1. The _____________________ method measures how long (in years and/or months) it takes to recover the initial project investment, based on the project’s cash inflows.
A. “Net Present Value” (NPV)
B. “Internal Rate of Return” (IRR)
C. payback period
D. Profitability Index (PI)
2. Each of the following is considered to be an advantage of the payback period capital budgeting method EXCEPT
A. it uses discounted cash flows in its analysis.
B. it is simple and intuitive to use.
C. it considers cash flows, rather than accounting profits.
D. it can be used as a supplement to other capital budgeting methods.
3. With the “Net Present Value” (NPV) method of capital budgeting, a firm would undertake a project only if
A. the project’s payback period is less than 3 years.
B. the present value of the cash flows that the project generates is greater than the cost of making the investment.
C. the present value of the cash flows that the project generates is less than the cost of making the investment.
D. the project cost is less than $1,000,000.
4. When using the “Net Present Value” (NPV) method for capital budgeting analysis,
A. if NPV > $0, then the project will be accepted.
B. if NPV < $0, then the project will be rejected.
C. A and B.
D. None of the above.
5. When companies evaluate investment opportunities using the “Profitability Index” (PI) analysis method, the firm will
A. invest in the project when the Profitability Index is less than 1.0.
B. invest in the project when the Profitability Index is greater than 1.0.
C. invest in the project only when the prime interest rate on the market exceeds 5%.
D. invest in the project only when the project’s Profitability Index has exceeded 1.0 for three consecutive years.