Capital Budgeting Techniques

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Check your learning of Capital budgeting concepts, techniques, calculations, and Excel functions.

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The estimated benefits from a project are expressed as cash flows instead of income flows because:

1 point

it is simpler to calculate cash flows than income flows.

it is cash, not accounting income, that is central to the firm's capital budgeting decision.

this is required by the Tax authorities

this is required by the securities regulator.

Clear selection

Bulging Stomach Restaurants, Inc., has estimated that a proposed project's 8-year net cash benefit will be $4,000 per year for years 1 through 8, with an additional terminal benefit of $8,000 at the end of the eighth year. Assuming that these cash inflows satisfy exactly Bulging's required rate of return of 8 percent, the project's initial cash outflow is closest to which of the following four possible answers?

5 points

$27,309

$25,149

$14,851

$40,000

Clear selection

To the nearest dollar, what is the net present value of a replacement project whose cash flows are -$104,000; $34,444; $39,877; $25,000; and $52,800 for years 0 through 4, respectively? The firm has decided to assume that the appropriate cost of capital is 10% and the appropriate risk-free rate is 6%.

5 points

$15,115

$26,798

$33,346

$48,121

Clear selection

A profitability index (PI) of .92 for a project means that __________.

1 point

the project's costs (cash outlay) are (is) less than the present value of the project's benefits

the project's NPV is greater than zero

the project's NPV is greater than 1

the project returns 92 cents in present value for each current dollar invested (cost)

Clear selection

The capital budgeting decision involves the planning of expenditures for projects with a life of at least:

1 point

one year

five years

ten years

fifteen years

Clear selection

Under the net present value method:

1 point

the interest rate is determined that equates inflows and outflows

the time value of money is not taken into account

inflows are discounted back to determine if they exceed outflows

the basic discount rate is the internal rate of return

Clear selection

One of the main advantages of the payback period is:

1 point

all inflows related to the decision are considered

it is easy to use and places a premium on liquidity

it ignores the time value of money

outflows are equated with inflows using the rate of return

Clear selection

A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as __________.

1 point

a mutually exclusive project

an independent project

a dependent project

a contingent project

Clear selection

A project has the following cash inflows $34,444; $39,877; $25,000; and $52,800 for years 1 through 4, respectively. The initial cash outflow is $104,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?

5 points

The IRR is less than 10%.

The IRR is greater than or equal to 10%, but less than 14%.

The IRR is greater than or equal to 14%, but less than 18%.

The IRR is greater than or equal to 18%.

Clear selection

All of the following influence capital budgeting cash flows EXCEPT:

1 point

accelerated depreciation.

salvage value.

tax rate changes.

method of project financing used.

Clear selection

A project whose acceptance precludes the acceptance of one or more alternative projects is referred to as __________.

1 point

a mutually exclusive project.

an independent project

a dependent project

a contingent project

Clear selection

All of the following are widely used methods for evaluating capital expenditures except;

1 point

payback period

internal rate of return

net present value

weighted average cost of capital

Clear selection

In proper capital budgeting analysis we evaluate incremental

1 point

accounting income.

cash flow.

earnings.

operating profit.

Clear selection

A capital investment is one that

1 point

has the prospect of long-term benefits.

has the prospect of short-term benefits.

is only undertaken by large corporations.

applies only to investment in fixed assets.

Clear selection

The LMN Corporation is considering an investment that will cost $80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are $25,000 per year and for the last two years they are $20,000 per year. What is the payback period for this investment?

2 points

3.2 years.

3.5 years.

4.0 years.

Cannot be determined from this information.

Clear selection

Which of the following statements is incorrect regarding a normal project?

1 point

If the NPV of a project is greater than 0, then its PI will exceed 1.

If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0.

If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash flows.

If the IRR of a project is greater than the discount rate, k, then its PI will be greater than 1.

Clear selection

The internal rate of return method:

1 point

does not consider inflows after the cutoff period

calculates the interest rate that equates outflows with subsequent inflows

determines the time required to recoup the initial investment

determines whether future benefits justify current expenditures

Clear selection

Under the payback period:

1 point

we compute the time required to recoup the original investment

there is no consideration of inflows after the cutoff period

the time value of money is ignored

all of the above are correct

Clear selection

The basic discount rate used in net present value analysis is:

1 point

the internal rate of return

the cost of common equity

the net discount rate

the cost of capital to the firm

Clear selection

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