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FFM_Capital Budgeting (Ch.11)

Total questions: 63

Worksheet time: 34mins

Name
Class
Date
1.

Which of the following best defines capital budgeting?

a)

The process of raising funds for short-term financing

b)

The process of analyzing and selecting long-term investments

c)

The process of issuing common stock

d)

The process of setting dividend policy

e)

The process of managing working capital

2.

The primary decision criterion in capital budgeting is:

a)

Payback period

b)

Internal Rate of Return (IRR)

c)

Accounting Rate of Return

d)

Net Present Value (NPV)

e)

Profitability Index

3.

Which project classification involves replacing equipment to reduce operating costs?

a)

Expansion into new products

b)

Replacement: cost reduction

c)

Safety/environmental projects

d)

Strategic diversification

e)

Miscellaneous projects

4.

Mutually exclusive projects are:

a)

Projects that can be undertaken simultaneously

b)

Projects that always have identical NPVs

c)

Projects where acceptance of one means rejection of the other

d)

Projects that have no impact on each other

e)

Projects with equal IRR

5.

Independent projects are those:

a)

Whose cash flows do not affect each other

b)

That must be ranked by IRR

c)

That must be ranked by payback

d)

That always have equal NPVs

e)

That require mutual exclusion

6.

Which of the following is NOT an advantage of the NPV method?

a)

Considers time value of money

b)

Measures shareholder wealth directly

c)

Considers all cash flows

d)

Easy for managers to interpret

e)

Provides a dollar value

7.

The IRR is defined as the discount rate that:

a)

Maximizes inflows

b)

Forces NPV to equal zero

c)

Always exceeds the cost of capital

d)

Guarantees positive NPV

e)

Equals the payback cutoff

8.

Which is a limitation of the IRR method?

a)

It considers the time value of money

b)

It can produce multiple IRRs

c)

It can be compared with cost of capital

d)

It is easy to compute with a calculator

e)

It always agrees with NPV

9.

The NPV reinvestment assumption is:

a)

Reinvestment at IRR

b)

Reinvestment at WACC

c)

Reinvestment at zero percent

d)

Reinvestment at profitability index

e)

Reinvestment at payback cutoff

10.

The IRR reinvestment assumption is:

a)

Reinvestment at IRR

b)

Reinvestment at WACC

c)

Reinvestment at zero percent

d)

Reinvestment at cost of debt

e)

Reinvestment at book value

11.

A project has 'normal' cash flows if:

a)

It has more than one sign change

b)

It has one initial outflow followed by inflows

c)

It has no cash inflows

d)

It has equal cash flows each year

e)

It has reinvestment at IRR

12.

Multiple IRRs occur when:

a)

The project life is more than 10 years

b)

Cash flow signs change more than once

c)

IRR > WACC

d)

NPV < 0

e)

Payback period is less than 3 years

13.

The MIRR is preferred over IRR because:

a)

It ignores the cost of capital

b)

It assumes reinvestment at the cost of capital

c)

It always exceeds NPV

d)

It avoids the payback calculation

e)

It gives the same value as NPV

14.

The payback period measures:

a)

How quickly an investment is recovered

b)

The profitability index

c)

The IRR

d)

The return on equity

e)

The crossover rate

15.

A disadvantage of the regular payback method is that it:

a)

Considers all cash flows

b)

Ignores time value of money

c)

Always agrees with IRR

d)

Always equals discounted payback

e)

Is identical to NPV

16.

Which method corrects for the time value of money in payback calculation?

a)

Regular payback

b)

Discounted payback

c)

Profitability index

d)

IRR

e)

Accounting return

17.

A crossover rate is the rate of discount at which:

a)

NPV = IRR

b)

NPV profiles of two projects are equal

c)

Payback equals IRR

d)

WACC = NPV

e)

NPV is zero

18.

Which method is least reliable for ranking mutually exclusive projects?

a)

NPV

b)

IRR

c)

MIRR

d)

Discounted payback

e)

Profitability index

19.

Which technique avoids the multiple IRR problem?

a)

IRR

b)

MIRR

c)

NPV

d)

Payback

e)

Discounted payback

20.

The post-audit process in capital budgeting is p

4 lines
21.

Which technique avoids the multiple IRR problem?

a)

IRR

b)

MIRR

c)

NPV

d)

Payback

e)

Discounted payback

22.

