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Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 81
TOPICS:
Net Working Capital
140. With the current techniques available, estimating cash flows has become the easiest step in the analysis of a capital
budgeting project.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Estimating Cash Flows
141. Estimating project cash flows is considered the most important and the most difficult step in the capital budgeting
process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of
estimating cash flows.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Estimating Cash Flows
142. Although it is difficult to make accurate forecasts, the initial outlays and subsequent costs of large projects are
forecast with great accuracy, but revenues are more uncertain and large errors are not uncommon.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Estimating Cash Flows
143. Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis.
a.
True
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 82
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Relevant Cash Flows
144. Net supplemental operating cash flow is calculated by adding back the change in depreciation to the change in
income after taxes.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Incremental Cash Flows
145. In cash flow estimation, the presence of externalities has no direct cash flow effects.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Externalities and Cash Flows
146. Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of
this, they should be excluded from the financial analyses.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 84
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Project Risk
151. Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Risk Adjustment
152. When risk is explicitly accounted for in capital budgeting, a project will be acceptable to a firm if its IRR is greater
than the firm's average required rate of return.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Accepting Risky Projects
153. One problem with Monte Carlo simulation analysis is that, while the simulation may provide some insights into the
riskiness of a project, the analysis does not lead to a clear-cut accept versus reject decision.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 90
170. The main reason that the NPV method is regarded as being conceptually superior to the IRR method for evaluating
mutually exclusive investments is that multiple IRRs may exist.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV versus IRR
171. The NPV and IRR methods, when used to evaluate an independent project, will lead to different accept/reject
decisions unless the IRR is greater than the required rate of return.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV versus IRR
172. The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also,
the NPV of X is greater than the NPV of Y at the required rate of return. If the two projects are mutually exclusive,
Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another
way, it is impossible to draw NPV profiles that would suggest not accepting Project X.
a.
True
b.
False
ANSWER:
False
RATIONALE:
Project X may have a negative NPV if r > IRR.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV Profile
173. In capital budgeting analyses, it is possible that NPV and IRR will both involve assuming reinvestment of the
project's cash flows at the same rate.
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 91
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Reinvestment Rate Assumption
174. Small businesses probably make less use of the DCF capital budgeting techniques than large businesses. This may
reflect a lack of knowledge on the part of small firms' managers, but it may also reflect a rational conclusion that the costs
of using DCF analysis outweigh the benefits of these methods for those firms.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Small Business
175. The two cardinal rules which financial analysts follow to avoid capital budgeting errors are: (1) capital budgeting
decisions must be based on accounting income, and (2) only incremental cash flows are relevant to accept/reject decisions.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Relevant Cash Flows
176. Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those
assets are not used for the project being evaluated.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 94
provide decision makers with somewhat different pieces of relevant information.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Capital Budgeting
184. Sensitivity analysis measures the stand-alone risk of a project by showing how much the project's NPV is affected by
a small change in one of the input variables, such as sales. Other things held constant, with the independent variable
graphed on the horizontal axis, the steeper the graph of the relationship line, the less risky the project.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Sensitivity Analysis
185. As a practical matter, it is much easier to use market risk analysis at the project level than at the divisional level
because it is easier to estimate the beta of a single project such as a machine tool die maker than the beta of an entire
division (or subsidiary) such as Phillip Morris' Kraft foods unit.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Market Risk
186. If a project is small relative to the total firm, and if its returns are not highly correlated with the returns on the firm's
other assets, then the project may not be very risky in either the within-firm (corporate) or the market risk sense, even if
the returns on the project are highly uncertain and thus the project has a high degree of stand-alone risk.
a.
True
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 95
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Project Risk
187. Other things held constant, if a firm takes on a project that increases its beta coefficient, unless the increased beta is
offset by a higher expected return, the firm's stock price will decline.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Changes in Beta
188. Assume the following: (1) A firm is considering two projects, one with a 5-year life and the other with a 10-year life;
(2) the cash flows of the two projects are equally risky by all definitions of the word "risky"; (3) the company uses 40
percent debt and 60 percent equity to finance the projects; (4) the debt used to finance any given project has a maturity
equal to the life of the project; and (5) the term structure of interest rates has a sharp upward slope. This would suggest,
other things held constant, that a lower discount rate should be used to find the NPV for the 5-year project than for the 10-
year project.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Risk Adjusted Discount Rate
189. Capital budgeting is process of planning expenditures on assets whose cash flows are expected to end in less than one
year.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 96
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Capital Budgeting
190. If a firm invests in a project with a present value less than its cost, the value of the firm will increase.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV
191. Estimating the cash flows in a capital project is the easiest and least important part of the capital budgeting process.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Cash Flow Estimation
192. Capital budgeting decisions must be based on net income to determine if the investment is to create value for the
firm.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 97
TOPICS:
Relevant Cash Flows
193. Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Relevant Cash Flows
194. The depreciable base of an asset includes the purchase price and any additional expenditures required to make the
asset operational, including shipping and installation.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Relevant Cash Flows
195. The change in net working capital that results from the acceptance of a project is an incremental cash flow that must
be considered in capital budgeting analysis.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
Net Working Capital
196. Net present value and internal rate of return will always give the same accept or reject decision for mutually
exclusive projects, but they might give different rankings for independent projects.
a.
True
b.
False
Principles of Finance, 6e
Besley/Brigham
Chapter 13
Cengage Learning Testing, Powered by Cognero
Page 98
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV and IRR
197. Internal rate of return assumes that all of the cash flows from a capital budgeting can be reinvested at the weighted
average cost of capital.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
IRR
198. The net present value of capital budgeting project with an initial cost of $5,000 that generates $1,000 after-tax cash
flows each year for ten years is $1,710 when discounted at 8 percent.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
Time Estimate-a - 5 min.
TOPICS:
NPV
199. The internal rate of return for a project that has initial costs of $10,000 and generates cash flows of $7,000 in year
one, $8,000 in year two, and $5,000 in year three is 35.7%.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
