Capital Budgeting

The (a)   measures the present value return for each dollar of initial investment.

According to the profitability index criterion, a project is acceptable if its profitability index is

• greater than 1 plus the cost of capital

• greater than 0

• greater than or equal to 1

• greater than 1.1

The advantages of the payback approach include all of the following except:

• it is easy to compute

• it considers a project's liquidity

• it considers cash flows, not net income

• it provides an objective measure of profitability

The relationship between NPV and IRR is such that:

• both approaches always provide the same ranking of alternative investment projects.

• the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0

• if the NPV of a project is negative, the IRR must be greater than the cost of capital.

• none of the above

f a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of

return calculation on the same project would yield an internal rate of return ___________ the required

rate of return for the firm.

• greater than

• less than

• equal to

• cannot be determined from the information given

When two or more normal ________ projects are under consideration, the profitability index, the net

present value, and the internal rate of return methods will yield identical accept/reject signals.

• coincident

• mutually exclusive

• independent

• none of the above

The profitability index is the ratio of the ________ to the _______.

• net present value, net investment

• net investment, net present value

• present value of future net cash flows, net investment

• net investment, present value of future net cash flows

If the net present value of an investment project is positive then the:

• project would be unacceptable under the internal rate of return method

• project would be acceptable under the payback method

• project's rate of return is greater than the firm's cost of capital

• all of the above are correct

The internal rate of return does not take into account the

• explicit risk of the net cash flows

• magnitude of cash flows over the project's life

• net investment

• timing of cash flows over the entire life of a project

A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's

12 percent cost of capital. Determine the net present value of the project.

• $ 112,500

• $ 562,500

• $ 1,012,500

• $ 140,625