Chapter 10 Perspective Contingent Projects Would Imply That a the Acceptance

Fundamentals of Corporate Finance 3e Test Bank

Chapter 10: The Fundamentals of Capital Budgeting

1.

The goal of the capital budgeting decisions is to select capital projects that will decrease the

value of the firm.

A)

True

B)

False

Ans:

B

2.

Capital budgeting decisions, once made, are not easy to reverse because of the huge

investments involved.

A)

True

B)

False

Ans:

A

3.

The basis on which capital budgeting plans are made is a firm’s three- to five-year strategic

plan.

A)

True

B)

False

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

4.

Most of the information required to make capital budgeting decisions are internally generated,

beginning with the sales force.

A)

True

B)

False

Ans:

A

5.

All capital budgeting projects are independent projects.

A)

True

B)

False

Ans:

B

AICPA: Industry/Sector Perspective

6.

When two projects have cash flows that are tied to each other, the projects may be classified as

independent.

A)

True

B)

False

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

7.

Projects are classified as independent when their cash flows are unrelated.

A)

True

B)

False

Ans:

A

8.

When two projects are independent, accepting one project implicitly eliminates the other.

A)

True

B)

False

Ans:

B

9.

When two projects are mutually exclusive, accepting one project implicitly eliminates the other.

A)

True

B)

False

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

10.

Projects that are classified as contingent could be mandatory or optional projects.

A)

True

B)

False

Ans:

A

11.

All contingent projects are mandatory projects.

A)

True

B)

False

Ans:

B

12.

The cost of capital is the maximum return a project can earn.

A)

True

B)

False

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

13.

Capital rationing refers to the limiting of capital resources to underperforming divisions.

A)

True

B)

False

Ans:

B

14.

The net present value technique is an approach that goes against the goal of shareholder wealth

maximization.

A)

True

B)

False

Ans:

B

15.

The NPV method determines how much the present value of cash inflows exceeds the present

value of costs.

A)

True

B)

False

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

16.

Accepting a positive-NPV project decreases shareholder wealth.

A)

True

B)

False

Ans:

B

17.

Accepting a positive-NPV project increases shareholder wealth.

A)

True

B)

False

Ans:

A

18.

Accepting a negative-NPV project increases shareholder wealth.

A)

True

B)

False

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

19.

The discount rate used to determine the present value of future cash flows is the cost of capital.

A)

True

B)

False

Ans:

A

20.

The payback method is a discounted cash flow technique.

A)

True

B)

False

Ans:

B

21.

If the payback period for a project exceeds the firm’s threshold period, then the project is

accepted.

A)

True

B)

False

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

22.

The payback method is consistent with the goal of shareholder wealth maximization.

A)

True

B)

False

Ans:

B

23.

The discounted payback period calculation calls for the future cash flows to be discounted by a

firm’s cost of capital.

A)

True

B)

False

Ans:

A

24.

Unlike the regular payback method, the discounted payback method does not ignore cash flows

beyond a firm’s threshold period.

A)

True

B)

False

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

25.

The accounting rate of return is not a true return because it simply utilizes some average figures

from a firm’s balance sheet and income statement.

A)

True

B)

False

Ans:

A

26.

The decision criterion for the accounting rate of return is consistent with the goal of shareholder

wealth maximization.

A)

True

B)

False

Ans:

B

27.

The IRR and NPV decisions are consistent with each other when a project’s cash flows follow a

conventional pattern.

A)

True

B)

False

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

28.

Unconventional cash flow patterns could lead to conflicting decisions by NPV and IRR.

A)

True

B)

False

Ans:

A

29.

When mutually exclusive projects are considered, both NPV and IRR will always produce the

same acceptance decision.

A)

True

B)

False

Ans:

B

30.

When evaluating two projects that require different outlays, the IRR does not recognize the

difference in the size of the investments.

A)

True

B)

False

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

31.

Which of the following is NOT true about capital budgeting?

A)

It involves identifying projects that will add to a firm’s value.

B)

It involves investing large capital.

C)

It allows a firm to reverse the decision of large capital investments at any time.

D)

It allows a firm’s management to analyze potential business opportunities and decide on

which ones to undertake.

Ans:

C

32.

Which of the following is an aspect of independent projects?

A)

The cash flows are related.

B)

The cash flows are unrelated.

C)

Selecting one would automatically eliminate accepting the other.

D)

None of the above

Ans:

B

AICPA: Industry/Sector Perspective

33.

Two projects are considered to be independent if

A)

selecting one would have no bearing on accepting the other.

B)

their cash flows are unrelated.

C)

Both a and b

D)

None of the above

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

34.

