1. Capital investments should
a. earn back their original capital outlay.
b. only be analyzed using the accounting rate of return.
c. always produce an increase in market share.
d. always be done using a payback criterion.
e. None of the above.
2. To make a capital investment decision, a manager must
a. estimate the quantity and timing of cash flows.
b. assess the risk of the investment.
c. consider the impact of the investment on the firm's profits.
d. select investments with a positive NPV.
e. All of the above.
3. Mutually exclusive capital budgeting projects are those that
a. if accepted or rejected do not affect the cash flows of other projects.
b. if accepted will produce a negative NPV.
c. if accepted preclude the acceptance of all other competing projects.
d. if rejected preclude the acceptance of all other competing projects.
e. if rejected imply that all other competing projects have a positive NPV.
4. An investment of $1,000 produces a net annual cash inflow of $500 for each of five years. What is the payback period?
a. Two years
b. One-half year
c. Unacceptable
d. $2,500
e. Can't be determined.
5. An investment of $1,000 produces a net cash inflow of $600 in the first year and $2,000 in the second year. What is the payback period?
a. 1.67 years
b. 0.50 years
c. 2.00 years
d. 1.20 years
e. Can't be determined.
6. The payback period suffers from which of the following deficiencies?
a. It is a rough measure of the uncertainty of future cash flows.
b. It helps control the risk of obsolescence.
c. It ignores the time value of money.
d. It ignores the financial performance of a project beyond the payback period.
e. Both c and d.
7. The accounting rate of return has one specific advantage not possessed by the payback period:
a. It considers the time value of money.
b. It measures the value added by a project.
c. It considers the profitability of a project beyond the payback period.
d. It is more widely accepted by financial managers.
e. It is always an accurate measure of profitability.
8. An investment of $1,000 provides an average net income of $220 with zero salvage value. Depreciation is $20 per year. The accounting rate of return using the original investment is
a. 44 percent.
b. 22 percent.
c. 20 percent.
d. 40 percent.
e. None of the above.
9. If the net present value is positive, it signals that the
a. initial investment has been recovered.
b. required rate of return has been earned.
c. value of the firm has increased.
d. All of the above.
e. Only a and b.
10. Net present value measures
a. the profitability of an investment.
b. the change in wealth.
c. the change in firm value.
d. the difference in present value of cash inflows and outflows.
e. All of the above.
11. The net present value is calculated using
a. accounting income.
b. the required rate of return.
c. the internal rate of return.
d. the future value of cash flows.
e. None of the above.
12. Using NPV, a project is rejected if
a. it is equal to zero.
b. it is positive.
c. it is negative.
d. it is less than the hurdle rate.
e. it is greater than the cost of capital.
13. If the present value of future cash flows is $1,200 for an investment that requires an outlay of $1,000,the NPV is
a. $200.
b. $1,000.
c. $1,200.
d. $2,200.
e. Can't be determined.
14. Assume an investment of $1,000 produces a future cash flow of $1,000. The discount factor for this future cash flow is 0.89. The NPV is
a. $0.
b. $110.
c. $2,000.
d. $911.
e. None of the above.
15. Which of the following is not true regarding the IRR?
a. The IRR is the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost.
b. The IRR is the interest rate that sets the NPV = 0.
c. The IRR is the most reliable of the capital budgeting methods.
d. If the IRR is greater than the required rate of return, then the project is acceptable.
e. The popularity of IRR may be attributable to the fact that it is a rate of return, a concept that managers are comfortable with using.
16. Using IRR, a project is rejected if
a. the IRR is less than the required rate of return.
b. the IRR is equal to the required rate of return.
c. the IRR is greater than the cost of capital.
d. the IRR is greater than the required rate of return.
e. the IRR produces a NPV = 0.
17. A postaudit
a. is a follow-up analysis of a capital project, once implemented.
b. compares the actual benefits with the estimated benefits.
c. evaluates the overall outcome of the investment.
d. proposes corrective action, if needed.
e. All of the above.
18. Postaudits of capital projects are useful because
a. they are not very costly.
b. they help ensure that resources are used wisely.
c. the assumptions underlying the original analyses are often invalidated. by changes in the actual working environment.
d. They have no significant limitations.
e. All of the above.
19. For competing projects, NPV is preferred to IRR because
a. maximizing IRR may not maximize the wealth of the owners.
b. in the final analysis, total dollars earned, not relative profitability, are what count.
c. choosing the project with the largest NPV maximizes the wealth of the shareholders.
d. assuming that cash flows are reinvested at the required rate of return is more realistic than assuming that cash flows are reinvested at the computed IRR.
e. All of the above.
20. Assume there are two competing projects: A and B. Project A has a NPV of $1,000 and an IRR of 15 percent; Project B has a NPV of $800 and an IRR of 20 percent. Which of the following is true?
a. It is not possible to use NPV or IRR to choose between the two projects.
b. Project B should be chosen because it has a higher IRR.
c. Project A should be chosen because it has a higher NPV.
d. Neither project should be chosen.
e. None of the above.