53) Black Friday Inc. has estimated the following cash lows for a project it is considering:
Period Cash Flow
0 ($150,000)
1 $70,000
2 $80,000
3 ($100,0000)
a. What is the payback period for this project?
b. What is the obvious problem with using the payback method in this case?
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
54) Tinker Tools, Inc. is considering a project with the following cash lows. Calculate the
MIRR of the project assuming a reinvestment rate of 8%.
Year Cash Flows
0 ($70,000)
1 ($55,000)
2 $40,000
3 $60,000
4 $100,000
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: modiied internal rate of return
Principles: Principle 1: Money Has a Time Value
11.4 A Glance at Actual Capital-Budgeting Practices
1) Recent surveys of the CFOs of large U.S. companies rank the popularity of major capital
budgeting methods in which order?
A) IRR, NPV, Payback, Discounted Payback, Proitability Index
B) Payback, Discounted Payback, Proitability Index, IRR, NPV
37
C) NPV, IRR, Proitability Index, Discounted Payback, Payback
D) NPV, IRR, Payback, Discounted Payback, Proitability Index
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
2) Which of the following best explains the continuing popularity of the payback method?
A) Mathematical simplicity and some insight into the riskiness of cash lows.
B) Uses all cash lows and takes into account the time value of money.
C) Reliably selects the projects that add most value to the irm.
D) It provides objective selection criteria and is taught as the primary method in most
business schools.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
3) With respect to the capital budgeting practices of large U. S. corporations
A) the proitability index has been gaining in popularity.
B) IRR and NPV have been gaining in popularity.
C) payback and discounted payback have been gaining in popularity.
D) IRR and NPV have declined in popularity.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
38
4) Which of the following techniques will always produce a single rate of return estimate?
A) IRR
B) MIRR
C) PI
D) Discounted payback
Question Status: New question
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
5) Which of the following techniques might be useful in situations where the economic life
of a project is highly uncertain?
A) IRR
B) MIRR
C) PI
D) Discounted payback
Question Status: New question
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
6) Which of the following techniques might be useful in situations where mutually exclusive
projects have unequal lives?
A) IRR
B) Equivalent annual cost (EAC).
C) PI
D) Discounted payback
Question Status: New question
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
39
7) When various capital budgeting techniques rank mutually exclusive projects diferently,
which of the following is theoretically most reliable?
A) IRR
B) Equivalent annual cost (EAC).
C) NPV
D) Discounted payback
Question Status: New question
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
8) Many irms today continue to use the payback method but employ the NPV or IRR
methods as secondary decision methods of control for risk.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
9) Currently, most irms use NPV and IRR as their primary capital-budgeting technique.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
10) Most irms use the payback period as a secondary capital-budgeting technique, which
in a sense allows them to control for risk.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
40
11) Although discounted cash low decision techniques have become widely accepted, their
use depends to some degree on the size of the project and where within the irm the
decision is being made.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
12) Briely describe the actual capital budgeting methods of large U.S. corporations.
Question Status: Previous edition
Objective: 11.4 Understand current business practice with respect to the use of capital budgeting
criteria.
Keywords: current practice
Principles: Principle 3: Cash Flows Are the Source of Value
41