Two projects are considered to be mutually exclusive if

A)

the projects perform the same function.

B)

selecting one would automatically eliminate accepting the other.

C)

Both a and b

D)

None of the above

Ans:

C

35.

Two projects are considered to be contingent projects if

A)

selecting one would automatically eliminate accepting the other.

B)

the acceptance of one project is dependent on the acceptance of the other.

C)

rejection of one project does not eliminate the selection of the other.

D)

None of the above

Ans:

B

36.

Contingent projects would imply that

A)

the acceptance of one project is dependent on the acceptance of the other.

B)

the projects can be either mandatory or optional.

C)

Both a and b.

D)

None of the above

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

37.

The firm’s decision will be to

A)

accept both projects because they are independent projects.

B)

accept both projects because they are contingent projects.

C)

pick the one that adds the most value because they are mutually exclusive projects.

D)

pick neither project.

Ans:

A

38.

If both projects are positive-NPV projects, then the firm should

A)

accept both projects because they are independent projects.

B)

select the higher NPV project because they are mutually exclusive.

C)

accept both projects because they are contingent projects.

D)

Not enough information is given to make a decision.

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

39.

The cost of capital is

A)

the minimum return that a capital project must earn to be accepted.

B)

the maximum return a project can earn.

C)

the return that a previous project for the firm had earned.

D)

None of the above

Ans:

A

40.

Capital rationing implies that

A)

a firm has constraint to fund all of the available projects.

B)

funding needs is equal to funding resources.

C)

the available capital will be allocated equally to all available projects.

D)

None of the above

Ans:

A

41.

Capital rationing implies that

A)

funding resources exceed funding needs.

B)

funding needs exceed funding resources.

C)

funding needs equal funding resources.

D)

None of the above

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

42.

Which one of the following statements is NOT true?

A)

Accepting a positive-NPV project increases shareholder wealth.

B)

Accepting a negative-NPV project has no impact on shareholder wealth.

C)

Accepting a negative-NPV project decreases shareholder wealth.

D)

Managers are indifferent about accepting or rejecting a zero NPV project.

Ans:

B

43.

Which one of the following statements is NOT true?

A)

Accepting a positive-NPV project increases shareholder wealth.

B)

Accepting a negative-NPV project decreases shareholder wealth.

C)

Accepting a zero NPV project has a negative impact on shareholder wealth.

D)

Managers are indifferent about accepting or rejecting a zero NPV project.

Ans:

C

44.

In computing the NPV of a capital budgeting project, one should NOT

A)

estimate the cost of the project.

B)

discount the future cash flows over the project’s expected life.

C)

ignore the salvage value.

D)

make a decision based on the project’s NPV.

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

45.

The net present value

A)

uses the discounted cash flow valuation technique.

B)

will provide a direct measure of how much a firm’s value will change because of the

capital project.

C)

is consistent with shareholder wealth maximization goal.

D)

All of the above

Ans:

D

46.

To accept a capital project when using NPV,

A)

the project NPV should be less than zero.

B)

the project NPV should be greater than zero.

C)

Both a and b

D)

None of the above

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

47.

The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to

generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the

appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not

round intermediate computations. Round final answer to nearest dollar.)

A)

$7,581,072

B)

$2,092,432

C)

$4,836,752

D)

$3,112,459

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

48.

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects

to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three

years. Given a required rate of return of 10 percent, what is the NPV of this project? (Do not

round intermediate computations. Round final answer to nearest dollar.)

A)

$1,802,554

B)

$197,446

C)

–$1,802,554

D)

–$197,446

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

49.

Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles.

The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four

years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company’s required rate

of return of 15 percent, what is the NPV of this project? (Do not round intermediate

computations. Round final answer to nearest dollar.)

A)

$1,169,806

B)

$2,919,806

C)

$4,669,806

D)

$3,122, 607

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

50.

Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to

generate annual cash flows of $1,225,000 for the next five years. If the firm’s required rate of

return is 18 percent, what is the NPV of this project? (Do not round intermediate computations.

Round final answer to nearest dollar.)

A)

$2,875,000

B)

$3,830,785

C)

$580,785

D)

$2, 225,875

Ans:

C

51.

Jenkins Corporation is investing in a new piece of equipment at a cost of $6 million. The

project is expected to generate annual cash flows of $1,850,000 over the next six years. The

firm’s cost of capital is 20 percent. What is the project’s NPV? (Do not round intermediate

computations. Round final answer to nearest dollar.)

A)

$722,604

B)

$351,097

C)

$152,194

D)

$261,008

Ans:

C

Initial investment = $6,000,000