FIN Ch 10
When two projects have cash flows that are tied to each other, the projects may be classified as independent.
False
When two projects are mutually exclusive, accepting one project implicitly eliminates the other.
True
If a project's IRR exceeds its _____, the project should be _____.
cost of capital; accepted
Capital budgeting is the process of:
determining which capital investments a firm should make.
The capital budgeting process starts with a firm's:
strategic plan.
Which of the following is an advantage of the payback method?
Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.
Which of the following is a weakness of the payback period?
Cash flows are not discounted.
Which of the following is one of the steps necessary for conducting a capital budgeting analysis of a project?
Estimating the project's future cash flows
All capital budgeting projects are independent projects.
False
All contingent projects are mandatory projects.
False
Capital rationing refers to the limiting of capital resources to underperforming divisions.
False
The cost of capital for a project is its return on equity.
False
The cost of capital is the maximum return a project can earn.
False
The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm
False
The net present value of a project equals the value of the assets used in the project.
False
The net present value technique is an approach that goes against the goal of shareholder wealth maximization.
False
When two projects are independent, accepting one project implicitly eliminates the other.
False
Which of the following is a disadvantage of the payback method?
It ignores the time value of money. It is inconsistent with the goal of maximizing shareholder wealth. It ignores cash flows beyond the payback period.
Which of the following capital budgeting technique ignores the time value of money?
Payback period
Which of the following represents an example of key reasons for making capital expenditures?
Replacing production equipment
Which of the following is true about the Net Present Value method?
The NPV assumes that all cash flows are reinvested at the firm's discount rate.
The basis on which capital budgeting plans are made is a firm's three- to five-year strategic plan.
The basis on which capital budgeting plans are made is a firm's three- to five-year strategic plan.
Which of the following is true of capital budgeting decisions?
They create value for a firm when the value of the selected productive assets is worth more than their cost. They define a firm's lines of business and its inherent business risk. They can involve substantial cash outlays, which once made are not easily reversed.
Capital budgeting decisions are the most important ones managers make because they help to select investments in long-term assets that increase the value of a firm.
True
Capital budgeting decisions, once made, are not easy to reverse because of the huge investments involved.
True
Most of the information required to make capital budgeting decisions are internally generated, beginning with the sales force.
True
Profitability index (PI) is a measure of the value a project generates for each dollar invested in that project.
True
Projects are classified as independent when their cash flows are unrelated.
True
Projects that are classified as contingent could be mandatory or optional projects.
True
Capital rationing implies that
a firm has constraint to fund all of the available projects.
If a firm can undertake only some of the value-adding projects available to it because of limited funds, the firm must engage in:
capital rationing
Of the four capital budgeting techniques, the one that managers use the least is:
accounting rate of return.
Contingent projects would imply that
both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional.
Capital rationing implies that
funding needs exceed funding resources.
In computing the NPV of a capital budgeting project, one should NOT
ignore the salvage value.
The net present value
is consistent with shareholder wealth maximization goal. uses the discounted cash flow valuation technique. will provide a direct measure of how much a firm's value will change because of the capital project.
Two projects are considered to be contingent projects if
the acceptance of one project is dependent on the acceptance of the other.
The cost of capital is
the minimum return that a capital project must earn to be accepted.
To accept a capital project when using NPV,
the project NPV should be greater than zero.
The valuation of real assets is less straightforward than the valuation of financial assets.
true
