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Monday, December 6, 2010
Chapter 13: Capital Budgeting Techniques MCQs
Multiple-Choice Quiz
Chapter 13: Capital Budgeting Techniques
Just click on the button next to each answer and you'll get immediate feedback.
1.
A profitability index of .85 for a project means that:
the present value of benefits is 85% greater than the project's costs.
the project's NPV is greater than zero.
the project returns 85 cents in present value for each current dollar invested.
the payback period is less than one year.
2.
BackInSoon, Inc., has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the tenth year. Assuming that these cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent, calculate the initial cash outlay. (Hint: With a desired IRR of 8%, use the IRR formula: ICO = discounted cash flows.)
$16,775
$19,090
Correct!
($2,500)(PVIFA at 8% for 10 periods) +
($5,000)(PVIF at 8% for 10 periods) =
($2,500)(6.710) + ($5,000)(.463) =
$19,090
$25,000
$30,000
3.
Woatich Windmill Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project? [(Hint: The cash f lows from the project are an annuity so you can solve for i in the equation PVA = R(PVIFA
i,10
).]
6 percent
7 percent
8 percent
9 percent
Correct!
$50,000 = $7,791(PVIFA at i% for 10 periods)
$50,000/$7,791 = 6.418
From the PVIFA table in the book, 6.418 is the PVIFA at 9% for 10 periods.
4.
Which of the following statements is correct?
If the NPV of a project is greater than 0, its PI will equal 0.
If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
If the PI of a project is less than 1, its NPV should be less than 0.
If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.
5.
Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If the net present value of this proposal is greater than zero and the firm is not under the constraint of capital rationing, then the firm should:
calculate the IRR of this investment to be certain that the IRR is greater than the cost of
capital.
compare the profitability index of the investment to those of other possible investments.
calculate the payback period to make certain that the initial cash outlay can be recovered within an appropriate period of time.
accept the proposal, since the acceptance of value-creating investments should increase shareholder wealth.
6.
A project's
profitability index
is equal to the ratio of the
of a project's future cash flows to the project's
.
present value; initial cash outlay
net present value; initial cash outlay
present value; depreciable basis
net present value; depreciable basis
7.
The discount rate at which two projects have identical
is referred to as
Fisher's rate of intersection.
present values
net present values
IRRs
profitability indexes
8.
Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods
give contradictory results.
will never
will always
may
will generally
9.
If capital is to be rationed
for only the current period,
a firm should probably first consider selecting projects by descending order of
.
net present value
payback period
internal rate of return
profitability index
10.
The
method provides correct rankings of mutually exclusive projects, when the firm is not subject to capital rationing.
net present value
internal rate of return
payback period
profitability index
11.
In an
NPV sensitivity graph
, a steep
sensitivity line
for a particular input variable means that a
in that variable results in a
in NPV.
small percentage change; large change
large percentage change; small change
12.
One potential problem with sensitivity analysis is that it generally looks at sensitivity "one variable at a time." However, one way to judge the sensitivity of results to simultaneous changes in two variables, at least, is to construct an
.
NPV profile
NPV sensitivity matrix
NPV sensitivity graph
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