If a firm can undertake only some of the value-adding projects available to it because of limited funds, the firm must engage in...
capital rationing
The _______ capital budgeting technique is the most appropriate one to use.
net present value
Which rate should be used to calculate a project's net present value?
cost of capital
A weakness of the accounting rate of return technique is it
does not distinguish between revenue and cash flows
If a project's IRR exceeds its _____, the project should be _____.
cost of capital; accepted
All of the following represent examples of key reasons for making capital expenditures except
floating a corporate bond issue.
Which one of the following is not an advantage of the NPV method of analyzing capital projects?
It provides a direct (dollar) measure of how much a capital project will increase or decrease the value of a firm by.
One of the main reasons why the discounted payback period is not widely used by managers is that
it ignores all cash flows that occur after the arbitrary cutoff period.
The NPV and IRR methods will always agree when you are evaluating __________ projects and the project's cash flows are _________________.
independent projects; conventional.
Which one of the following is not a key disadvantage of the IRR method?
The IRR is not based on a discounted cash flow technique.
Which of the following is NOT true about capital budgeting.
The large capital investments can be reversed at any time.
Which of the following are aspects of independent projects?
Their cash flows are unrelated.
Two projects are considered to be independent if...
selecting one would have no bearing on accepting the other / their cash flows are unrelated
Two projects are considered to be mutually exclusive if...
projects perform the same function / selecting one would automatically eliminate accepting the other
A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. The firm's decision will be to...
accept both projects because they are independent projects.
A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. If both projects are positive-NPV projects, then the firm should
accept both projects because they are independent projects.
Which one of the following statements is NOT true?
Accepting a negative-NPV project has no impact on shareholder wealth.
Which ONE of the following statements about the payback method is true?
There is no economic rational that links the payback method to shareholder wealth maximization.
The internal rate of return is...
the discount rate that makes the NPV equal to zero.
When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if...
Both a and b.
In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if...
cash flow pattern is unconventional / projects are mutually exclusive