chapter10 test bank in manegerial finance

Principles of Managerial Finance, 13e, Global Edition (Gitman)Chapter 10 Capital Budgeting Techniques

10.1 Understand the key elements of the capital budgeting process.

1) In capital budgeting, the preferred approaches in assessing whether a project is acceptable are those that integrate time value procedures, risk and return considerations, and valuation concepts.Answer: TRUETopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

2) In capital budgeting, the preferred approaches in assessing whether a project is acceptable integrate time value procedures, risk and return considerations, valuation concepts, and the required payback period.Answer: FALSETopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

3) Capital budgeting techniques are used to evaluate the firm's fixed asset investments which provide the basis for the firm's earning power and value.Answer: TRUETopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

4) The purchase of additional physical facilities, such as additional property or a new factory, is an example of a capital expenditure.Answer: TRUETopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) Capital budgeting is the process of evaluating and selecting short-term investments consistent with the firm's goal of owner wealth maximization.Answer: FALSETopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure that would appear as a current asset on the firm's balance sheet.Answer: FALSETopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

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7) A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce benefits over a period of time less than one year.Answer: FALSETopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

8) An outlay for advertising and management consulting is considered to be a fixed asset expenditure.Answer: FALSETopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

9) Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall objectives and plans, and to evaluate their economic validity.Answer: TRUETopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

10) The basic motives for capital expenditures are to expand, replace, or renew fixed assets or to obtain some other, less tangible benefit over a long period.Answer: TRUETopic: Motives for Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

11) The primary motive for capital expenditures is to refurbish fixed assets.Answer: FALSETopic: Motives for Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

12) Research and development is considered to be a motive for making capital expenditures.Answer: TRUETopic: Motives for Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

13) The capital budgeting process consists of five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.Answer: TRUETopic: Steps in Capital Budgeting ProcessQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


14) The capital budgeting process consists of four distinct but interrelated steps: proposal generation, review and analysis, decision making, and termination.Answer: FALSETopic: Steps in Capital Budgeting ProcessQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

15) Independent projects are projects that compete with one another for the firm's resources, so that the acceptance of one eliminates the others from further consideration.Answer: FALSETopic: Independent ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

16) A non-conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by a series of inflows.Answer: FALSETopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

17) If a firm has unlimited funds to invest in capital assets, all independent projects that meet its minimum investment criteria should be implemented.Answer: TRUETopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

18) The following three projects would seem to compete with one another form the firm's resources and therefore would be examples of mutually exclusive projects.(1) installing air conditioning in the plant(2) acquiring a small supplier(3) purchasing a new computer systemAnswer: FALSETopic: Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

19) If a firm has unlimited funds to invest, all the mutually exclusive projects that meet its minimum investment criteria can be implemented. Answer: FALSETopic: Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


20) Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.Answer: FALSETopic: Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

21) To increase its production capacity, a firm is considering: 1) to expand its plant, 2) to acquire another company, or 3) to contract with another company for production. These three projects would appear to be good examples of independent projects.Answer: FALSETopic: Independent ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

22) Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate any others from further consideration.Answer: TRUETopic: Independent versus Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

23) Mutually exclusive projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate any others from further consideration.Answer: FALSETopic: Independent versus Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

24) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one does not eliminate any others from further consideration.Answer: FALSETopic: Independent versus Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

25) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates others from further consideration.Answer: TRUETopic: Independent versus Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


26) If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.Answer: FALSETopic: Capital RationingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

27) If a firm has unlimited funds, it is able to accept all independent projects that provide an acceptable return.Answer: TRUETopic: Capital RationingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

28) If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars.Answer: TRUETopic: Capital RationingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

29) The ranking approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.Answer: TRUETopic: Accept-Reject versus Ranking ApproachesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

30) The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.Answer: FALSETopic: Accept-Reject versus Ranking ApproachesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

31) A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.Answer: TRUETopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

32) A nonconventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.Answer: FALSETopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