The post-audit process in capital budgeting is primarily intended to:

a)

Approve new projects

b)

Compare actual results with forecasts

c)

Lower project costs

d)

Increase IRR

e)

Reduce NPV

23.

Which is an advantage of NPV over IRR?

a)

Easier to communicate

b)

Directly measures shareholder wealth

c)

Assumes reinvestment at IRR

d)

Ignores timing differences

e)

Requires no discount rate

24.

Which is a disadvantage of the payback method?

a)

Ignores liquidity

b)

Ignores cash flows after cutoff

c)

Ignores project cost

d)

Ignores accounting profit

e)

Ignores project risk

25.

Which is a strength of IRR?

a)

Provides a percentage return familiar to managers

b)

Always avoids multiple IRRs

c)

Always superior to NPV

d)

Ignores reinvestment assumptions

e)

Ignores project size

26.

Which project classification involves compliance with government regulation?

a)

Expansion

b)

Safety/environmental projects

c)

Replacement

d)

Cost reduction

e)

Strategic plan

27.

What is the main purpose of discounted payback?

a)

To provide liquidity measure

b)

To adjust payback for time value of money

c)

To maximize shareholder wealth

d)

To rank projects with same IRR

e)

To measure profitability index

28.

What happens if NPV < 0?

a)

Project increases shareholder wealth

b)

Project reduces shareholder wealth

c)

Project always accepted

d)

Project IRR > WACC

e)

Payback < cutoff

29.

Which of the following decision rules is most consistent with wealth maximization?

a)

NPV

b)

IRR

c)

Payback

d)

Discounted payback

e)

Profitability index

30.

When do NPV and IRR always agree?

a)

For mutually exclusive projects

b)

For independent projects with normal cash flows

c)

For projects with multiple IRRs

d)

For projects with negative NPV

e)

For projects with zero IRR

31.

The NPV profile intercept on Y-axis equals:

a)

Project's IRR

b)

Sum of undiscounted inflows

c)

Payback cutoff

d)

Cost of capital

e)

Present value of costs

32.

Which project ranking conflict occurs when?

a)

IRR > NPV

b)

Timing or scale differences

c)

IRR < WACC

d)

Payback > cutoff

e)

MIRR > NPV

33.

Which is an advantage of MIRR over IRR?

a)

MIRR always equals NPV

b)

MIRR avoids multiple IRRs

c)

MIRR requires no discounting

d)

MIRR ignores cost of capital

e)

MIRR ignores timing differences

34.

Which project measure is expressed in years?

a)

Payback

b)

IRR

c)

NPV

d)

MIRR

e)

Profitability index

35.

The profitability index is useful when:

a)

Capital is limited

b)

NPV is negative

c)

IRR > WACC

d)

Payback < cutoff

e)

Cash flows are uniform

36.

Which technique gives results in dollars rather than percentages?

a)

NPV

b)

IRR

c)

MIRR

d)

Payback

e)

Profitability index

37.

Which capital budgeting method was most popular historically but is less used now?

a)

Payback

b)

IRR

c)

NPV

d)

MIRR

e)

Profitability index

38.

What is a strategic business plan?

a)

A short-term budget

b)

A long-run plan outlining firm's strategy

c)

A project's IRR

d)

A financial forecast

e)

A dividend policy

39.

What is the main flaw of profitability index?

a)

Ignores time value of money

b)

Can conflict with NPV rankings

c)

Ignores project scale

d)

Ignores project cost

e)

Ignores project risk

40.

Which technique is best for mutually exclusive projects?

a)

NPV

b)

IRR

c)

MIRR

d)

Payback

e)

Accounting return

41.

Which capital budgeting method is most consistent with accounting EPS focus?

a)

Payback

b)

NPV

c)

IRR

d)

MIRR

e)

Profitability index

42.

Which of the following is part of the post-audit benefits?

a)

Improves forecasts and operations

b)

Increases IRR

c)

Reduces WACC

d)

Eliminates cash flow risk

e)

Eliminates need for NPV

43.

A project costs $1,000 and provides inflows of $500, $400, $300, and $100 over 4 years. If WACC = 10%, what is the NPV?

a)

$50.30

b)

$60.40

c)

$78.82

d)

$100

44.

A project costs $1,000 and provides inflows of $500, $400, $300, and $100 over 4 years. If WACC = 10%, what is the NPV?

a)

$50.30

b)

$60.40

c)

$78.82

d)

$100.00

e)

$120.00

45.

