chapter 9 mc questions
Different discounted cash flow evaluation methods may provide conflicting rankings of investment projects when A. the size of investment outlays differ. B. the projects are mutually exclusive. C. the accounting policies differ. D. the internal rate of return equals the cost of capital.
A
Which of the following is NOT TRUE in regarding measuring cash flows? A. It considers depreciation as a negative cash flow B. It considers only after-tax cash flows C. It considers only incremental revenues D. It considers only marginal costs E. All of the above statements are true
A
Which of the following is TRUE regarding mutually exclusive projects? A. Accepting one project will necessarily mean rejecting the others B. There is no ranking problem in mutually exclusive projects C. The size-disparity problem occurs when mutually exclusive projects have different timing of cash flows D. Firms should always use IRR to evaluate mutually exclusive projects E. All of the above
A
12. A company estimates that an average-risk project has a WACC of 10 percent, a below-average risk project has a WACC of 8 percent, and an above-average risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? A. Project A has average risk and a return of 9 percent B. Project B has below-average risk and a return of 8.5 percent C. Project C has above-average risk and a return of 11 percent D. All of the projects above should be accepted E. None of the projects above should be accepted
B
A project with a positive NPV may not be accepted due to _________. A. low IRR B. capital rationing C. short payback period D. nonnormal cash flows (more than one sign change) E. all of the above
B
If the NPV (Net Present Value) of a project with one sign reversal is positive, then the project's IRR (Internal Rate of Return) ________ the required rate of return. A. must be less than B. must be greater than C. could be greater or less than D. The project's IRR cannot be determined without actual cash flows.
B
The internal rate of return is A. the discount rate that makes the NPV positive. B. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows. C. the discount rate that makes NPV negative and the PI greater than one. D. the rate of return that makes the NPV positive.
B
What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five, and $50,000 per year for years six through eight? A. 5.80 years B. 5.20 years C. 5.40 years D. 5.59 years
B
A project requires a net investment of $1,000,000 and has a payback period of 4.75 years. You analyze the project and decide that Year 1 free cash flow is $150,000 too low, and Year 3 free cash flow is $150,000 too high. After making the necessary adjustments, the project's ____. A. the IRR will increase. B. the NPV will decrease. C. payback period will shorten D. payback period will be lengthen
C
A project requires an initial investment of $389,600. The project generates free cash flow of $540,000 at the end of year 4. What is the internal rate of return for the project? A. 138.6% B. 38.6% C. 8.5% D. 6.9%
C
A significant advantage of the payback period is that it A. places emphasis on time value of money. B. allows for the proper ranking of projects. C. tends to reduce firm risk because it favors projects that generate early, less uncertain returns. D. gives proper weighting to all cash flows.
C
All of the following are criticisms of the payback period criterion EXCEPT A. time value of money is not accounted for. B. cash flows occurring after the payback are ignored. C. it deals with accounting profits as opposed to cash flows. D. None of the above; they are all criticisms of the payback period criteria.
C
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project A is A. $12,989. B. $13,357. C. $15,024. D. $18,532.
C
The net present value always provides the correct decision provided that A. cash flows are constant over the asset's life. B. the required rate of return is greater than the internal rate of return. C. capital rationing is not imposed. D. the internal rate of return is positive.
C
We compute the profitability index of a capital budgeting proposal by A. multiplying the internal rate of return by the cost of capital. B. dividing the present value of the annual after-tax cash flows by the cost of capital. C. dividing the present value of the annual after-tax cash flows by the cash investment in the project. D. multiplying the cash inflow by the internal rate of return.
C
When capital is limited, a firm should rank projects according to the A. Net present value B. Internal rate of return C. Profitability indexes D. External rate of return E. All of the above
C
Which of the following statements about the internal rate of return (IRR) is true? A. It has the most conservative and realistic reinvestment assumption. B. It never gives conflicting answers. C. It fully considers the time value of money. D. It is greater than the modified internal rate of return if the discount rate is higher than the IRR.
C
Your company is considering a project with the following cash flows: Initial Outlay = $3,000,000 Cash Flows in Years 1-8 = $547,000 Compute the internal rate of return on the project. A. 6.38% B. 8.95% C. 9.25% D. 12.34%
C
the following are criticisms of the payback period criterion EXCEPT A. time value of money is not accounted for. B. cash flows occurring after the payback are ignored. C. it deals with accounting profits as opposed to cash flows. D. None of the above; they are all criticisms of the payback period criteria.
C
A capital budgeting project has the NPV of $30,000 and the MIRR of 12%. The project's required rate of return is 9%. The project's IRR is A. below $30,000 B. below 9% C. above $30,000 D. above 12% E. between 9% and 12%
D
Holding a project's cash flow constant, if the required rate of return increases, the project's ______ will also increase. A. NPV B. IRR C. Payback Period D. Discounted Payback Period E. probability of acceptance
D
Which of the following is a disadvantage of the profitability index method? A. It uses free cash flows B. It does not recognizes the time value of money C. It is consistent with the firm's goal of shareholder wealth maximization D. It requires detailed long-term forecast of a project's cash flows E. All of the above
D
Which of the following statements about the net present value is true? A. It produces a percentage result that is easy to describe. B. It has an inadequate reinvestment assumption. C. It is likely that there will be more than one NPV for a project. D. It may be used to select among projects of different sizes.
D
Which of the following is TRUE regarding IRR? A. If IRR is greater than the firm's required rate of return, then the project should be accepted B. If IRR is less than the firm's required rate of return, then the project should be rejected C. If IRR is equal to the firm's required rate of return, NPV is zero D. All of the above E. Only a and b
E
Which of the following is not a drawback of the payback period method? A. Does not consider the time value of money B. Does not consider any required rate of return C. Does not take account of cash flows beyond the payback period D. Decision criterion is subjective E. All of the above are drawbacks of the payback method
E