Categories
Finance Flashcards

Finance 3000 Chapter 13

d Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects? A. payback periodB. discounted payback periodC. modified internal rate of returnD. net present value
b The Net Present Value decision technique uses a statistic denominated in A. years.B. currency.C. a percentage.D. time lines.
a The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. time or resource constraints.B. a labor union.C. the election of a new board of directors.D. a major investment.
d All capital budgeting techniques A. render the same investment decision.B. use the same measurement units.C. include all crucial information.D. exclude some crucial information.
a This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. paybackB. internal rate of returnC. net present valueD. profitability index
b This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates. A. paybackB. discounted paybackC. net present valueD. profitability index
a This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors. A. paybackB. internal rate of return.C. net present valueD. profitability index
c Neither payback period nor discounted payback period techniques for evaluating capital projects account for A. time value of money.B. market rates of return.C. cash flows that occur after payback.D. cash flows that occur during payback.
d When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose A. either project if they both are more than managers’ maximum payback period.B. neither project if they both are less than managers’ maximum payback period.C. the project that pays back the soonest.D. the project that pays back the soonest if it is equal to or less than managers’ maximum payback period.
c Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return? A. Internal Rate of Return, IRRB. Modified Internal Rate of Return, MIRRC. Profitability Index, PID. Net Present Value, NPV
c The benchmark for the Profitability Index, PI, is the A. cost of capitalB. managers’ maximum number of yearsC. zero or anything larger than zeroD. zero or anything less than zero
c These are groups or pairs of projects where you can accept one but not all. A. dependentB. independentC. mutually exclusiveD. mutually dependent
d These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive. A. expected cash flowsB. time line cash flowsC. non-normal cash flowsD. normal cash flows
b A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows. A. discounted paybackB. net present valueC. internal rate of returnD. profitability index
c A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project’s rate of return. A. discounted paybackB. net present valueC. internal rate of returnD. profitability index
c A capital budgeting technique that converts a project’s cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule. A. discounted paybackB. net present valueC. modified internal rate of returnD. profitability index
b A graph of a project’s ______ is a function of cost of capital. A. discounted paybackB. net present valueC. modified internal rate of returnD. profitability index
d Which of the following tools is suitable for choosing between mutually exclusive projects? A. Profitability IndexB. IRRC. MIRRD. NPV
a All of the following capital budgeting tools are suitable for firms facing time constraints except ______. A. NPVB. PaybackC. Discounted paybackD. All of these answers are suitable for firms facing time constraints
c All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRRB. Profitability IndexC. PaybackD. NPV
c All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRRB. Profitability IndexC. Discounted PaybackD. NPV
c All of the following capital budgeting tools are suitable for non-normal cash flows except ____. A. MIRRB. Profitability IndexC. IRRD. NPV
b A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________. A. NPVB. Profitability IndexC. MIRRD. Discounted Payback
d A capital budgeting method that converts a project’s cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as ______________. A. IRRB. EARC. NPVD. MIRR
c . A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as ______________. A. PIB. IRRC. NPVD. MIRR
b Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI? A. The discounted payback will be greater than zero.B. It will have a PI and NPV of zero.C. The NPV and IRR will yield the same decision.D. The IRR will just equal the cost of capital
d Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV? A. Independent projects that are evaluated at a high cost of capital.B. Mutually exclusive projects that are evaluated at a low cost of capital.C. Any projects that exhibit differences in scale or timing.D. Mutually exclusive projects that exhibit differences in scale or timing
a A project’s IRR ____________________. A. is the average rate of return necessary to pay back the project’s capital providersB. will change with the cost of capitalC. is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuityD. All of these answers are correct.
d A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Given this, the project must have: A. only one negative cash flow.B. a PI that is negative.C. a discounted payback period that is shorter than its payback period.D. an NPV that is greater than zero.
b All of the following are strengths of NPV except _______________. A. It works equally well for independent and mutually exclusive projectsB. Managers have a preference for using a statistic that is in percent instead of dollarsC. It uses a conservative reinvestment rate assumptionD. These are all strengths of the NPV statistic
d All of the following are strengths of payback except ____________________. A. Its benchmark is not determined by a relevant external constraintB. It incorporates the time value of moneyC. It uses a conservative reinvestment rateD. None of these
b Which of the following statements is correct? A. Discounted payback solves all the shortcomings of payback.B. The reinvestment rate of NPV and MIRR is the same.C. The MIRR and IRR have the same reinvestment rate.D. All of these are correct statements.
b Which of the following is incorrect regarding the IRR statistic? A. For independent projects, IRR will give the same accept/reject decision as NPV.B. For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.C. To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero.D. None of these statements is incorrect.
a Which of the following statements is correct? A. A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.B. Discounted payback uses a more aggressive reinvestment rate assumption than payback.C. Neither payback nor discounted payback uses time value of money concepts.D. None of these statements is correct.
c Which of the following best describes the NPV profile? A. A graph of a project’s NPV as a function of possible IRRs.B. A graph of a project’s NPV over time.C. A graph of a project’s NPV as a function of possible capital costs.D. None of these statements is correct.
a Which of the following statements is correct regarding the NPV profile? A. The IRR appears as the intersection of the NPV profile with the x-axis.B. The IRR appears at the crossover point or where the two profiles intersect.C. NPV profiles for independent projects with normal cash flows will intersect.D. All of these statements are correct
d The least-used capital budgeting technique in industry is ____________. A. NPVB. IRRC. PaybackD. MIRR
d We accept projects with a positive NPV because it means that ____________. A. We have recovered all our costsB. We are creating wealth for shareholdersC. The project’s expected return exceeds the cost of capitalD. All of these
a The MIRR statistic is different from the IRR statistic in that _____________. A. The MIRR assumes that the cash inflows can be reinvested at the cost of capitalB. The MIRR assumes that the cash inflows can be reinvested at the IRRC. The MIRR uses weighted-average dollarsD. The MIRR uses input from the NPV whereas the IRR does not
d A disadvantage of the payback statistic is that ___________. A. It does not reflect the time value of moneyB. It does not give an indication of the project’s riskinessC. It does not consider cash flows beyond the payback periodD. All of these are disadvantages of payback

Leave a Reply

Your email address will not be published. Required fields are marked *