FINANCE SDM CH10

Which of the following statements is correct for a project with a positive NPV? IRR exceeds the cost of capital
The IRR can lead to incorrect project rankings because projects with much higher NPVs may also have: longer project lives
A conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by: A SERIESE OF CASH INFLOW
Chris has been offered the chance to invest $120,000 in a partnership, which is expected to return $25,000 per year. If Chris is in the 30% tax bracket and limits investments to those with a payback of six years, should Chris invest? No, because the payback period is 6.86 years.
Unlike the IRR criteria, the NPV approach assumes an interest rate equal to the: firm’s cost of capital
The profitability index is a ratio of: NPV to invest cost
A firm has undertaken a project with an initial investment of $100,000. The firm’s cost of capital is 14% What is the NPV for this project? $54,623
An NPV profile is __________. a graph of a project’s NPV over a range of different discount rates
A firm is evaluating a proposal which has an initial investment of $45,000 and has cash flows of $5,000 in year 1, $20,000 in year 2, $15,000 in year 3, and $10,000 in year 4. The payback period of the project is: 3.5 years
One weakness of the payback period is that it:
Capital rationing is the process of: using limited cash to select among investments available
The minimum return that must be earned on a project in order to leave the firm’s value unchanged is: the discount rate
The first step in the capital budgeting process is: proposal generation
MIRR is used when: cash flows of a project change sign
Projects that do not compete with one another so that the acceptance of one project will have no bearing on the acceptance of other projects being considered by the firm are known as: independent projects
Jenna is considering an investment which has a price of $16,000. She expects to receive $3,000 for eight years. What is the investment’s internal rate of return? 10%
When resources are limited you should select the projects with the: highest NPV
To evaluate differences in project scale, a financial manager should always use ___________ as the primary capital budgeting evaluation tool. NPV
__________ are projects where the acceptance of one project automatically means we are rejecting other options. mutually exclusive projects
The “gold standard” of investment criteria refers to: net present value
What is the NPV of a project that costs 100,000 USD and returns 50,000 USD annually for three years if the opportunity cost of capital is 14%? CFo= -100,000CF1= 50,000F1=3I=14CPT NPV= 16,801.60
As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Project X Project Z Year Cash Flow Cash Flow 0 -$100,000 -$100,000 1 50,000 10,000 2 40,000 30,000 3 30,000 40,000 4 10,000 60,000If Denver’s cost of capital is 15 percent, which project would you choose?A. Neither project.B. Project X, since it has the higher IRR.C. Project Z, since it has the higher NPV.D. Project X, since it has the higher NPV.E. Project Z, since it has the higher IRR. A. neither project.
Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept-reject decision. A. TrueB. False A. True
Which of the following statements is most correct?A. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.B. The NPV method assumes that cash flows will be reinvested at the risk free rate while the IRR method assumes reinvestment at the IRR.C. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate.D. The NPV method does not consider the inflation premium.E. The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period. A. the NPV method assume that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the IRR.
Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?A. All else equal, a project’s IRR increases as the cost of capital declines.B. All else equal, a project’s NPV increases as the cost of capital declines.C. All else equal, a project’s MIRR is unaffected by changes in the cost of capital.D. Answers a and b are correct.E. Answers b and c are correct. B. All else equal, a project’s NPV increase as the cost of capital decline
When managers select correctly from among mutually exclusive projects, they: A. may give up rate of return for NPV.B. may give up NPV for rate of return.C. have a tendency to select the largest project. A. may give up rate of return for NPV
A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company’s cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the regular IRR (not MIRR) of the better project?A. 12.00%B. 15.53%C. 18.62%D. 19.08%E. 20.46% D. 19.08 %
multiple choice questionA company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company’s cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the MIRR of the better project?A.12.00%B. 8.37%C.18.62%D.17.84E.20.46% C. 18.62%
Which of the following investment evaluation tools is considered to be the best capital budgeting decision tool?A. Net present valueB. Internal rate of returnC. Payback periodD. Discounted payback period A. Net present value

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