The __________ model is usually considered the best of the capital budgeting decision-making models. A. Internal Rate of Return (IRR) B. Net Present Value (NPV) C. Profitability Index (PI) D. Discounted Payback Period The capital budgeting decision model that utilizes all the discounted cash flow of a project is the __________ model, which is one of the single most important models in finance. A. Net Present Value (NPV) B. Internal Rate of Return (IRR) C. Profitability Index (PI) D. Discounted Payback Period In terms of revenues and costs for a project, which of the statements below is FALSE? A. Projected revenues and costs are estimates of future activity. B. Estimates of revenues and costs begin with operating cash flow of the project. C. Projected revenues and costs form the basis of the potential for a project's acceptance or rejection. D. Estimates of revenues and costs begin with sales forecasts and the production costs associated with the sales forecast Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting? A. multiple IRRs B. disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not. C. the incorporation of the IRR as the reinvestment rate for the future cash flows D. the comparison of mutually exclusive projects The most popular alternative to NPV for capital budgeting decisions is the __________ method. A. Internal Rate of Return (IRR) B. Payback Period C. Discounted Payback Period D. Profitability Index (PI) Find the Modified Internal Rate of Return (MIRR. for the following annual series of cash flows, given a discount rate of 10.50%: Year 0: -$75,000; Year 1: $15,000; Year 2: $16,000; Year 3: $17,000; Year 4: $17,500; and, Year 5: $18,000. A. about 6.35% B. about 6.88% C. about 7.35% D. about 7.88% Without a computer and special calculator, __________. A. computing the payback period is much more difficult than computing the IRR B. finding the IRR will typically be a very easy process C. finding the IRR may be a very tedious process only if the NPV is negative D. finding the IRR may be a very tedious process since it is an iterative proces __________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project. A. Future B. Current C. Discounted D. Incremental In the NPV Model, all cash flows are stated __________ . A. in future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative B. in present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative C. in present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative D. in future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive Consider the following 10-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years one through 10 are $200,000 per year. What is the payback period without discounting cash flows? A. 10 years B. 5 years C. 2.5 years D. 0.5 years __________ of a project are those that have already been incurred and cannot be reversed. A. Erosion costs B. Opportunity costs C. Sunk costs D. Working capital costs Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. Which project should be preferred if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)? A. We should prefer Project B since it has a higher PI. B. We should compute the EAA before we make any decision. C. We should prefer Project A since it has a higher NPV. D. We should prefer Project B if it has a higher IRR Berra, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years one through eight are the same at $30,000. Berra has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Berra wants to compute the profitability index (PI) for each project. What is the PI for Berra's current project? A. about 1.29 B. about 1.31 C. about 1.33 D. about 1.39 __________is at the heart of corporate finance because it is concerned with making the best choices about project selection. A. Capital budgeting B. Capital structure C. Payback period D. Short-term budgeting Which of the statements below is FALSE? A. We calculate the equivalent annual annuity by taking the NPV of the project and find the annuity stream that equates to the NPV, using the appropriate discount rate for the project and life of the project. B. In dealing with mutually exclusive projects of unequal lives, we can compute the EAA for the NPV of the project over the life of the project. C. One of the advantages of NPV over other decision models is that we can select the appropriate discount rate for each individual project and still compare the resulting NPVs across different projects. D. By using the EAA approach for mutually exclusive projects, we overcome all potential problems Managers typically look at the initial outlay for the project as its capital expenditure and determine __________ from this capital expenditure. A. interest expenses B. dividends C. depreciation D. CEO expenses __________ corrects for most, but not all, of the problems of IRR and gives the solution in terms of a return. A. Profitability Index B. Discounted Payback Period C. Net Present Value D. MIRR The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals __________ . A. the future value of the present cash outflows B. the present value of the future benefits or cash inflows C. the present value of the cash outflow D. the investment The __________Model provides a single measure (return. but must apply risk outside the model, thus allowing for errors in rankings of projects. A. Payback Period B. Internal Rate of Return (IRR) C. Net Present Value (NPV) D. Profitability Index (PI) In regard to the NPV method, which of the statements below is TRUE? A. In the NPV Model, if two projects are being compared, the one with the highest IRR is selected. B. In the NPV Model, the present cash flows are discounted at the rate r, the cost of capital. C. In the NPV Model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative. D. In the NPV Model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project  |
