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Exam 10: Capital-Budgeting Techniques and Practice

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Question 51

True/False

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The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

A) True
B) False

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Question 52

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When reviewing the net present profile for a project

A) the higher the discount rate,the higher the NPV.
B) the higher the discount rate,the higher the IRR.
C) the IRR will always be a point on the horizontal axis line where NPV = 0.
D) the IRR will always be a point on the horizontal axis equal to the required return.

E) A) and B)
F) A) and C)

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Question 53

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Arguments against using the net present value and internal rate of return methods include that

Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

Which of the following statements about the internal rate of return (IRR) is true?

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's profitability index?

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.

An infinite-life replacement chain allows projects of different lengths to be compared.

The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

The internal rate of return will equal the discount rate when the net present value equals zero.

Under what condition would you NOT accept a project that has a positive net present value?

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The net present value for Project B is

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments

Which of the following statements about the net present value is true?

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The profitability index for Project A is

Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?