accounting rate of return

A) net present value

A nonconventional cash flow pattern associated with capital investment projects consists of an initial ________. A) outflow followed by a series of both cash inflows and outflows B) inflow followed by a series of both cash inflows and outflows C) outflow followed by a series of inflows D) inflow followed by a series of outflows

A) outflow followed by a series of both cash inflows and outflows

Which of the following capital budgeting techniques ignores the time value of money? A) payback period approach B) net present value C) internal rate of return D) profitability index

A) payback period approach

A firm can accept a project with a net present value of zero because ________. A) the project would maintain the wealth of the firm's owners B) the project would enhance the wealth of the firm's owners C) the project would maintain the earnings of the firm D) the project would enhance the earnings of the firm

A) the project would maintain the wealth of the firm's owners

The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is ________. A) the reinvestment rate assumption regarding intermediate cash flows B) that neither method explicitly considers the time value of money C) the assumption made by the IRR method that cash inflows are spread equally throughout the timeline D) that NPV approach favors small projects with high returns

A) the reinvestment rate assumption regarding intermediate cash flows

What is the payback period for Tangshan Mining company's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? A) 4.33 years B) 3.33 years C) 2.33 years D) 1.33 years

B) 3.33 years

________ is the process of evaluating and selecting long-term investments that are consistent with a firm's goal of maximizing owners' wealth. A) Recapitalizing assets B) Capital budgeting C) Ratio analysis D) Securitization

B) Capital budgeting

________ projects do not compete with each other; the acceptance of one ________ the others from consideration. A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; eliminates

B) Independent; does not eliminate

Which of the following is a reason for firms not using the payback method as a guideline in capital investment decisions? A) It gives an explicit consideration to the timing of cash flows. B) It cannot be specified in light of the wealth maximization goal. C) It is a measure of risk exposure and projects the possibility of a calamity. D) It is easy to calculate and has intuitive appeal.

B) It cannot be specified in light of the wealth maximization goal.

Which of the following is an advantage of NPV? A) It measures the risk exposure. B) It takes into account the time value of investors' money. C) It is highly sensitive to the discount rates. D) It measures how quickly a firm can breakeven.

B) It takes into account the time value of investors' money.

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4? A) Yes, since the payback period of the project is less than the maximum acceptable payback period. B) No, since the payback period of the project is more than the maximum acceptable payback period. C) Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure. D) No, since the risk exposure of the project is more than the maximum acceptable risk exposure.

B) No, since the payback period of the project is more than the maximum acceptable payback period.

Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis? A) It measures the benefits relative to the relative amount invested. B) The reinvestment rate assumed by this method is reasonable. C) Financial decision makers are inclined to higher rates of return. D) Interest rates are expressed as annual rates of return.

B) The reinvestment rate assumed by this method is reasonable.

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should ________. A) accept both the projects because they have equal IRR B) accept Project Y because its IRR is higher than Project Z C) accept Project Z because its IRR is higher than Project X D) reject both the projects because they have negative IRR

B) accept Project Y because its IRR is higher than Project Z

The final step in the capital budgeting process is ________. A) implementation B) follow-up C) review and analysis D) decision making

B) follow-up

The ________ is the compound annual rate of return that a firm will earn if it invests in the project and receives the given cash inflows. A) risk-free rate B) internal rate of return C) opportunity cost D) cost of capital

B) internal rate of return

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because ________. A) it explicitly considers the time value of money B) it can be viewed as a measure of risk exposure due to its focus on liquidity C) the determination of the required payback period is an objectively determined criteria D) it considers the timing of cash flows and therefore the time value of money

B) it can be viewed as a measure of risk exposure due to its focus on liquidity

Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called ________. A) independent projects B) mutually exclusive projects C) replacement projects D) capital projects

B) mutually exclusive projects

In comparing the internal rate of return and net present value methods of evaluation, ________. A) internal rate of return is theoretically superior, but financial managers prefer net present value B) net present value is theoretically superior, but financial managers prefer to use internal rate of return C) financial managers prefer net present value, because it is presented as a rate of return D) financial managers prefer net present value, because it measures benefits relative to the amount invested

B) net present value is theoretically superior, but financial managers prefer to use internal rate of return

Which of the following is an unsophisticated capital budgeting technique? A) internal rate of return B) payback period C) profitability index D) net present value

B) payback period

When evaluating projects using NPV approach, ________. A) projects having lower early-year cash flows tend to be preferred at higher discount rates B) projects having higher early-year cash flows tend to be preferred at higher discount rates C) projects having higher early-year cash flows tend to be preferred at lower discount rates D) the discount rate and magnitude of cash flows do not affect the ranking by NPV approach

B) projects having higher early-year cash flows tend to be preferred at higher discount rates

Unlike the net present value criteria, the internal rate of return approach assumes a reinvestment rate equal to ________. A) the relevant cost of capital B) the project's internal rate of return C) the project's opportunity cost D) the market's interest rate

B) the project's internal rate of return

What is the NPV for a project whose cost of capital is 15 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? A) $1,700,000 B) $371,764 C) -$137,053 D) -$4,862,947

C) -$137,053

What is the profitability index of a project that has an initial cash outflow of $600, an inflow of $250 for the next 3 years and a cost of capital of 10 percent? A) 0.667 B) 2.036 C) 1.036 D) 2.739

C) 1.036

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in year 4? A) 15.57% B) 0.00% C) 13.57% D) 12.25%

C) 13.57%

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is ________. A) 1.5 years B) 2 years C) 3.3 years D) 4 years

C) 3.3 years

Which of the following statements is true of payback period? A) If the payback period is less than the maximum acceptable payback period, management should be indifferent. B) If the payback period is greater than the maximum acceptable payback period, accept the project. C) If the payback period is less than the maximum acceptable payback period, accept the project. D) If the payback period is greater than the maximum acceptable payback period, management should be indifferent.

