Question 1

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Accepted Answer

A)   It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV) .
B)   It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV) .
C)   The firm will accept too many projects in all economic states because a 4-year payback is too low.
D)   The firm will accept too few projects in all economic states because a 4-year payback is too high.
E)   If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.F) C) and D)
G) B) and D)

Question 2

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Accepted Answer

A)   A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV) , then discounting the TV at the IRR to find its PV.
B)   The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
C)   If a project's NPV is greater than zero, then its IRR must be less than the WACC.
D)   If a project's NPV is greater than zero, then its IRR must be less than zero.
E)   The NPVs of relatively risky projects should be found using relatively low WACCs.F) A) and B)
G) A) and E)

Question 4

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

A) True 
 B)False

Question 5

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Accepted Answer

A) True 
 B)False

Exam 11: The Basics of Capital Budgeting

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Correct Answer
verified

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Correct Answer
verified

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct Answer
verified

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Correct Answer
verified

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Correct Answer
verified

Exam 11: The Basics of Capital Budgeting

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

Correct AnswerverifiedShow Answer

The NPV method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.

Correct AnswerverifiedShow Answer

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?

Correct AnswerverifiedShow Answer

In theory, capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital. The decision criterion should not be affected by managers' tastes, choice of accounting method, or the profitability of other independent projects.

Correct AnswerverifiedShow Answer

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital, the payback method and NPV method would always lead to the same decision on which project to undertake.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified