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09: Capital Budgeting Techniques
1. Which of the following statements best describes the post-audit function in the capital budgeting process?
a. The post-audit should be performed before a purchase decision is made for a new capital budgeting project.
b. The post-audit is a fairly simple process, primarily because it is easy to separate the operating results of one
project from those of other related projects.
c. The post-audit involves comparing the actual results of previous capital budgeting decisions with the forecasted
results to identify and explain any differences.
d. The results of a post-audit generally can be used to develop future cash flow forecasts for new capital budgeting
projects that are 100 percent accurate.
e. Because it is quite expensive to perform, the post-audit should always be considered a voluntary part of the capital
budgeting process.
2. The ultimate purpose of a capital budget is to forecast _____.
a. the target payback periods of the projects undertaken by a firm
b. the funds required to purchase fixed assets for future projects
c. the future value of the cash inflows from various projects
d. the terminal value of the cash flows from different projects
e. whether projects have multiple internal rates of return
3. The present value of the expected net cash flows of all the projects undertaken by a firm will most likely exceed the
present value of the firm’s expected net profit after tax, because:
a. income is reduced by taxes paid, whereas cash flow is not.
b. there is a greater probability of actually receiving the projected cash flows than the forecasted income.
c. income is reduced by dividends paid, whereas cash flow is not.
d. income is reduced by depreciation and other non-cash charges, whereas cash flows are not.
e. cash flows lead to changes in net working capital, whereas sales do not.
4. Which of the following statements is true about capital budgeting analysis?
a. A project should be purchased if its net present value (NPV) is positive.
b. A project with only cash outflows and no cash inflows would have two internal rates of return (IRRs).
c. The traditional payback period method should be used for capital budgeting decisions when there is a conflict in
the project rankings using the NPV method and the internal rate of return (IRR) method.
d. The net present value (NPV) method should be used to evaluate independent projects, but the internal rate of
return (IRR) method should be used to evaluate mutually exclusive projects.
e. The payback period method should be used to evaluate capital budgeting projects that have multiple cash outflows.
5. Two firms, Tangerine Inc. and Cyan Inc. analyzed the same capital budgeting project. Tangerine Inc. determined that
the project’s internal rate of return (IRR) is 9 percent. Cyan Inc. used the net present value (NPV) method to evaluate the
project and determined that it is not acceptable. Given this information, which of the following statements is correct?
a. The net present value of the project must be positive for both the firms.
b. If it had computed the project’s IRR, Cyan would have found the IRR to be less than 9 percent.
c. Tangerine’s chief financial officer (CFO) should use the traditional payback period method to evaluate the project.
d. Tangerine Inc. should use a discount rate of more than 9 percent for capital budgeting analysis by the net present
value (NPV) method.
e. Cyan Inc.’s required rate of return is greater than 9 percent.
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09: Capital Budgeting Techniques
6. Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting
project that requires an initial investment of $170,000. The project will generate a $60,750 cash inflow at the year-end of
each of the next four years. According to this information, which of the following statements is correct?
a. The project is acceptable if its internal rate of return (IRR) is less than 14 percent.
b. The project is acceptable if its discounted payback period is greater than its economic life.
c. The project is acceptable because its net present value is positive.
d. The project’s is acceptable if its discounted payback period is less than the traditional payback period.
e. The project is not acceptable because its net present value is less than the future value of the cash flows it is
expected to generate during its life.
7. If the net present value (NPV) of a project is positive,:
a. the project’s discounted payback period is longer than the useful life of the project.
b. the internal rate of return is lower than the firm’s required rate of return.
c. the project is not acceptable.
d. the project’s discounted payback period is less than its traditional payback period.
e. accepting the project will increase the value of the firm.
8. Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for each project
is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will
generate only one cash inflow in the amount of $99,500 at the end of the fifth year (i.e., no cash flows are generated in the
first four years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?
a. Neither project should be purchased, because neither has a positive net present value (NPV).
b. Project B should be purchased because it has a higher net present value (NPV) than Project A.
c. Project A should be purchased because it will produce cash every year for five years.
d. Project A should be purchased because it has a positive net present value (NPV).
e. Project A should be purchased because Project B does not generate cash flows during the first four years of its life.
9. The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for
10 years, and produces after-tax cash flows equal to $44,503 per year. If the firm’s required rate of return is 14 percent and
its tax rate is 40 percent, what is the project’s internal rate of return (IRR)?
a. 8%
b. 14%
c. 18%
d. 5%
e. 20%
10. An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new
investment costs $1,246 to purchase, what is its internal rate of return (IRR)?
a. 9%
b. 7%
c. 5%
d. 3%
e. 11%
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09: Capital Budgeting Techniques
11. Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 in both Year
1 and Year 2, $35,000 in both Year 3 and Year 4, and $40,000 in Year 5. The investment will cost the firm $100,000
today, and the firm’s required rate of return is 10 percent. What is the net present value (NPV) for this investment?
a. $23,653.26
b. $27,104.46
c. $44,226.00
d. $70,000.00
e. $35,768.45
12. Which of the following is true about the net present value (NPV) capital budgeting technique?
a. The NPV capital budgeting technique ignores the time value of money.
b. When projects are evaluated using the NPV formula, it shows by how much a firm’s future value will decrease if a
capital budgeting project is purchased.
c. The NPV calculation is based on the assumption that the rate at which cash flows can be reinvested is the project’s
internal rate of return.
d. The NPV calculation fails to assume a realistic reinvestment rate assumption (the required rate of return), which is
implicit in the internal rate of return calculation (IRR).
e. If the net benefit computed on a present value basis—that is, NPV—is positive, then the asset (project) is
considered an acceptable investment.
13. A project’s net present value is equal to:
a. the present value of the expected future cash inflows minus the present value of all the cash outflows.
b. the future value of the cash outflows plus the present value of cash inflows.
c. the present value of the final cash inflow.
d. the future value of all the expected future cash outflows minus the project’s initial cost.
e. the present value of all the cash inflows that remain after the full recovery of the initial investment in the project.
14. If a capital budgeting project is purchased, a firm’s value, and thus its stockholders’ wealth, will change by the amount
of the project’s _____.
a. modified internal rate of return (MIRR)
b. discounted payback period (DPB)
c. nondiscounted cash inflows
d. cash inflows discounted at the project’s internal rate of return (IRR)
e. net present value (NPV)
15. If a project’s net present value (NPV) is positive,:
a. its internal rate of return (IRR) is equal to the firm’s required rate of return.
b. it is not an acceptable project.
c. it is an acceptable investment.
d. the firm’s required rate of return is not attainable.
e. its payback period is greater than the maximum cost-recovery time established by the firm.
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16. Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?
a. It is the same as the firm’s required rate of return.
b. It is the discount rate that equates the present value of a project’s cash outflows (or costs) with the present value of
its cash inflows.
c. It is the discount rate at which the net present value of a project is negative.
d. It is the rate of return at which a project’s payback period is shortest.
e. It is the discount rate that should be used to evaluate a project with multiple cash outflows.
17. For a particular project, other things held constant, an increase in the firm’s required rate of return will result in _____.
a. a decrease in the project’s net present value (NPV)
b. a decrease in the project’s internal rate of return (IRR)
c. a decrease in the project’s discounted payback period (DPB)
d. an increase in the project’s modified internal rate of return (MIRR)
e. a decrease in the project’s traditional payback period
18. The net present value (NPV) of a project is negative when the discount rate used is:
a. equal to the project’s internal rate of return (IRR).
b. equal to the yield to maturity of the bonds issued to finance the project.
c. greater than the project’s internal rate of return (IRR).
d. lower than the return demanded by the firm’s stockholders.
e. less than the project’s internal rate of return.
