Principles of Finance - C708 module 12 quiz

Which investment proposal ranking method is widely used due to its simplicity, despite having several limitations? Profitability Index Net Present Value (NPV) Internal Rate of Return (IRR) Payback period

Payback period Payback period is widely used because of its ease of use despite several recognized limitations, such as not taking into account the time value of money.

firm is trying to choose the most profitable project to invest in. Which feature should be used as the company's discount rate? The company's reinvestment rate The company's weighted average cost of capital The company's profitability index The company's internal rate of return

The company's reinvestment rate Selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would be a better choice.

Which definition is a correct description of a capital budgeting method? Real option analysis is the ratio of payoff to investment of a proposed project. The internal rate of return is the discount rate that gives a net present value of zero. Equivalent annuity method essentially value projects as if they were risk bonds. The profitability index is the time required for an investment to "repay" the original investment.

The internal rate of return is the discount rate that gives a net present value of zero. The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency.

Which statement reflects the best reason to use the payback method to evaluate investments? The payback method covers all cash inflows and outflows for the duration of the investment. If you use the payback method, you do not need to perform additional analyses. The payback method helps gauge a project's risk. The payback method is easy to use and understandable for most people, regardless of training.

The payback method is easy to use and understandable for most people, regardless of training. Payback period is widely used because of its ease of use despite the recognized limitations: The time value of money is not taken into account.

Which of the following is a function of corporate capital budgeting? To rank projects by profitability To provide a history of past revenues and expenditures To encourage managers to operate independently of other business operations and departments To assist managers with reacting to problems after they arise

To rank projects by profitability Capital Budgeting is most involved in ranking projects and raising funds when long-term investment is taken into account.