Chapter 13 Finance Questions
Which of the following best describes the NPV profile?
A graph of a project's NPV as a function of possible capital costs
Which of the following statements is correct?
A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
Which of the following is incorrect regarding the IRR statistic?
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 capital budgeting tools are suitable for non-normal cash flows except ____.
IRR
Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?
Mutually exclusive projects that exhibit differences in scale or timing.
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 is referred to as ______________.
NPV
All of the following capital budgeting tools are suitable for firms facing time constraints except ______.
NPV
Which of the following tools is suitable for choosing between mutually exclusive projects?
NPV
All of the following are strengths of payback except ____________________
None of these 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
All of the following capital budgeting tools are suitable for non-normal cash flows except ____.
Payback
A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________.
Profitability Index
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?
Profitability Index, PI
Which of the following statements is correct regarding the NPV profile?
The IRR appears as the intersection of the NPV profile with the x-axis.
The MIRR statistic is different from the IRR statistic in that _____________.
The MIRR assumes that the cash inflows can be reinvested at the cost of capital
We accept projects with a positive NPV because it means that ____________.
All of these A. We have recovered all our costs B. We are creating wealth for shareholders C. The project's expected return exceeds the cost of capital
A disadvantage of the payback statistic is that ___________.
All of these are disadvantages of payback: A. It does not reflect the time value of money B. It does not give an indication of the project's riskiness C. It does not consider cash flows beyond the payback period
All of the following capital budgeting tools are suitable for non-normal cash flows except ____.
Discounted Payback
Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?
It will have a PI and NPV of zero.
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 ______________.
MIRR
he least-used capital budgeting technique in industry is ____________.
MIRR
All of the following are strengths of NPV except _______________.
Managers have a preference for using a statistic that is in percent instead of dollars
Which of the following statements is correct?
The reinvestment rate of NPV and MIRR is the same.
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:
an NPV that is greater than zero.
Neither payback period nor discounted payback period techniques for evaluating capital projects account for
cash flows that occur after payback.
The Net Present Value decision technique uses a statistic denominated in
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.
discounted payback
All capital budgeting techniques
exclude some crucial information.
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.
internal rate of return
A project's IRR ____________________.
is the average rate of return necessary to pay back the project's capital providers
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.
modified internal rate of return
These are groups or pairs of projects where you can accept one but not all.
mutually exclusive
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.
net present value
A graph of a project's ______ is a function of cost of capital.
net present value
Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?
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.
normal cash flows
This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors.
payback
This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project.
payback
When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose
the project that pays back the soonest if it is equal to or less than managers' maximum payback period.
The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing
time or resource constraints.
The benchmark for the Profitability Index, PI, is the
zero or anything less than zero