19. Which of the following statements is correct about the reinvestment assumptions that are inherent in the use of the net
present value (NPV) method and the internal rate of return (IRR) method?
a. The NPV method assumes that the project’s cash flows will be reinvested at the firm’s required rate of return,
whereas the IRR method assumes reinvestment at the project’s IRR.
b. The NPV method assumes that the project’s cash flows will be reinvested at the risk-free rate, whereas the IRR
method assumes reinvestment at the firm’s required rate of return.
c. The NPV method assumes that the project’s cash flows will be reinvested at the firm’s required rate of return,
whereas the IRR method assumes reinvestment at the risk-free rate.
d. The NPV method assumes that the project’s cash flows are not reinvested, whereas the IRR method assumes the
cash flows are reinvested at the firm’s required rate of return.
e. The NPV method assumes that the project’s cash flows are reinvested at the firm’s required rate of return, whereas
the IRR method assumes the cash flows are not reinvested.
20. Which of the following statements is correct?
a. A project’s discounted payback period (DBP) is normally shorter than its traditional payback period (PB) because
DPB accounts for the time value of money, whereas PB does not.
b. To compute the NPV for a project, the firm’s required rate of return must be known. To compute a project’s
internal rate of return (IRR), the firm’s required rate of return is not used because the IRR is the discount rate where the
project’s NPV equals zero.
c. Two firms could compute different internal rate of return (IRR) for a project if their required rates of return differ.
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09: Capital Budgeting Techniques
d. If a project’s net present value (NPV) is equal to its internal rate of return (IRR), the project’s value is in
equilibrium.
e. Everything else equal, firms with higher required rates of return generally are able to purchase more capital
budgeting projects than firms will lower required rates of return.
21. Which of the following statements is correct?
a. The discounted payback period is generally shorter than the traditional payback period.
b. A project might generate multiple rates of return whenever its internal rate of return (IRR) is greater than the
firm’s required rate of return.
c. The net present value (NPV) technique and internal rate of return (IRR) technique can lead to conflicting
investment decisions when mutually exclusive projects are being evaluated.
d. The net present value (NPV) technique and internal rate of return (IRR) technique can lead to conflicting
accept/reject decisions only when independent projects are being evaluated.
e. Larger, longer-term projects are favored over smaller, shorter-term alternatives if the required rate of return is
relatively high.
22. When determining a project’s true profitability, it is normally better to compute the project’s modified internal rate of
return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:
a. considers only the cash flows after the project’s payback period.
b. has a decision rule that is easier to apply than the IRR decision rule.
c. assumes that the project’s cash flows are reinvested at the firm’s required rate of return, whereas IRR assumes the
cash flows are reinvested at the project’s IRR.
d. assumes that the project’s cash flows are reinvested at the risk-free rate.
e. assumes that the project’s cash flows are discounted at its IRR.
23. Which of the following capital budgeting techniques makes the assumption that the project’s cash flows are reinvested
at the firms required rate of return?
a. traditional payback period (PB)
b. internal rate of return (IRR)
c. discounted rate of return
d. discounted payback period (DPB)
e. net present value (NPV)
24. Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money capital
budgeting techniques, has determined that all of the projects are acceptable. If the projects are mutually exclusive, which
of the following capital budgeting techniques should be used to make the purchasing decision to ensure the firm’s value is
maximized?
a. traditional payback period (PB)
b. internal rate of return (IRR)
c. modified internal rate of return (MIRR)
d. net present value (NPV)
e. discounted payback period (DPB)
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25. Which of the following capital budgeting assumes that any cash flows generated by a project can be reinvested at its
internal rate of return (IRR)?
a. net present value (NPV) method
b. discounted payback period method
c. traditional payback period method
d. internal rate of return (IRR) method
e. modified internal rate of return (MIRR) method
26. Which of the following cash flow patterns would produce multiple internal rates of return (IRRs) for a project?
a. A project requires cash payments for the first three years of its life, followed by cash inflows for the remainder of
its life.
b. A project requires a large cash payment today, but it generates cash inflows every year after it is purchased.
c. A project requires cash payments for its entire life.
d. A project requires a large cash payment today, it generates cash inflows for the next four years, a large cash
payment must be paid in Year 5, and then cash inflows are generated for the remainder of the project’s life.
e. A project with a five-year life requires no cash outlay today, it generates cash inflows for the next three years, and
then requires cash payments for the last two years.
27. Suppose a capital budgeting project generates its largest cash flows in the early years of its life
(i.e., up front) rather than near the end of its life. In this situation. Which of the following statements about the project
must be correct?
a. The project’s traditional payback period will be greater than the years expected to recover the original investment.
b. The net present value of the project is not as sensitive to changes in the firm’s required rate of return as the net
present value of a project that generates large cash flows later in its life.
c. The required rate of return of the project must be revised throughout its life.
d. The net present value of the project must be negative.
e. The project will have multiple internal rates of return.
28. A project should be accepted if _____.
a. its traditional payback period is greater than the expected number of years to recover the original investment
b. its internal rate of return (IRR) exceeds the firm’s required rate of return
c. it yields multiple internal rates of return
d. in addition to cash inflows, the project generates multiple cash outflows during its life
e. the sum of its raw (undiscounted) cash inflows is greater than the sum of the present value of its cash outflows.
29. Suppose a firm uses both the net present value (NPV) technique and the internal rate of return (IRR) technique to
evaluate two mutually exclusive capital budgeting projects. If a ranking conflict exists between NPV and IRR, which of
the following criteria should be used to make the final investment decision?
a. The project with the higher IRR should be purchased.
b. The project with an internal rate of return (IRR) equal to the firm’s expected rate of return should be purchased.
c. The project with the higher net present value (NPV) should be purchased.
d. The project with the payback period equal to the expected years required to recover the original investment should
be purchased.
e. The project with the discounted payback period that is greater than its traditional payback period should be
purchased.
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30. Project A, which costs of $1,000 to purchase, will generate net cash inflows equal to $500 at the end of each of the
next three years. The project’s required rate of return is 10 percent. What are the project’s internal rate of return (IRR) and
modified internal rate of return (MIRR)?
a. 23.4%; 38.2%
b. 14.5%; 12.6%
c. 23.4%; 18.3%
d. 23.4%; 16.7%
e. 16.7%; 18.3%
31. Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at
the end of Years 1-5. LALC’s cost of capital is 10 percent. What is the project’s modified IRR (MIRR)?
a. 10.04%
b. 12.87%
c. 15.23%
d. 18.34%
e. 20.72%
32. Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by
cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the
required rate of return is 12 percent.
a. $3,336.78
b. $2,486.23
c. $2,389.66
d. $1,889.45
e. $1,518.67
33. Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to
generate $5,000 per year for three years. If the firm’s required rate of return is 10 percent, what is the project’s terminal
value?
a. $15,000
b. $16,550
c. $11,550
d. $14,050
e. $12,500
34. A project’s terminal value is the _____.
a. present value of all the cash outflows, including the initial cost of investment
b. cash inflow that is generated in the last year of the project
c. sum of the future values of the cash inflows compounded at the firm’s required rate of return
d. sum of the cash inflows after full recovery of the initial investment in the project
e. excess of the cash outflows over the cash inflows generated by the project
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35. The modified internal rate of return (MIRR) is the discount rate that forces the ______.
