62) Assume a $6,500 investment and the following cash flows for two alternatives.
Year
Investment X
Investment Y
1
$
1,000
$
1,300
2
1,800
2,000
3
1,700
1,100
4
2,000
1,500
5
600
Under the payback method, which of the following could be concluded?
A) Investment X should be selected.
B) Investment Y should be selected.
C) Investment X and Y provide the same payback period.
D) The investments are not comparable since they have different time frames.
Year 1
Year 2
Year 3
Year 4
Payback = 4 years
Payback = 5 years
63) The Dammon Corp. has the following investment opportunities:
Machine B
Machine C
($22,500 cost)
($35,500 cost)
Inflows
Inflows
year 1
$
6,000
year 1
$
12,000
year 1
$
-0-
year 2
3,000
year 2
7,500
year 2
30,000
year 3
3,000
year 3
1,500
year 3
5,000
year 4
-0-
year 4
1,500
year 4
20,000
Under the payback method and assuming these machines are mutually exclusive, which
machine(s) would Dammon Corp. choose?
A) Machine A
B) Machine B
C) Machine C
D) Machine A and B
1
$4,000
$10,500
$35,500
2
$1,000
$3,000
= $5,500
3
0.33 years
$1,500
$500
4
0.025 years
years
Payback = 4 years
years
64) Suppose that interest rates (and, therefore, the firm’s weighted average cost of capital)
increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it
A) uses payback method analysis.
B) uses net present value analysis.
C) uses internal rate of return analysis.
D) uses profitability indices.
65) You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per
year for 10 years. What is the internal rate of return?
A) 4%
B) 6%
C) 8%
D) 10%
66) You require an internal rate of return of 8% to accept a project. If the project will yield
$10,000 per year for 10 years, what is the maximum amount that you would be willing to invest
in the project?
A) $51,400
B) $67,100
C) $100,000
D) $144,870
67) How would the salvage value be treated in a net present value calculation?
A) Disregard the salvage
B) As a positive cash flow in the final year that the asset is used
C) As a negative cash flow in the final year that the asset is used
D) As a negative cash flow in the first year that the asset is used
68) The longer the life of an investment
A) the more significant the discount rate.
B) the less significant the discount rate.
C) the more it can initially cost.
D) the less it can initially cost.
69) Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to
be $1,500, $1,500, and $10,000 in the three years over which the project will produce cash flows.
If the discount rate is 6%, what is the net present value of the project?
A) $11,150
B) $26,930
C) $8,430
D) $1,650
70) Assuming that a firm has no capital rationing constraint and that a firm’s investment
alternatives are not mutually exclusive, the firm should accept all investment proposals
A) for which it can obtain financing.
B) that have a positive net present value.
C) that have positive cash flows.
D) that provide returns greater than the after-tax cost of debt.
71) If projects are mutually exclusive
A) they can only be accepted under capital rationing.
B) the selection of one alternative precludes the selection of other alternatives.
C) the payback method should be used.
D) only the net present value method can be used.
72) The internal rate of return and net present value methods
A) always give the same investment decision answer.
B) never give the same investment decision answer.
C) usually give the same investment decision answer.
D) always give conclusions different from the payback method.
73) A characteristic of capital budgeting is that
A) a large amount of money is always involved.
B) the net present value must be negative to be accepted.
C) the internal rate of return must be greater than the cost of capital.
D) the time horizon is at least five years.
74) A project requires an investment of $2,500 and has a net present value of $430. If the internal
rate of return is 10%, what is the profitability index for the project?
A) 0.25
B) 2.33
C) 0.70
D) 1.17
75) With non-mutually exclusive projects,
A) the payback method will select the best project.
B) only one project can be accepted.
C) the IRR, NPV, and payback methods are all treated equally in the decision making process.
D) the net present value and the internal rate of return methods will accept or reject the same
projects.
76) The net present value method (NPV) is a more conservative technique for selecting
investment projects than the internal rate of return method because the NPV method
A) assumes that cash flows are reinvested at the project’s internal rate of return.
B) concentrates on the liquidity aspects of investment projects.
C) assumes that cash flows are reinvested at the firm’s weighted average cost of capital.
D) None of these options are true.
77) The ________ assumes returns are reinvested at the cost of capital.
A) payback method
B) internal rate of return method
C) net present value method
D) capital rationing procedure
78) In using the internal rate of return method, it is assumed that cash flows can be reinvested at
A) the cost of equity.
B) the cost of capital.
C) the internal rate of return.
D) the prevailing interest rate.
79) For acceptable investments, the reinvestment assumption under the internal rate of return is
generally
A) higher acceptance than under the net present value method.
B) lower acceptance than under the net present value method.
C) at the cost of capital.
D) below the cost of capital.
80) The internal rate of return assumes that funds are reinvested at the
A) cost of capital.
B) yield on the investment.
C) minimal acceptable rate to the corporation.
D) yield to maturity.
81) If an investment project has a positive net present value, then the internal rate of return is
A) less than the cost of capital.
B) greater than the cost of capital.
C) equal to the cost of capital.
D) indeterminate, because it depends on the length of the project.
82) As the cost of capital increases
A) fewer projects are accepted.
B) more projects are accepted.
C) project selection remains unchanged.
D) None of these options
83) The net present value (NPV) method is considered to be a better method of evaluation than
the internal rate of return (IRR) method because the NPV method
A) uses time value of money while IRR does not.
B) is a more liberal method of analysis.
C) assumes that cash flows can be reinvested at the firm’s more conservative cost of capital.
D) None of these options are true.
84) The modified internal rate of return (MIRR) assumes that
A) inflows are invested at the traditional interest rate of return.
B) inflows are reinvested at the cost of capital.
C) outflows must be funded with debt.
D) outflows must be funded with equity.
85) The modified internal rate of return (MIRR) is used to
A) help bridge the reinvestment assumption difference between NPV and IRR.
B) calculate a new discount rate using future value of the cash inflows and the original value of
the investment.
C) give a more conservative outlook.
D) all of the answers are true.
86) Capital rationing
A) is a way of preserving the assets of the firm over the long term.
B) is a less than optimal way to arrive at capital budgeting decisions.
C) assures stockholder wealth maximization.
D) assures maximum potential profitability.
87) If a firm is experiencing no capital rationing, it should accept all investment proposals
A) as long as it has available funds.
B) that return an amount equal to or greater than the cost of capital.
C) that return an amount greater than the cost of equity.
D) that are available, regardless of return.
88) A firm may adopt capital rationing because
A) it is hesitant to use external sources of financing.
B) it wishes to maximize profits.
C) it wishes to maximize growth.
D) all of the options are true.
89) Capital rationing assumes that
A) a limited amount of capital is available.
B) a limited amount of investments are available.
C) maximum profitability will be obtained.
D) a limited amount of investments are available and maximum profitability will be obtained.
90) The net present value profile
A) doesn’t work if projects have a negative net present value.
B) is a substitute for the internal rate of return method.
C) graphically portrays the relationship between the discount rate and the net present value.
D) measures the initial cost to the present value of all future earnings.
91) Which of the following is not a step in creating the net present value profile?
A) Determine the net present value at a zero discount rate.
B) Determine the net present value at a normal discount rate.
C) Determine the project’s internal rate of return.
D) Determine the payback for the project.
92) Using higher discount rates,
A) accelerated cost recovery depreciation is more valuable than straight line.
B) straight-line depreciation is more valuable than the accelerated cost recovery system of
depreciation.
C) depreciation policy makes no difference.
D) later year depreciation has a higher net present value.