33) A nonconventional cash flow pattern is one in which an initial outflow is followed by a series of both inflows and outflows.Answer: TRUETopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

34) ________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.A) Recapitalizing assetsB) Capital budgetingC) Ratio analysisD) Restructuring debtAnswer: BTopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

35) Fixed assets that provide the basis for the firm's profit and value are often calledA) tangible assets.B) non-current assets.C) earning assets.D) book assets.Answer: CTopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

36) The most common motive for adding fixed assets to the firm isA) expansion.B) replacement.C) renewal.D) transformation.Answer: ATopic: Motives for Capital Budgeting ExpendituresQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

37) The final step in the capital budgeting process isA) implementation.B) follow-up.C) re-evaluation.D) education.Answer: BTopic: Steps in Capital Budgeting ProcessQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


38) The first step in the capital budgeting process isA) review and analysis.B) implementation.C) decision-making.D) proposal generation.Answer: DTopic: Steps in Capital Budgeting ProcessQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

39) A $60,000 outlay for a new machine with a usable life of 15 years is calledA) capital expenditure.B) operating expenditure.C) replacement expenditure.D) none of the above.Answer: ATopic: Capital Budgeting TerminologyQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

40) A capital expenditure is all of the following EXCEPTA) an outlay made for the earning assets of the firm.B) expected to produce benefits over a period of time greater than one year.C) an outlay for current asset expansion.D) commonly used to expand the level of operations.Answer: CTopic: Concept of Capital BudgetingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

41) All of the following are motives for capital budgeting expenditures EXCEPTA) expansion.B) replacement.C) renewal.D) invention.Answer: DTopic: Motives for Capital Budgeting ExpendituresQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


42) All of the following are steps in the capital budgeting process EXCEPTA) implementation.B) follow-up.C) transformation.D) decision-making.Answer: CTopic: Steps in Capital Budgeting ProcessQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

43) ________ projects do not compete with each other; the acceptance of one ________ the others from consideration.A) Capital; eliminatesB) Independent; does not eliminateC) Mutually exclusive; eliminatesD) Replacement; does not eliminateAnswer: BTopic: Independent ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

44) ________ projects have the same function; the acceptance of one ________ the others from consideration.A) Capital; eliminatesB) Independent; does not eliminateC) Mutually exclusive; eliminatesD) Replacement; does not eliminateAnswer: CTopic: Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

45) A firm with limited dollars available for capital expenditures is subject toA) capital dependency.B) mutually exclusive projects.C) working capital constraints.D) capital rationing.Answer: DTopic: Capital RationingQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


46) A conventional cash flow pattern associated with capital investment projects consists of an initialA) outflow followed by a broken cash series.B) inflow followed by a broken series.C) outflow followed by a series of inflows.D) inflow followed by a series of outflows.Answer: CTopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

47) A non-conventional cash flow pattern associated with capital investment projects consists of an initialA) outflow followed by a series of both cash inflows and outflows.B) inflow followed by a series of both cash inflows and outflows.C) outflow followed by a series of inflows.D) inflow followed by a series of outflows.Answer: ATopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

48) ________ is a series of equal annual cash flows.A) A mixed streamB) A conventionalC) A non-conventionalD) An annuityAnswer: DTopic: Annuity Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

49) The cash flows of any project having a conventional pattern include all of the basic components EXCEPTA) initial investment.B) operating cash outflows.C) operating cash inflows.D) terminal cash flow.Answer: BTopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


50) Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are calledA) independent projects.B) mutually exclusive projects.C) replacement projects.D) none of the above.Answer: BTopic: Mutually Exclusive ProjectsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

51) The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criteria is calledA) the ranking approach.B) an independent investment.C) the accept-reject approach.D) a mutually exclusive investment.Answer: CTopic: Accept-Reject versus Ranking ApproachesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

52) Which pattern of cash flow stream is the most difficult to use when evaluating projects?A) Mixed stream.B) Conventional flow.C) Nonconventional flow.D) Annuity.Answer: CTopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