A project costs $1,000 and provides inflows of $100, $300, $400, and $675 over 4 years. If WACC = 10%, what is the NPV?

a)

$75.00

b)

$85.50

c)

$100.40

d)

$115.00

e)

$125.00

46.

A project costs $2,000 today and generates inflows of $900 in year 1, $800 in year 2, and $700 in year 3. If the WACC = 12%, what is the NPV?

a)

$200

b)

$215

c)

$225

d)

$240

e)

$260

47.

A project costs $700 and provides inflows of $500, $300, and $100 over 3 years. What is the IRR?

a)

12%

b)

15%

c)

18.0%

d)

20%

e)

25%

48.

A project costs $700 and provides inflows of $100, $300, and $600 over 3 years. What is the IRR?

a)

12%

b)

15.6%

c)

18%

d)

20%

e)

25%

49.

A project requires an investment of $1,500 and will generate inflows of $600 in year 1, $700 in year 2, and $800 in year 3. What is the IRR?

a)

10%

b)

12%

c)

14%

d)

16%

e)

18%

50.

An investment of $1,200 generates inflows of $400 annually. What is the payback period?

a)

2.5 years

b)

3.0 years

c)

3.5 years

d)

4.0 years

e)

5.0 years

51.

A project costs $1,000 and generates inflows of $500 in year 1, $400 in year 2, and $300 in year 3. What is the payback period?

a)

2 years

b)

2.33 years

c)

2.5 years

d)

3 years

e)

3.33 years

52.

A project costs $1,000 and generates $500 in year 1, $400 in year 2, and $300 in year 3. If WACC = 10%, what is the discounted payback period?

a)

2.2 years

b)

2.6 years

c)

2.8 years

d)

3.0 years

e)

3.5 years

53.

A project costs $1,000 and provides inflows of $100, $300, $400, and $675. What is the regular payback?

a)

2.5 years

b)

3.0 years

c)

3.3 years

d)

3.5 years

e)

4 years

54.

A project requires $50,000 in new equipment and an additional $5,000 investment in net working capital (NWC). At the end of the project, the equipment has zero salvage value and the full NWC is recovered. If annual inflows are $20,000 for 3 years and WACC = 10%, what is the NPV?

a)

$2,000

b)

$3,155

c)

$4,000

d)

$5,000

e)

$6,000

55.

A project costs $1,000 and generates $300 annually for 3 years plus $1,000 in year 4. At 15% WACC, what is NPV?

a)

$150

b)

$200

c)

$256.72

d)

$300

e)

$400

56.

(NPV vs IRR decision) Project A costs $1,000 and has IRR = 16%, NPV = $150. Project B costs $1,000 and has IRR = 20%, NPV = $120. If WACC = 12%, which project should be accepted?

a)

A only

b)

B only

c)

Both

d)

Neither

e)

Whichever pays back faster

57.

If project SS costs $10,000 and pays $16,500 after 1 year, what is IRR?

a)

60%

b)

65%

c)

70%

d)

75%

e)

80%

58.

If project LL costs $100,000 and pays $115,550 after 1 year, what is IRR?

a)

12%

b)

13%

c)

15.6%

d)

16%

e)

20%

59.

A project costs $1,600,000, pays $10,000,000 in year 1, and requires $10,000,000 restoration in year 2. How many IRRs exist?

a)

None

b)

One

c)

Two

d)

Three

e)

Infinite

60.

A project has cash flows: Year 0 = -1,000; Year 1 = 1,150; Year 2 = 100. At 10% WACC, what is NPV?

a)

$100

b)

$120

c)

$128.10

d)

$140

e)

$150

61.

A project costs $2,000 and generates inflows of $600 in year 1, $800 in year 2, $700 in year 3, and $500 in year 4. What is the payback period?

a)

2.0 years

b)

2.8 years

c)

3.0 years

d)

3.5 years

e)

4.0 years

62.

A firm has two projects: A (IRR = 20%, NPV = $9M, 1-year life), B (IRR = 30%, NPV = $50M, long life). Which should be chosen?

a)

Project A

b)

Project B

c)

Both

d)

Neither

e)

Whichever improves EPS first

63.

A firm has two projects X and Y, both cost $10,000. If WACC = 12% and crossover rate is 6.22%, which method is superior?

a)

IRR

b)

NPV

c)

Payback

d)

Accounting return

e)

Profitability index

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