Finance Final

Which of the following is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds the firm has available?

Capital budgeting is the process of deciding which projects a firm will acquire using its long-term funds.

When evaluating a project, a firm's managers should select projects whose cash flows

Decision criterion for internal rate of return requires the project's IRR exceed the cost of capital.

Most errors committed in capital budgeting analysis occur during which stage?

Estimating relevant cash flows is the toughest part for any firm, making errors almost inevitable.

Analysts at Tabby Fur Storage predict that the net present value of a proposed new $10 million warehouse is $1 million. How should these findings be interpreted?

If a project will add value to a firm, it should be accepted.

The most widely used capital budgeting technique is

Net present value is the most popular capital budgeting technique.

All of the following are considered to be disadvantages of using the payback method EXCEPT the fact that it ignores the time value of money. has no clearly defined decision rule. does not consider cash flows that occur beyond the payback period. does not adjust for risk. does not provide a good measure of the project's liquidity.

Not providing a good measure of the project's liquidity is not a disadvantage of the payback method.

When evaluating a new project, the firm should consider all of the following factors EXCEPT

Previous expenditures associated with a market test are a sunk cost. Sunk costs are costs that have already been paid and cannot be recovered.

If only one capital budgeting technique could be used to evaluate a project, which of the following would be the most preferred?

The NPV is the most preferred capital budgeting technique.

The return that shareholders require on their investment in the firm is called the

The cost of equity is the return shareholders require on their investment in a firm

The discount rate assigned to an individual project should be based on

The discount rate assigned to an individual project should be based on the risk level of the project itself

The major advantage provided by the profitability index is it

The major advantage of the profitability index is its use in helping rank projects from best to worst.

Which of the following capital budgeting methods might not consider the salvage value of a machine being considered for purchase?

The payback period method will not consider the salvage value of a machine considered for purchase.

The major advantage provided by the profitability index is it

provides a better measure of the effects of a project on shareholder wealth than NPV. The major advantage of the profitability index is its use in helping rank projects from best to worst.

The overall cost of capital for a retail store

reflects the return investors require on the total assets of the firm.

According to the net present value technique, a project is considered acceptable if

the difference between all discounted cash inflows and outflows exceeds zero. NPV projects are acceptable if they have a positive NPV value.

Capital structure may be defined as

the mix of debt and equity. The mix of debt and equity is the capital structure of the firm.

The weighted average of the firm's costs of equity, preferred stock, and after-tax debt is the

weighted average cost of capital (WACC). Decision criterion for internal rate of return requires the project's IRR exceed the cost of capital.