Finc 489 Ch 17 True/False
13. The net present value, internal rate of return and payback period methods always agree on which project would enhance shareholder wealth and which would diminish it.
False
16. A sunk cost is a project-related expense that is dependent upon whether or not the project is undertaken.
False
19. A higher-risk project needs to be evaluated using a lower required rate of return.
False
2. The typical capital budgeting project involves a large up-front cash outlay, followed by a series of smaller net cash outflows.
False
22. Nonfinancial information plays no part in capital budgeting.
False
25. The internal rate of return measures the return on the project's initial cost.
False
26. The profitability index is calculated by subtracting the net investment from the present value of the cash flows.
False
28. Projects favored using payback techniques will be ranked the same using net present value.
False
3. A capital budgeting project's cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts.
False
30. Payback explicitly considers the time value of money.
False
31. A firm's cost of capital is the discount rate used in the evaluation of capital budgeting projects using payback and IRR.
False
34. A NPV profile shows how NPV varies given alternative IRRs.
False
37. Incremental cash flows represents a project's cash flows summed together with the firm's other cash flows to get a total firm view of the project.
False
38. Enhancement occurs when a project robs cash flow from the firm's existing line of business.
False
4. Capital budgeting decisions can only involve mutually exclusive projects.
False
40. The risk-adjusted discount rate (RADR) is the risk adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.
False
42. Mutually exclusive projects are projects that are not in direct competition with one another.
False
43. In a capital budgeting context, a project's required rate of return is called the yield to maturity.
False
46. Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project's initial investment.
False
47. Opportunity costs reflect the cost of passing up the next best alternative and are irrelevant in capital budgeting analysis.
False
6. The majority of capital budgeting projects are short-lived projects.
False
8. The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account.
False
1. Capital budgeting is the process of identifying, evaluating, and implementing a firm's investment opportunities.
True
10. The internal rate of return is the return that caused the net present value to be zero.
True
11. The net present value and internal rate of return methods will always agree on whether a project enhances or harms shareholder wealth.
True
12. Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0.
True
14. Independent projects are not in direct competition with one another.
True
15. The identification stage in capital budgeting involves finding potential capital investment opportunities and determining whether a project involves a replacement decision and/or revenue expansion.
True
17. The selection stage involves applying the appropriate capital budgeting techniques to help make a final decision.
True
18. The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm's tax rate.
True
20. Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty.
True
21. One weakness of the payback period method is that all cash flows beyond the payback period are ignored.
True
23. The stand-alone principle focuses on the project's own cash flows, uncontaminated by cash flows from the firm's other activities.
True
24. Projects with negative net present values will lead to a decrease in the value of the firm.
True
27. The profitability index measures the present value of benefits received for each dollar invested.
True
29. Sound capital budgeting decisions require a variety of information including internal financial data, external economic and political data, and non-financial data.
True
32. A firm's cost of capital is the discount rate used in the evaluation of capital budgeting projects using NPV and IRR.
True
33. A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost, but also all financing costs.
True
35. The profitability index is also sometimes referred to as the benefit/cost ratio.
True
36. The stand-alone principle suggests that a project must be viewed separately from the rest of the firm.
True
39. Cannibalization occurs when a project robs cash flow from the firm's existing line of business.
True
41. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.
True
44. A net present value profile is a useful tool for evaluating the sensitivity of a project's NPV to changes in required return.
True
45. When applied to the analysis of independent projects, NPV and IRR never provide conflicting accept or reject decisions.
True
5. The net present value of an investment is the present value of a project's future cash flows minus its initial cost.
True
7. Information generation develops three types of data: internal financial data, external economic and political data, and non-financial data.
True
9. To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.
True
