Capital budgeting is probably the most important of the three key areas of concern to the financial manager because

it defines the business of the firm

In capital budgeting (blank) determines the dollar value of a project of the company

net present value

What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%?

-$95+($107/1.06) = $5.94

A project should be (blank) if its NPV is greater than zero?
a. delayed
b. rejected
c. accepted

accepted

Specifying variables in the excel NPV function differs from the manner in which they are entered in a financial calculator in which of the following ways?
a. the range of cash flows specified in Excel begins with cashflow #1 not cashflow 0
b. the excel NPV function is actually a PV function
c. the discount rate in excel is entered as a decimal, or a percentage with a percentage sign
d. with the excel NPV function, cashflow #0 must be handled outside the NPV function
e. there are no significant differents between variable entry in excel and in a financial calculator

a. the range of cash flows specified in Excel begins with cashflow #1 not cashflow 0
b. the excel NPV function is actually a PV function
c. the discount rate in excel is entered as a decimal, or a percentage with a percentage sign
d. with the excel NPV function, cashflow #0 must be handled outside the NPV function

the (blank) method evaluates a project by determining the time needed to recoup the initial investment
a. accounting rate of return
b. internal rate of return
c. payback

payback

One of the flaws of the payback period method is that cash flows after the cutoff dates are

not considered in the analysis

According to the average accounting return rate rule, a project is acceptable if its average accounting return exceeds
a. the NPV
b. a target average accounting return
c. the internal rate of return
d. the required rate of return

b. a target average accounting return

The internal rate of return is a function of
a. the market interest rate
b. the cost of debt incurred by a project
c. a projects opportunity costs
d. a projects cash flows

a projects cash flows

If the IRR is greater than the (blank) (blank), we should accept the project
a. tax rate
b. required return
c. inflation rate
d. payback perios

b. required return

The IRR is the discount rate that makes NPV equal to (blank)
a. the payback period
b. zero
c. $42
d. the terminal book value of the projects fixed assets

zero

What is the IRR for a project with an initial investment of $500 and subsequent cash inflows of $145 per year for 5 years?

13.82%

Which of the following present problems when using the IRR method?
a. non-coventional cash flows
b. larger cash flows later in the project
c. a high discount rate
d. mutually exclusive projects

a. non-coventional cash flow
d. mutually exclusive projects

(t/f) some projects, such as mines, have cash outflows followed by cash inflows and cash outflows again, giving the project multiple IRR

True

If a firm is evaluating two possible projects, both of which require the use of the same production facilities, these projects would be considered (blank)
a. mutually exclusive
b. co-dependent
c. independent
d. inter-dependent

mutually exclusive

Which of the following are reasons why IRR continues to be used in practice?
a. the IRR of a proposal can be calculated without knowing the appropriate discount rate
b. it is easier to communicate information about a proposal with an IRR
c. business people prefer to talk about rate of returns
d. the IRR allows the correct ranking of projects

a. the IRR of a proposal can be calculated without knowing the appropriate discount rate
b. it is easier to communicate information about a proposal with an IRR
c. business people prefer to talk about rate of returns

If a project has multiple IRR, which of the following methods should be used?
a. MIRR
b. NPV
c. IRR

a. MIRR
b. NPV

The combination MIRR method is used by the excel MIRR function and uses which of the following?

compounding cash inflows to the end of the project
discounting all cash outflows to time 0
a financing rate for discounting
a reinvestment rate for compounding

What is the profitability index for a project with an intial cash outflow of $30 and subsequent cash inflows of $80 in year one and $20 in year two if the discount rate is 12%?

2.91

The PI rule for an independent project is to (blank) the project if the PI is greater than one
a. delay
b. reject
c. accept

accept

The profitability index is calculated by dividing the PV of the (blank) cash inflows by the initial investment
a. future
b. positive
c. previous

future

Which of the following is a disadvantage of the PI?
a. cannot rank mutually exclusive projects
b. useful when capital is rationed
c. easy to understand
d. is closely related to NPV

a. cannot rank mutually exclusive projects

Capital (blank) is the decision-making process for accepting and rejecting projects

budgeting

(blank) is a measure of how much value is created or added by undertaking an investment
a. an investment's market value
b. an investments social value
c. NPV
d. NFV

NPV

When calculating NPV the present value of the n cash flow is found by divided by the n cash flow by 1 plus (blank) rate raised to the n power
a. the discount
b. the federal funds
c. the prime
d. the LIBOR

the discount

the spreadsheet function for calculating NPV is

=NPV(rate,CF1,...,CFn) +CFO

A(n) (blank) project does not rely on the acceptance or rejection of another project

independent

Which of the following are methods of calculating the MIRR of a project
a. the reinvestment approach
b. the discounting approach
c. the combination approach
d. the PV approach

a. the reinvestment approach
b. the discounting approach
c. the combination approach

(t/f) an advantage of the ARR is that it is based on book values, not market values

false

What are the advantages of the payback period method for management?
a. the payback period method is easy to use
b. adjusts for the discount rate
c. ideal for minor projects
d. allows lower level managers to make small decisions effectively

a. the payback period method is easy to use
c. ideal for minor projects
d. allows lower level managers to make small decisions effectively

Higher cash flows earlier in the project's life are (blank) valuable than higher cash flows later on
a. less
b. more

b. more

the payback period can lead to foolish decisions if it is used too literally because
a. it uses an arbitrary discount rate
b. it ignored cash inflows after the cutoff date
c. it ignores the initial cost
d. it always includes all cash flows

b. it ignored cash inflows after the cutoff date

the AAR is defined as
a. avg net income/initial project cost
b. avg book value/avg net income
c. avg book value/initial project cost
d. avg net income/avg book value

d. avg net income/avg book value

According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are widely used by firms inthe U.S. and Canada?
a. NPV
b. IRR
c. profitability index
d. payback method
e. accounting rate of return