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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 payback
B) net present value
C) internal rate of return
D) profitability index

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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected? Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected? A) Discounted payback = 4.25 years; accept the project B) Discounted payback = 3.50 years; accept the project C) Discounted payback > 5 years; reject the project D) Discounted payback = 4.67 years; reject the project


A) Discounted payback = 4.25 years; accept the project
B) Discounted payback = 3.50 years; accept the project
C) Discounted payback > 5 years; reject the project
D) Discounted payback = 4.67 years; reject the project

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Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project J Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project J A) The project's MIRR is 14.77% and the project should be accepted. B) The project's MIRR is 9.29% and the project should be rejected. C) The project's MIRR is 13.76% and the project should be accepted. D) The project's MIRR is 15.31% and the project should be accepteD.


A) The project's MIRR is 14.77% and the project should be accepted.
B) The project's MIRR is 9.29% and the project should be rejected.
C) The project's MIRR is 13.76% and the project should be accepted.
D) The project's MIRR is 15.31% and the project should be accepteD. Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project J A) The project's MIRR is 14.77% and the project should be accepted. B) The project's MIRR is 9.29% and the project should be rejected. C) The project's MIRR is 13.76% and the project should be accepted. D) The project's MIRR is 15.31% and the project should be accepteD.

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Suppose two projects with normal cash flows, X and Y, have exactly the same required initial investment, but X has a longer payback. Can we say anything about X's IRR versus that of Y?

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The project with the longer pa...

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Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?


A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

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A project's IRR ____________________.


A) is the average rate of return necessary to pay back the project's capital providers
B) will change with the cost of capital
C) is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity
D) All of these answers are correct.

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Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?


A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

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The benchmark for the Profitability Index, PI, is the


A) cost of capital
B) managers' maximum number of years
C) zero or anything larger than zero
D) zero or anything less than zero

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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.

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Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?


A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

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How many possible IRRs could you find for the following set of cash flows? How many possible IRRs could you find for the following set of cash flows? A) 1 B) 2 C) 3 D) 4


A) 1
B) 2
C) 3
D) 4

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B

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? A) MIRR = 11.59%; accept the project B) MIRR = 9.21%; reject the project C) MIRR = 7.19%; reject the project D) MIRR = 10.58%; accept the project


A) MIRR = 11.59%; accept the project
B) MIRR = 9.21%; reject the project
C) MIRR = 7.19%; reject the project
D) MIRR = 10.58%; accept the project

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B

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $100, followed by cash flows of $95, $20 and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20 and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10%.


A) 15.24%
B) 15.96%
C) 16.17%
D) 15.42%

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A

We accept projects with a positive NPV because it means that ____________.


A) We have recovered all our costs
B) We are creating wealth for shareholders
C) The project's expected return exceeds the cost of capital
D) All of these

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Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?


A) Project B because it has the higher NPV.
B) Project B because it has the higher IRR.
C) Project A because it has the higher NPV.
D) Project A because it has the higher IRR.

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Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project Z Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project Z A) The project's PI is 8.48% and the project should be accepted. B) The project's PI is 8.48% and the project should be rejected. C) The project's PI is 16.48% and the project should be accepted. D) The project's PI is 21.48% and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = 214.78; Step 2: 214.78/1000 = 21.48% and since PI>0 accept.


A) The project's PI is 8.48% and the project should be accepted.
B) The project's PI is 8.48% and the project should be rejected.
C) The project's PI is 16.48% and the project should be accepted.
D) The project's PI is 21.48% and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = 214.78; Step 2: 214.78/1000 = 21.48% and since PI>0 accept.

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The least-used capital budgeting technique in industry is ____________.


A) NPV
B) IRR
C) Payback
D) MIRR

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Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?


A) 12.00%, reject
B) 31.21%, accept
C) 54.22%, accept
D) 80.67%, accept

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All of the following are strengths of NPV except _______________.


A) It works equally well for independent and mutually exclusive projects
B) Managers have a preference for using a statistic that is in percent instead of dollars
C) It uses a conservative reinvestment rate assumption
D) These are all strengths of the NPV statistic

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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? A) MIRR = 13.59%; accept the project B) MIRR = 7.96%; reject the project C) MIRR = 7.19%; reject the project D) MIRR = 12.58%; accept the project


A) MIRR = 13.59%; accept the project
B) MIRR = 7.96%; reject the project
C) MIRR = 7.19%; reject the project
D) MIRR = 12.58%; accept the project

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