Table 10.1

53) The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.1)A) an annuity and conventional cash flowB) a mixed stream and non-conventional cash flowC) an annuity and non-conventional cash flowD) a mixed stream and conventional cash flowAnswer: ATopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

Table 10.2

54) The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2)A) an annuity and conventional cash flowB) a mixed stream and non-conventional cash flowC) an annuity and non-conventional cash flowD) a mixed stream and conventional cash flowAnswer: DTopic: Conventional versus Nonconventional Cash FlowsQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


10.2 Calculate, interpret, and evaluate the payback period.

1) In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

2) The payback period is the amount of time required for the firm to dispose of a replaced asset.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

3) The payback period is generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money by discounting cash flows to find present value.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

4) By measuring how quickly the firm recovers its initial investment, the payback period gives implicit (though not explicit) consideration to the timing of cash flows and therefore to the time value of money.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) One strength of payback period is that it fully accounts for the time value of money.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) One weakness of payback is its failure to recognize cash flows that occur after the payback period.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


7) A project must be rejected if its payback period is less than the maximum acceptable payback period.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

8) Since the payback period can be viewed as a measure of risk exposure, many firms use it as a supplement to sophisticated decision techniques.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

9) The major weakness of payback period in evaluating projects is that it cannot specify the appropriate payback period in light of the wealth maximization goal.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

10) If a project's payback period is less than the maximum acceptable payback period, we would reject it.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

11) Which of the following capital budgeting techniques ignores the time value of money?A) Payback.B) Net present value.C) Internal rate of return.D) Two of the above.Answer: ATopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

12) If a project's payback period is less than the maximum acceptable payback period, we would accept it.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


13) If a project's payback period is greater than the maximum acceptable payback period, we would reject it.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

14) If a project's payback period is greater than the maximum acceptable payback period, we would accept it.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

15) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 for the next three years is 3.33 years.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

16) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 each year for the next three years is 0.333 years.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

17) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $3,000 each year for the next three years is 0.333 years.Answer: TRUETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

18) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $3,000 each year for the next three years is 3.33 years.Answer: FALSETopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills


19) Examples of sophisticated capital budgeting techniques include all of the following EXCEPTA) internal rate of return.B) payback period.C) annualized net present value.D) net present value.Answer: BTopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

20) The ________ measures the amount of time it takes the firm to recover its initial investment.A) average rate of returnB) internal rate of returnC) net present valueD) payback periodAnswer: DTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

21) Unsophisticated capital budgeting techniques do notA) examine the size of the initial outlay.B) use net profits as a measure of return.C) explicitly consider the time value of money.D) take into account an unconventional cash flow pattern.Answer: CTopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

22) All of the following are weaknesses of the payback period EXCEPTA) a disregard for cash flows after the payback period.B) only an implicit consideration of the timing of cash flows.C) the difficulty of specifying the appropriate payback period.D) it uses cash flows, not accounting profits.Answer: DTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


23) Many firms use the payback method as a guideline in capital investment decisions. Reasons they do so include all of the following EXCEPTA) it gives an implicit consideration to the timing of cash flows.B) it recognizes cash flows which occur after the payback period.C) it is a measure of risk exposure.D) it is easy to calculate.Answer: BTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

24) Payback is considered an unsophisticated capital budgeting because itA) gives explicit consideration to the timing of cash flows and therefore the time value of money.B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate.C) gives explicit consideration to the timing of cash flows and therefore the time value of money.D) none of the above.Answer: DTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

25) Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, becauseA) it explicitly considers the time value of money.B) it can be viewed as a measure of risk exposure because of its focus on liquidity.C) the determination of the required payback period for a project is an objectively determined criteria.D) none of the above.Answer: BTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

26) A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project isA) 1 year.B) 2 years.C) between 1 and 2 years.D) between 2 and 3 years.Answer: DTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills


27) A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project isA) 1.5 years.B) 2 years.C) 3.3 years.D) 4 years.Answer: CTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

