Capital Budgeting K

Capital budgeting is primarily concerned with

• capital formation in the economy

• planning future financing needs

• evaluating investment alternatives

• minimizing the cost of capital

Which of the following is not a time value of money adjusted method for ranking investment proposals?

• NPV Method

• Payback method

• Internal rate of return

• All of these are time adjusted methods

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

• or which it can obtain financing

• that have a positive net present value

• that have positive cash flows

• that provide returns greater than the after-tax cost of debt

If projects are mutually exclusive

• they can only be accepted under capital rationing

• the selection of one alternative precludes the selection of other alternatives

• the payback method should be used

• the net present-value should be used

A project whose acceptance prevents the acceptance of another project is

known as

• a dependent

• an independent project

• a mutually exclusive project

• a rational project

What does the payback method assume about returns?

• Returns are reinvested at the cost of capital

• Returns are reinvested at a higher rate than the cost of capital

• Returns are not reinvested

• Returns are reinvested at a lower rate than the cost of capital

What is the term for the difference between the present value of cash inflows and the present value of cash outflows associated with a project?

• Net present value of the project

• Net future value of the project

• Net historical value of the project

• Net salvage value of the project

Capital budgeting is the process of evaluating and ______________consistent with the firm's goal of owner wealth maximization.

• a. Recapitalization of assets

• b. Selecting long-term investments

• c. Restructuring debt

• d. Ratio Analysis

The length of time a company should wait to recover the amount it has invested is called:

• a. Internal Rate of Return

• b. Valuation Period

• c. Discounted Cash Period

• d. Payback Period

For projects which do not compete with each other, the acceptance of one does not eliminate the other from consideration.

• a. Dependent Projects

• b. Independent Projects

• c. Mutually exclusive Projects

• d. Replacement Project