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Theories - Capital Budgeting - Answers

The document outlines key concepts in financial modeling and capital budgeting, including definitions, processes, and techniques for evaluating long-term investments. It discusses the importance of net present value, internal rate of return, and the implications of cash flow patterns. Additionally, it highlights the significance of understanding risk and the cost of capital in investment decisions.

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Benicel Lane M. D. V.
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19 views2 pages

Theories - Capital Budgeting - Answers

The document outlines key concepts in financial modeling and capital budgeting, including definitions, processes, and techniques for evaluating long-term investments. It discusses the importance of net present value, internal rate of return, and the implications of cash flow patterns. Additionally, it highlights the significance of understanding risk and the cost of capital in investment decisions.

Uploaded by

Benicel Lane M. D. V.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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New Era University D.

the chance that the internal rate of return will exceed


College of Accountancy the cost of capital.
Financial Modelling
10. Unsophisticated capital budgeting techniques do not
A. examine the size of the initial outlay.
Name:________________________ Block:________ Date:________ B. use net profits as a measure of return.
C. explicitly consider the time value of money.
I. Theories D. take into account an unconventional cash flow pattern.
1. ________ is the process of evaluating and selecting long-
term investments consistent with the firm’s goal of owner 11. Which of the following is taken into account by the net-
wealth maximization. present-value method?
A. Recapitalizing assets C. Ratio analysis A Project's Cash Time
Immediate Flows Value
B. Capital budgeting D. Restructuring debt
Cash Flows During a of
Project's Money
2. Capital-budgeting decisions primarily involve: Life
A. emergency situations. A. Yes No No
B. long-term decisions. B. Yes Yes No
C. short-term planning situations. C. Yes Yes Yes
D. cash inflows and outflows in the current year. D. No Yes Yes
E. planning for the acquisition of capital. E. No Yes No

3. The first step in the capital budgeting process is 12. Consider the following factors related to an investment:
A. review and analysis. C. decision-making. I. The net income from the investment.
B. implementation. D. proposal generation. II. The cash flows from the investment.
III. The timing of the cash flows from the investment.
4. The final step in the capital budgeting process is
Which of the preceding factors would be important
A. implementation. C. re-evaluation. considerations in a net-present-value analysis?
B. follow-up monitoring. D. education A. I only C. I and II.
B. II only. D. II and III.
5. ________ projects do not compete with each other; the
acceptance of one _________ the others from 13. A firm would accept a project with a net present value of
consideration. zero because
A. Capital; eliminates A. the project would maintain the wealth of the firm’s
B. Independent; does not eliminate owners.
B. the project would enhance the wealth of the firm’s
C. Mutually exclusive; eliminates
owners.
D. Replacement; does not eliminate C. the return on the project would be positive.
D. the return on the project would be zero.
6. ________ projects have the same function; the acceptance
of one _________ the others from consideration. 14. The _________ is a weighted average of the cost of funds
A. Capital; eliminates which reflects the interrelationship of financing decisions.
B. Independent; does not eliminate A. risk premium C. cost of capital
C. Mutually exclusive; eliminates B. nominal cost D. internal rate of return
D. Replacement; does not eliminate
15. The cost of capital reflects the cost of funds
7. A conventional cash flow pattern associated with capital A. over a short-run time period.
investment projects consists of an initial B. at a given point in time.
A. outflow followed by a broken cash series. C. over a long-run time period.
B. inflow followed by a broken series. D. at current book values.
C. outflow followed by a series of inflows.
D. inflow followed by a series of outflows. 16. The minimum return that must be earned on a project in
order to leave the firm’s value unchanged is
8. Initial cash flows and subsequent operating cash flows for a A. the internal rate of return.
project are sometimes referred to as B. the interest rate.
A. necessary cash flows. C. consistent cash flows. C. the discount rate.
B. relevant cash flows. D. ordinary cash flows. D. the compound rate.

9. In the context of capital budgeting, risk refers to 17. In a net-present-value analysis, the discount rate is often
A. the degree of variability of the cash inflows. called the:
B. the degree of variability of the initial investment. A. payback rate. C. minimal value.
C. the chance that the net present value will be greater B. hurdle rate. D. internal rate of return
than zero.
18. The internal rate of return:
A. ignores the time value of money.
B. equates a project's cash inflows with its cash outflows.
C. equates a project's cash outflows with its expenses.
D. equates the present value of a project's cash inflows
with the present value of the cash outflows.
E. equates the present value of a project's cash flows with
the future value of the project's cash flows.

19. The internal rate of return on an asset can be calculated:


A. if the return is greater than the hurdle rate.
B. if the asset's cash flows are identical to the future value
of a series of cash flows.
C. if the future value of a series of cash flows can be
arrived at by the annuity accumulation factor.
D. by finding a discount rate that yields a zero net present
value.
E. by finding a discount rate that yields a positive net
present value.

20. Which of the following statements is most correct?


A. If a project’s internal rate of return (IRR) exceeds the
cost of capital, then the project’s net present value
(NPV) must be positive.
B. If Project A has a higher IRR than Project B, then Project
A must also have a higher NPV.
C. The IRR calculation implicitly assumes that all cash
flows are reinvested at a rate of return equal to the cost
of capital.
D. Statements a and c are correct.
E. None of the statements above is correct.

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