The common assumption in capital budgeting analysis is that cash inflows
occur in lump sums at the end of individual years during the life of an
investment project when in fact they flow more or less continuously during
those years *
2 points
Results in understated estimates of NPV.
Is done because present value tables for continuous flows cannot be
constructed.
Will result in inconsistent errors being made on estimating NPVs such that
project cannot be evaluated reliably.
Results in higher estimate for the IRR on the investment.
In capital budgeting, these techniques are applied: payback (PB) method, net
present value (NPV) method and time-adjusted rate of return (TARR)
method. PB method has this in common with NPV and TARR methods. (M) *
2 points
Use of cash flows.
Consideration of the time value of money.
Use of discounting.
Use of accrual method of accounting.
High-Tech Industries is considering the acquisition of a new state-of-the-art
manufacturing machine to replace a less efficient machine. Hi-Tech has
completed a net present value analysis and found it to be favorable. Which
one of the following factors should not be of concern to Hi-Tech in its
acquisition considerations? *
2 points
The availability of any necessary financing.
The probability of near-term technological changes to the manufacturing
process.
The investment tax credit.
Maintenance requirements, warranties, and availability of service
arrangements.
Fast Freight, Inc. is planning to purchase equipment to make its operations
more efficient. This equipment has an estimated life of 6 years. As part of this
acquisition, a P75,000 investment in working capital is anticipated. In a
discounted cash flow analysis, the investment in working capital *
2 points
Should be amortized over the useful life of the equipment.
Should be treated as a recurring cash outflow over the life of the
equipment.
Should be treated as an immediate cash outflow.
Should be treated as an immediate cash outflow recovered at the end
of 6 years.
The following capital expenditures may not appear in the capital budget
except: *
2 points
Investment in information technology
Investment in research and development
Investment in training and personal development
Investment in a new office building
An organization is using capital budgeting techniques to compare two
independent projects. It could accept one, both, or neither of the projects.
Which of the following statements is true about the use of net-present-value
(NPV) and internal-rate-of-return (IRR) methods for evaluating these two
projects? *
2 points
NPV and IRR criteria will always lead to the same accept or reject decision
for two independent projects.
If the first project’s IRR is higher than the organization’s cost of capital, the
first project will be accepted but the second project will not.
If the NPV criterion leads to accepting or rejecting the first project, one
cannot predict whether the IRR criterion will lead to accepting or rejecting
the first project.
If the NPV criterion leads to accepting the first project, the IRR criterion will
never lead to accepting the first project.
You are the treasurer of the Hibang Corp. The company is considering a
proposed project which has an expected economic life of seven years. Net
present value is the capital budgeting technique the president wants you to
use. Salvage value of the project would be *
2 points
Treated as cash inflow at estimated salvage value.
Treated as cash flow at its present value.
Irrelevant cash flow item.
Treated as cash inflow at the future value.
Which of the following groups of capital budgeting techniques uses the time
value of money? *
2 points
Book rate of return, payback, and profitability index.
IRR, payback, and NPV.
IRR, NPV, and profitability index.
IRR, book rate of return, and profitability index.
Project C and Project D are two mutually exclusive projects with normal cash
flows and the same risk. If the WACC were equal to 10 percent, the two
projects would have the same positive NPV. However, if the WACC < 10%,
Project C has a higher NPV, whereas if the WACC > 10%, Project D has a
higher NPV. On the basis of this information, which of the following
statements is most correct? *
2 points
Project D has a higher IRR, regardless of the cost of capital.
If the WACC < 10%, Project C has a higher IRR.
If the WACC < 10%, Project D’s MIRR is less than its IRR.
Statements a and c are correct.
The following statements refer to the accounting rate of return (ARR)1. The
ARR is based on the accrual basis, not cash basis. 2. The ARR does not
consider the time value of money. 3. The profitability of the project is
considered. From the above statements, which are considered limitations of
the ARR concept? *
2 points
Statements 2 and 3 only.
All the 3 statements.
Statements 3 and 1 only.
Statements 1 and 2 only.
A weakness of the internal rate of return (IRR) approach for determining the
acceptability of investments is that it *
2 points
Does not consider the time value of money.
Is not a straightforward decision criterion.
Implicitly assumes that the firm is able to reinvest project cash flows at the
firm’s cost of capital.
Implicitly assumes that the firm is able to reinvest project cash flows
at the project’s internal rate of return.
Assume a project has normal cash flows (that is, the initial cash flow is
negative, and all other cash flows are positive). Which of the following
statements is most correct? *
2 points
All else equal, a project’s IRR increases as the cost of capital declines.
All else equal, a project’s NPV increases as the cost of capital declines.
All else equal, a project’s MIRR is unaffected by changes in the cost of
capital.
Statements a and b are correct.
Statements b and c are correct.
The profitability index is *
2 points
the ratio of net cash flows to the original investment.
the ratio of the present value of cash flows to the original investment.
a capital budgeting evaluation technique that doesn't use discounted
values.
a mandatory technique when capital rationing is used.
The payback period is the *
2 points
length of time over which the investment will provide cash inflows.
length of time over which the initial investment is recovered.
shortest length of time over which an investment may be depreciated.
shortest length of time over which the net present value will be positive.
The payback reciprocal can be used to approximate a project’s *
2 points
Profitability index
Net present value.
Accounting rate of return if the cash flow pattern is relatively stable.
Internal rate of return if the cash flow pattern is relatively stable.
If a project has a payback period shorter than its life, *
2 points
Its NPV may be negative.
Its IRR is greater than cost of capital.
It will have a positive NPV.
Its incremental cash flows may not cover its cost.
A project has an IRR in excess of the cost of capital. The profitability index
for this project would be *
2 points
Less than zero.
Between zero and one.
Greater than one.
Cannot be determined without more information.
