CAPITAL BUDGETING

The difference between the present value of an investment and its cost is the

• net present value.

• internal rate of return.

• payback period.

• profitability index.

Which of the following statements best describe the IRR?

• The rate of return on the investment calculated based on cash inflows and outflows.
• The rate of return on the investment calculated based on investment capital and profit generate.
• The minimum rate of return required for the business to be profitable.
• The maximum rate of return that business could generate.

Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?

• internal rate of return

• net present value

• payback

• accounting rate of return

A set of projects in which the acceptance of one project means that the others cannot be accepted

• Replacement Decision

• Expansion Decision

• Independent Projects

• Mutually Exclusive Projects

When selecting the best project from a group of mutually exclusive projects, you should choose the project with the highest ________.

• net present value

• internal rate of return

• accounting rate of return

• payback period

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.

• project B because it has the shortest payback period.

• both projects as they both have positive net present values.

• project A and reject project B based on their net present values.

• project B and reject project A based on other criteria not mentioned in the problem.

The payback period rule accepts all investment projects in which the payback period for the cash flows is

• greater than one.

• greater than the cutoff point.

• positive

• less than the cutoff point.

What is the net present value of a project with the following cash flows and a required return of 12%?

• -$287.22

• -$177.62

• $177.62

• $204.36