FIN 350- MindTap Ch. 12
When there is a conflict, a key to resolving this it is assumed reinvestment rate. The IRR calculation assumes that intermediate cash flows are reinvested at the ________________, and the NPV calculation implicitly assumes that the rate at which cash flows can be reinvested is the _________________ As a result, when evaluating mutually exclusive projects, the ______________ is usually the better decision criteria
internal rate of return (IRR); required rate of return NPV method
If mutually exclusive projects with normal cash flows are being analyzed, the net present value (NPV) and internal rate of return (IRR) methods _____________ agree
sometimes
Capital budgeting is the process of planning and controlling investments in assets that are expected to produce cash flows for more than one year. This statement is:
True
If an independent project with conventional, or normal, cash flows is being analyzed, the net present value (NPV) and internal rate of return (IRR) methods _______ agree
always
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will ______ agree
always
For which of the following reasons are capital budgeting decisions important to a business organization? Check all that apply. a) Capital investments are relatively inexpensive. b) Capital investments have multiyear life spans, so mistakes linger for a long time. c) Capital investments are difficult to reverse without incurring large additional expenses. d) Capital investments tend to require sizable cash outlays. e) Capital investments tend to reflect the firm's future activities, markets, and productive technologies. f) Capital investments have relatively short life spans, so mistakes are worked through rather quickly.
b) Capital investments have multiyear life spans, so mistakes linger for a long time c) Capital investments are difficult to reverse without incurring large additional expenses d) Capital investments tend to require sizable cash outlays e) Capital investments tend to reflect the firm's future activities, markets, and productive technologies
Which of these are examples of a capital budgeting project? a) Sanger Machine Co.'s purchase of its normal stock of raw materials inventory b) National Transmissions Inc.'s purchase of a competitor's subsidiary c) Wellington Industries Inc.'s purchase of a new piece of equipment d) Houston Horticulture Co.'s investment in a research and development program e) Lancashire Railway Co.'s investment in employee education and training programs f) Amalgamated Football League Inc.'s $25,000 investment in short-term marketable securities
b) National Transmissions Inc.'s purchase of a competitors subsidiary c) Wellington Industries Inc.'s purchase of a new piece of equipment d) Houston Horticulture Co,.'s investment in a research and development program e) Lancashire Railway Co.'s investment in employee education and training programs
Which of the following statements best explains what it means when a project has an NPV of $0? a) When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive. b) When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. c) When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable.
b) When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning minimum rate of return
Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? a) No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a project's NPV. b) Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. c) No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows.
c) No, the NPV calculation will take into account not only the projects' cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows
