Chap012 capital Budgeting Quiz PDF

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Multiple Choice Questions 51. Cash flow can be said to equal A. operating income less taxes plus depreciation. B. operating income less taxes. C. operating income before depreciation and taxes plus depreciation. D. operating income after taxes minus depreciation. 52. The reason cash flow is used in capital budgeting is because A. cash rather than income is used to purchase new machines. B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. all of these. 53. The first step in the capital budgeting process is A. collection of data. B. idea development. C. assign probabilities. D. determine cashflow. 54. Capital budgeting is primarily concerned with A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital. 55. An appropriate capital budgeting process requires that the following steps are taken in which order? a) collection of data b) reevaluation and adjustment c) evaluation and decision making d) search for and discovery of investment opportunities A. d, a, c, b B. d, a, b, c C. d, b, a, c D. b, d, a, c 56. Assume a corporation has earnings before depreciation and taxes of Php100,000, depreciation of Php40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? A. Php82,000 B. Php110,000 C. Php42,000 D. none of these 57. Assume a project has earnings before depreciation and taxes of Php10,000, depreciation of Php40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? A. Php47,000 B. Php19,000 C. a loss of Php21,000 D. none of these 58. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback method C. Internal rate of return method D. All of these are time-adjusted methods 59. Which of the following statements about the "payback method" is true? A. The payback method considers cash flows after the payback has been reached. B. The payback method does not consider the time value of money.

C. The payback method uses discounted cash-flow techniques. D. The payback method generally leads to the same decision as other investment selection methods. 60. There are several disadvantages to the payback method, among them: A. payback ignores the time value of money. B. payback emphasizes receiving money back as fast as possible for reinvestment. C. payback is easy to use and to understand. D. payback can be used in conjunction with time adjusted methods of evaluation.

61. The payback method has several disadvantages, among them: A. payback fails to choose the optimum or most economic solution to a capital budgeting problem. B. payback ignores cash inflows after the payback period. C. a and b. D. none of these. 62. Assume a Php4,000 investment and the following cash flows for two alternatives.

Under the payback method, which of the following would 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. Neither investment is acceptable under the payback method 63. The Dammon Corp. has the following investment opportunities:

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 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 period analysis. B. uses net present value analysis. C. uses internal rate of return analysis. D. uses profitability indexes. 65. You buy a new piece of equipment for Php5,535, and you receive a cash inflow of Php1,000 per year for 8 years. What is the internal rate of return? A. less than 10% B. between 10% and 11% C. between 11% and 12% D. more than 12% 66. You require an IRR of 13% to accept a project. If the project will yield Php10,000 per year for 6 years, what is the maximum amount that you would be willing to invest in the project? A. less than Php25,000 B. more than Php25,000 and less than Php30,000 C. more than Php30,000 and less than Php35,000 D. more than Php35,000

67. The longer the life of an investment A. the more significant the discount rate. B. the less significant the discount rate. C. Makes no difference. D. None of these.

68. Stone Inc. is evaluating a project with an initial cost of Php8,450. Cash inflows are expected to be Php1,000, Php1,000 and Php10,000 in the three years over which the project will produce cash flows. If the discount rate is 13%, what is the net present value of the project? A. less than Php0 B. between Php0 and Php400 C. between Php400 and Php800 D. more than Php800 69. 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. 70. 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. the net present-value should be used. 71. 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 answers different from the payback method. 72. A characteristic of capital budgeting is A. a large amount of money is always involved. B. the internal rate of return must be less than the cost of capital. C. the internal rate of return must be greater than the cost of capital. D. the time horizon is at least five years. 73. A project requires an investment of Php1000 and has a net present value of Php430. If the IRR is 12%, what is the profitability index for the project? A. 0.25 B. 2.33 C. 0.70 D. none of these. 74. With non-mutually exclusive projects. A. the payback method will select the best project. B. the net present value is not acceptable C. the internal rate of return method will always select the best project. D. the net present value and the internal rate of return methods will accept or reject the same project. 75. The Net Present Value Method 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. 76. The _________ assumes returns are reinvested at the cost of capital. A. payback method B. internal rate of return C. net present value D. capital rationing 77. 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. 78. For acceptable investments, the reinvestment assumption under the internal rate of return is generally A. higher than under the net present-value method. B. lower than under the net present-value method. C. at the cost of capital. D. below the cost of capital.

79. 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. 80. 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; it depends on the length of the project. 81. 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. 82. The net present value method is a better method of evaluation than the internal rate of return method because the NPV method A. assumes cash flows are reinvested at the internal rate of return. 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. 83. The modified internal rate of return assumes: 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. 84. 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. 85. 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. 86. 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 is fearful of too much growth. D. a and c. 87. Capital rationing assumes: A. a limited amount of capital is available. B. a limited amount of investments are available. C. maximum profitability will be obtained. D. B and C. 88. The net present value profile A. doesn't work if projects have a negative net present value. B. is a substitute for the IRR. C. graphically portrays the relationship between the discount rate and the net present value. D. two of the above.

89. Which of the following is not a step in creating the net present value profile? A. determining the net present value at a zero discount rate. B. determining the net present value at a normal discount rate. C. determining the project's internal rate of return D. determining the payback for the project....