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1)If investment A has a payback period of three years and investment B has a payback period of four years, then A is more profitable than B

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1)If investment A has a payback period of three years and investment B has a payback period of four years, then

1. 1. A is more profitable than B.
   2. A is less profitable than B.
   3. A and B are equally profitable.
   4. the relative profitability of A and B cannot be determined from the information given.
2. The payback period is the
   1. length of time over which the investment will provide cash inflows.
   2. length of time over which the initial investment is recovered.
   3. shortest length of time over which an investment may be depreciated.
   4. shortest length of time over which the net present value will be positive.
3. Which of the following capital budgeting techniques has been criticized because it fails to consider investment profitability?
   1. payback method
   2. accounting rate of return
   3. net present value method
   4. internal rate of return
4. The time value of money is explicitly recognized through the process of
   1. interpolating.
   2. discounting.
   3. annuitizing.
   4. budgeting.
5. The time value of money is considered in long-range investment decisions by
   1. assuming equal annual cash flow patterns.
   2. investing only in short-term projects.
   3. assigning greater value to more immediate cash flows.
   4. ignoring depreciation and tax implications of the investment.
6. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important?
   1. method of financing the project under consideration
   2. timing of cash flows relating to the project
   3. impact of the project on income taxes to be paid
   4. amounts of cash flows relating to the project
7. As to a capital investment, net cash inflow is equal to the
   1. cost savings resulting from the investment.
   2. sum of all future revenues from the investment.
   3. net increase in cash receipts over cash payments.
   4. net increase in cash payments over cash receipts.
8. In a discounted cash flow analysis, which of the following would not be consistent with adjusting a project’s cash flows to account for higher-than-normal risk?

      a.   increasing the expected amount for cash outflows

b. increasing the discounting period for expected cash inflows

3. increasing the discount rate for cash outflows

d. decreasing the amount for expected cash inflows

9. The pre-tax cost of capital is higher than the after-tax cost of capital because
   1. interest expense is deductible for tax purposes.
   2. principal payments on debt are deductible for tax purposes.
   3. the cost of capital is a deductible expense for tax purposes.
   4. dividend payments to stockholders are deductible for tax purposes.
10. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the
    1. pre-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
    2. pre-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
    3. after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
    4. after-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
11. The combined weighted average interest rate that a firm incurs on its long-term debt, preferred stock, and common stock is the
    1. cost of capital.
    2. discount rate.
    3. cutoff rate.
    4. internal rate of return.
12. The weighted average cost of capital that is used to evaluate a specific project should be based on the
    1. mix of capital components that was used to finance a project from last year.
    2. overall capital structure of the corporation.
    3. cost of capital for other corporations with similar investments.
    4. mix of capital components for all capital acquired in the most recent fiscal year.
13. Debt in the capital structure could be treated as if it were common equity in computing the weighted average cost of capital if the debt were
    1. callable.
    2. participating.
    3. cumulative.
    4. convertible.
14. The weighted average cost of capital approach to decision making is not directly affected by the
    1. value of the common stock.
    2. current budget for capital expansion.
    3. cost of debt outstanding.
    4. proposed mix of debt, equity, and existing funds used to implement the project.
15. The ___________________ is the highest rate of return that can be earned from the most attractive, alternative capital project available to the firm.

      a.   accounting rate of return

b.internal rate of return

3. hurdle rate

d. opportunity cost of capital

16. If an analyst desires a conservative net present value estimate, she will assume that all cash inflows occur at
    1. mid year.
    2. the beginning of the year.
    3. year end.
    4. irregular intervals.
17. The salvage value of an old lathe is zero. If instead, the salvage value of the old lathe was $20,000, what would be the impact on the net present value of the proposal to purchase a new lathe?
    1. It would increase the net present value of the proposal.
    2. It would decrease the net present value of the proposal.
    3. It would not affect the net present value of the proposal.
    4. Potentially it could increase or decrease the net present value of the new lathe.
18. The net present value method of evaluating proposed investments
    1. measures a project’s internal rate of return.
    2. ignores cash flows beyond the payback period.
    3. applies only to mutually exclusive investment proposals.
    4. discounts cash flows at a minimum desired rate of return.
19. Which of the following statements is true regarding capital budgeting methods?
    1. The Fisher rate can never exceed a company’s cost of capital.
    2. The internal rate of return measure used for capital project evaluation has more conservative assumptions than the net present value method, especially for projects that generate a positive net present value.
    3. The net present value method of project evaluation will always provide the same ranking of projects as the profitability index method.
    4. The net present value method assumes that all cash inflows can be reinvested at the project’s cost of capital.
20. A company is evaluating three possible investments. Information relating to the company and the investments follow:
    1. 1. 1. 1. Fisher rate for the three projects       7 %
             2. Cost of capital 8 %

Based on this information, we know that

                 a.    all three projects are acceptable.

20. 2. none of the projects are acceptable.
    3. the capital budgeting evaluation techniques profitability index, net present value, and internal rate of return will provide a consistent ranking of the projects.
    4. the net present value method will provide a ranking of the projects that is superior to the ranking obtained using the internal rate of return method.
21. If a project generates a net present value of zero, the profitability index for the project will
    1. equal zero.
    2. equal 1.
    3. equal -1.
    4. be undefined.
22. If the profitability index for a project exceeds 1, then the project’s
    1. net present value is positive.
    2. internal rate of return is less than the project’s discount rate.
    3. payback period is less than 5 years.
    4. accounting rate of return is greater than the project’s internal rate of return.
23. If a project’s profitability index is less than 1, the project’s
    1. discount rate is above its cost of capital.
    2. internal rate of return is less than zero.
    3. payback period is infinite.
    4. net present value is negative.
24. The profitability index is
    1. the ratio of net cash flows to the original investment.
    2. the ratio of the present value of cash flows to the original investment.
    3. a capital budgeting evaluation technique that doesn’t use discounted values.
    4. a mandatory technique when capital rationing is used.
25. Which method of evaluating capital projects assumes that cash inflows can be reinvested at the discount rate?
    1. internal rate of return
    2. payback period
    3. profitability index
    4. accounting rate of return
26. If the total cash inflows associated with a project exceed the total cash outflows associated with the project, the project’s
    1. net present value is greater than zero.
    2. internal rate of return is greater than zero.
    3. profitability index is greater than 1.
    4. payback period is acceptable.
27. The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they

      a.   are easier to implement.

                    b. consider the time value of money.

3. require less input.

d. reflect the effects of sensitivity analysis.

28. If an investment has a positive net present value, the
    1. internal rate of return is higher than the discount rate.
    2. discount rate is higher than the hurdle rate of return.
    3. internal rate of return is lower than the discount rate of return.
    4. hurdle rate of return is higher than the discount rate.
29. The rate of interest that produces a zero net present value when a project’s discounted cash operating advantage is netted against its discounted net investment is the

            a.   cost of capital.

2. discount rate.
3. cutoff rate.
4. internal rate of return.