a. future value of the project’s terminal value to equal the future value of its cash outflows
b. present value of the project’s terminal value to equal the present value of its costs (cash outflows)
c. future value of the project’s terminal value to equal the present value of its costs
d. present value of the project’s terminal value to equal the future value of its costs
e. present value of the project’s terminal value to equal the sum of its undiscounted cash inflows
36. The internal rate of return (IRR) technique assumes that cash flows are reinvested at the _____.
a. firm’s expected rate of return
b. project’s internal rate of return (IRR)
c. market rate of return
d. risk-free rate of return
e. firm’s opportunity rate of return
37. Which of the following is a reason the modified internal rate of return (MIRR) measure is a better indicator of a
project’s true profitability than the internal rate of return (IRR) measure?
a. The modified internal rate of return (MIRR) assumes that the project’s cash flows are reinvested at its internal rate
of return (IRR), which is generally correct.
b. The modified internal rate of return (MIRR) assumes that the terminal value of the project is the profit it
generates, which is generally correct.
c. The modified internal rate of return (MIRR) assumes that the project’s cash flows are reinvested at the firm’s
required rate of return, which is a better assumption than the IRR assumption that the cash flows are reinvested at its IRR.
d. The modified internal rate of return (MIRR) assumes that the future value of the project’s cash outflows is equal to
its terminal value, which is generally correct.
e. The modified internal rate of return (MIRR) assumes that projects with multiple cash outflows should be
evaluated with high required rates of return, which is generally correct.
38. Modified internal rate of return (MIRR) is the discount rate that forces the present value of a project’s terminal value
to equal the _____.
a. future value of its purchase price
b. future value of its cash outflows
c. present value of its cash inflows
d. future value of its cash inflows
e. present value of its cash outflows
39. If a capital budgeting project has a negative net present value (NPV),
a. its internal rate of return (IRR) is also negative.
b. its discounted payback period (DPB) is greater than the project’s economic life.
c. the firm should invest in the project as long as the initial investment outlay is low.
d. its traditional payback period (PB) is greater than the firm’s expected payback period.
e. its internal rate of return (IRR) is greater than the discount rate that would be used to compute the project’s NPV.
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40. The traditional payback period technique that is used in capital budgeting analyses:
a. is the simplest and oldest formal method used to evaluate capital budgeting projects.
b. directly accounts for the time value of money.
c. considers the discounted value of cash flows beyond the project’s payback period.
d. always results in maximizing the value of the firm when used to evaluate mutually exclusive projects.
e. incorporates risk into the discount rate that is used to compute the payback period.
41. In capital budgeting analyses, the primary difference between the traditional payback period (PB) technique and the
discounted payback period (DPB) technique is that the DPB:
a. considers cash flows that occur after the discounted payback period.
b. is always shorter than the traditional payback period.
c. considers the time value of money.
d. ensures a shorter payback period for a project, because projects with longer payback periods generally are
accepted using the DPB technique.
e. ensures the amount of the original investment is recovered more quickly from the project’s cash flows.
42. Which of the following statements is correct?
a. The internal rate of return (IRR) does not allow you to determine whether mutually exclusive projects are
acceptable.
b. The net present value (NPV) is the only capital budgeting technique that allows you to determine which
independent projects are acceptable.
c. The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to
the firm’s shareholders of purchasing a capital budgeting project.
d. A project’s internal rate of return (IRR) depends on the firm’s required rate of return, which means that a project’s
IRR is different for each firm that has a different required rate of return.
e. The net present value (NPV) technique contains information about a project’s safety margin, which is not inherent
in the internal rate of return (IRR).
43. Seattle Inc. identified an investment opportunity that requires an initial cash outflow of $150,000. Seattle’s required
rate of return is 10 percent. The investment will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per
year in Years 5 through 9, and $40,000 in Year 10. Assume the cash flows occur evenly during the year. What is the
traditional payback period for this investment?
a. 5.23 years
b. 4.86 years
c. 4.51 years
d. 6.12 years
e. 4.35 years
44. A firm is evaluating a capital budgeting project that generates cash inflows equal to $50 per year for the next five
years. If the project’s traditional payback period (PB) is 3.6 years, what is its initial cost?
a. $200
b. $120
c. $180
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e. $150
45. Everything else equal, a project that has a long traditional payback period (PB) _____.
a. has greater implied risk than a project that has a shorter PB
b. generally ensures the firm has enough liquidity to survive for a fairly long period of time
c. must have a positive net present value (NPV)
d. has an expected rate of return that is greater its internal rate of return
e. results in a terminal value that is greater than the present value of its cash outflows
46. Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the
cost of (investment in) a project sooner rather than later?
a. Internal rate of return (IRR)
b. Traditional payback period (PB)
c. Modified internal rate of return (MIRR)
d. Net present value (NPV)
e. Present value (PV) of cash flows
47. If a project’s net present value (NPV) is positive,:
a. Its internal rate of return is less than the firm’s expected rate of return.
b. It must have multiple internal rates of return.
c. Its terminal value is less than the future value of the initial investment in the project.
d. Its initial investment is recovered on a present value basis prior to the end of the project’s useful life.
e. The present value of the project’s cash inflows and the present value of its cash outflows are equal when they are
discounted at the firm’s required rate of return.
48. Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time
value of money. Which of the following statements is correct?
a. The company should purchase the one project that has the highest internal rate of return (IRR).
b. All of the capital budgeting techniques the company uses should provide the same accept/reject decisions.
c. The company should purchase the project that has the shortest traditional payback period (PB).
d. The company should purchase the one project that has the highest net present value (NPV); the other projects
should not be purchased, even if their NPVs are positive.
e. The capital budgeting techniques used by the company will always agree on which project should be ranked as
the best one to purchase.
49. If a project’s discounted payback period is less than its useful life, _____.
a. the terminal value of its future cash inflows is less than the future value of its initial cost
b. its future cash inflows are less than its initial cost
c. the present value of its future cash flows exceeds its initial cost
d. the present value of its future cash inflows is greater that the future value of its initial cost
e. its cost-recovery time should exceed the maximum cost-recovery time established by the firm
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50. With the improvement in the technology and understanding of discounting techniques, both the net present value
(NPV) technique and internal rate of return (IRR) technique used in capital budgeting analyses have become more popular
because these techniques provide decisions that help the firm to _____.
a. minimize its overall payback period
b. maximize it required rate of return
c. maximize its value
d. minimize the number of multiple IRRs computed for every project
e. maximize the initial capital investment
51. If a firm discovers a ranking conflict exists after evaluating two mutually exclusive capital budgeting projects using
the net present value (NPV) technique and the internal rate of return (IRR) technique, which of the following capital
budgeting techniques should it use to ensure the correct value-maximizing decision is made?
a. Traditional payback period (PB)
b. Net present value (NPV)
c. Internal rate of return (IRR)
d. Discounted payback period (DPB)
e. It doesn’t matter which capital budgeting technique is used because they all produce correct value-maximizing
decisions.
52. If the traditional payback period method is used to evaluate a capital budgeting project, the project is considered
acceptable if _____.
a. the total cash inflows yield a rate of return more than the expected rate of return from the project
b. the payback period is longer than the life of the project
c. there are no cash outflows during the payback period
d. discounted value of cash inflows is less than the initial investment
e. the payback period is less than the maximum cost-recovery time established by the firm
53. Which of the following is a correct statement about the traditional payback period (PB) method that is used to evaluate
capital budgeting projects?
a. To compute a project’s PB, simply add up the expected cash flows for each year until the cumulative value equals
the amount that is initially invested.
b. To compute a project’s PB, simply add up the discounted cash flows for each year until the cumulative value
equals the amount that is initially invested.
c. The PB gives a direct measure of the dollar change in the firm’s value if the project is purchased.
d. The PB considers the time value of money.
e. The PB does not provide information about the risk associated with the recapture of the original amount invested
in a project.
54. Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to
evaluate capital budgeting projects?
a. To compute a project’s DPB, simply add up the unadjusted expected cash flows for each year until the cumulative
value equals the amount that is initially invested.
b. According to DPB, a project should be accepted when its discounted payback period is greater than its useful life.
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d. The DPB method considers the time value of money.
e. To compute a project’s DPB, its internal rate of return (IRR) must be known.
55. Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. By
forecasting the needs for capital assets in advance, a firm will have an opportunity to purchase and install assets before
they are needed.
a. True
b. False
56. The post-audit is a simple process in which actual results of capital budgeting analyses are compared with forecasted
results and only discrepancies that result from factors that are completely under management’s control are evaluated
further.
a. True
b. False
57. The two main purposes of post-audit are to improve forecasts and to improve operations.
a. True
b. False
58. Any capital budgeting decision should depend solely on a project’s forecasted cash flows and the firm’s required rate
of return. Such a decision should not be affected by managers’ tastes, the choice of accounting method, or the profitability
of other independent projects.
a. True
b. False
59. A capital budgeting project is acceptable if the firm’s rate of return required is greater than the project’s internal rate of
return (IRR).
a. True
b. False
60. Project A has a pattern of large cash inflows in the early years of its life, whereas Project B generates a majority of its
cash inflows in the later years of its life. Currently, both projects have the same net present value (NPV). If the firm’s
required rate of return increases, other things held constant, Project B will be more preferable than Project A after the rate
change.
a. True
b. False
61. When considering two mutually exclusive projects, the financial manager should always select the project with the
higher internal rate of return, provided the projects have the same initial cost.
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09: Capital Budgeting Techniques
a. True
b. False
62. The main reason that the net present value (NPV) method is regarded as being conceptually superior to the internal
rate of return (IRR) method for the purpose of evaluating mutually exclusive investments, is that mutually exclusive
projects have multiple internal rates of return (IRRs).
a. True
b. False
63. In capital budgeting analyses, the net present value (NPV) method and the internal rate of return (IRR) method both
assume that the reinvestment of the project’s cash flows occurs at the same rate.
a. True
b. False
64. Suppose a firm is evaluating a capital budgeting project using the net present value (NPV) technique. If the firm’s
required rate of return increases, the project’s NPV will decrease.
a. True
b. False
65. Suppose a firm is evaluating a capital budgeting project using the internal rate of return (IRR) technique. If the firm’s
required rate of return increases, the project’s IRR will decrease.
a. True
b. False
66. The net present value (NPV) and internal rate of return (IRR) methods will always lead to the same investment
decisions when mutually exclusive projects are being evaluated.
a. True
b. False
67. The net present value (NPV) method implicitly assumes that the rate at which cash flows can be reinvested is the
required rate of return, whereas the internal rate of return (IRR) method implies that the firm has the opportunity to
reinvest at the project’s IRR.
a. True
b. False
68. There exists an internal rate of return (IRR) solution for each time the direction of cash flows associated with a project
is interrupted, that is, each time outflows change to inflows.
a. True
b. False
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09: Capital Budgeting Techniques
69. The internal rate of return (IRR) of a project that generates its largest cash flows in the early years of its life is more
sensitive to changes in the firm’s required rate of return than is the IRR of a project whose largest cash flows come later in
life.
a. True
b. False
70. One advantage to using the traditional payback period technique is that it provides a rough measure of a project’s
liquidity and risk.
a. True
b. False
71. Although the modified internal rate of return (MIRR) method has wide appeal to academics, most business executives
prefer to use the net present value (NPV) method to evaluate capital budgeting projects.
a. True
b. False
72. When the discounted payback period (DPB) technique is used to evaluate a capital budgeting project, it should be
accepted when its DPB is greater than the project’s expected life.
a. True
b. False
73. When evaluating multiple independent projects, a firm will reach the same conclusions about the acceptability of each
project using either the net present value (NPV) technique or the internal rate of return (IRR) technique.
a. True
b. False