C) If the payback period is less than the maximum acceptable payback period, accept the project.

Which of the following is true of the accept-reject approach? A) It involves ranking projects on the basis of some predetermined measure, such as the rate of return. B) It cannot be used when the firm has limited funds. C) It can be used for making capital budgeting decisions when there is capital rationing. D) It can be used only for evaluating mutually exclusive projects.

C) It can be used for making capital budgeting decisions when there is capital rationing.

Which of the following is a disadvantage of payback period approach? A) It does not examine the size of the initial outlay. B) It does not use net profits as a measure of return. C) It does not explicitly consider the time value of money. D) It does not take into account an unconventional cash flow pattern.

C) It does not explicitly consider the time value of money.

________ projects have the same function; the acceptance of one ________ the others from consideration. A) Capital; eliminates B) Independent; does not eliminate C) Mutually exclusive; eliminates D) Replacement; eliminates

C) Mutually exclusive; eliminates

Fixed assets that provide the basis for a firm's earning and value are often called ________. A) tangible assets B) noncurrent assets C) earning assets D) book assets

C) earning assets

When the net present value is negative, the internal rate of return is ________ the cost of capital. A) greater than B) greater than or equal to C) less than D) equal to

C) less than

Comparing net present value and internal rate of return ________. A) always results in the same ranking of projects B) always results in the same accept-reject decision C) may give different accept-reject decisions D) is only necessary on independent projects

C) may give different accept-reject decisions

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent? A) Project X, since it has a higher NPV than Project Y B) Project Y, since it has a higher NPV than Project X C) neither, since both the projects have negative NPV D) neither, since both the projects have positive NPV

C) neither, since both the projects have negative NPV

Which pattern of cash flow stream is the most difficult to use when evaluating projects? A) mixed stream B) conventional flow C) nonconventional flow D) annuity

C) nonconventional flow

A conventional cash flow pattern associated with capital investment projects consists of an initial ________. A) outflow followed by a broken cash series B) inflow followed by a broken series of outlay C) outflow followed by a series of inflows D) outflow followed by a series of outflows

C) outflow followed by a series of inflows

The minimum return that must be earned on a project in order to leave the firm's value unchanged is ________. A) the internal rate of return B) the interest rate C) the cost of capital D) the compound rate

C) the cost of capital

Which of the following is true of NPV profile? A) It is used for evaluating and comparing independent projects when conflicting ranking exists. B) It is a graph that illustrates a project's IRR against various values of NPV. C) It shows an inverse relationship between a project's IRR and NPV. D) It charts the net present value of a project as a function of the cost of capital.

D) It charts the net present value of a project as a function of the cost of capital.

Which of the following is true of a capital expenditure? A) It is an outlay made to replace current assets. B) It is an outlay expected to produce benefits within one year. C) It is commonly used for current asset expansion. D) It is commonly used to expand the level of operations.

D) It is commonly used to expand the level of operations.

Which of the following is a strength of payback period? A) a disregard for cash flows after the payback period B) only an implicit consideration of the timing of cash flows C) merely a subjectively determined number D) a measure of risk exposure

D) a measure of risk exposure

An annuity is ________. A) a mix of cash flows in conventional and nonconventional B) a stream of perpetual cash flows C) a series of constantly growing cash flows D) a series of equal annual cash flows

D) a series of equal annual cash flows

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is ________. A) 1 year B) 2 years C) between 1 and 2 years D) between 2 and 3 years

D) between 2 and 3 years

A firm with limited dollars available for capital expenditures is subject to ________. A) capital dependency B) capital gains C) working capital constraints D) capital rationing

D) capital rationing

Which of the following steps in the capital budgeting process follows the decision making step? A) proposal generation B) review and analysis C) transformation D) implementation

D) implementation

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment. A) payback period B) net present value C) cost of capital D) internal rate of return

D) internal rate of return

Payback is considered an unsophisticated capital budgeting because it ________. A) gives explicit consideration to the timing of cash flows and therefore the time value of money B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate C) does not gives explicit consideration on the recovery of initial investment and possibility of a calamity D) it does not explicitly consider the time value of money

D) it does not explicitly consider the time value of money

The ________ measures the amount of time it takes a firm to recover its initial investment. A) profitability index B) internal rate of return C) net present value D) payback period

D) payback period

The first step in the capital budgeting process is ________. A) review and analysis B) implementation C) decision making D) proposal generation

D) proposal generation