28) Which of the following statements is false?A) If the payback period is less than the maximum acceptable payback period, accept the project.B) If the payback period is greater than the maximum acceptable payback period, reject the project.C) If the payback period is less than the maximum acceptable payback period, reject the projectD) Two of the above.Answer: CTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

29) Which of the following statements is false?A) If the payback period is greater than the maximum acceptable payback period, accept the project.B) If the payback period is less than the maximum acceptable payback period, reject the project.C) If the payback period is greater than the maximum acceptable payback period, reject the project.D) Two of the above.Answer: DTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

30) What is the payback period for Tangshan Mining company's new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?A) 4.33 yearsB) 3.33 yearsC) 2.33 yearsD) None of the aboveAnswer: BTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills


31) Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?A) Yes.B) No.C) It depends.D) None of the above.Answer: ATopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

32) Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?A) Yes.B) No.C) It depends.D) None of the above.Answer: BTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills

33) Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Year Project A Project B0 -10,000 -10,0001 4,000 4,0002 4,000 3,0003 4,000 2,0004 0 1,000,000

A) Project A can be accepted because the payback period is 2.5 years but Project B can not be accepted because it's payback period is longer than 3 years.B) Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B.C) Project B should be accepted because you get more money paid back in the long run.D) Both projects can be accepted because the payback is less than 3 years.Answer: ATopic: Payback MethodQuestion Status: NewAACSB Guidelines: Analytic skills


10.3 Calculate, interpret, and evaluate the net present value (NPV) and economic value added (EVA).

1) Net present value is considered a sophisticated capital budgeting technique since it gives explicit consideration to the time value of money.Answer: TRUETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

2) The discount rate (which is also known as the required return, cost of capital, or opportunity cost) is the minimum return that must be earned on a project to leave the firm's market value unchanged.Answer: TRUETopic: Project Required ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

3) If net present value of a project is greater than zero, the firm will earn a return greater than its cost of capital. The acceptance of such a project would enhance the wealth of the firm's owners.Answer: TRUETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

4) The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital is called net present value.Answer: TRUETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital is called internal rate of return.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


7) If the NPV is greater than the cost of capital, a project should be accepted.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

8) If the NPV is greater than the initial investment, a project should be accepted.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

9) If the NPV is greater than $0.00, a project should be accepted.Answer: TRUETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

10) The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is $856.49.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

11) The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is $143.51.Answer: FALSETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

12) The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is -$143.51.Answer: TRUETopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills


13) Economic value added is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.Answer: TRUETopic: Economic Value AddedQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

14) The investment operating schedule is the difference between an investment's net operating profit after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the funds used to finance the investment by the firm's weighted average cost of capital.Answer: FALSETopic: Economic Value AddedQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

15) A firm is evaluating three capital projects. The net present values for the projects are as follows:

The firm shouldA) accept Projects 1 and 2 and reject Project 3.B) accept Projects 1 and 3 and reject Project 2.C) accept Project 1 and reject Projects 2 and 3.D) reject all projects.Answer: ATopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

16) Sophisticated capital budgeting techniques do notA) examine the size of the initial outlay.B) use net profits as a measure of return.C) explicitly consider the time value of money.D) take into account an unconventional cash flow pattern.Answer: BTopic: Capital Budgeting TechniquesQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


17) The minimum return that must be earned on a project in order to leave the firm's value unchanged isA) the internal rate of return.B) the interest rate.C) the cost of capital.D) the compound rate.Answer: CTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

18) A firm would accept a project with a net present value of zero becauseA) the project would maintain the wealth of the firm's owners.B) the project would enhance the wealth of the firm's owners.C) the return on the project would be positive.D) the return on the project would be zero.Answer: ATopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

19) A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.A) -$1,000B) $0C) $1,000D) $1.25Answer: ATopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

20) What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?A) $1,700,000B) $371,764C) ($137,053)D) None of the aboveAnswer: CTopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills


21) What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?A) $1,700,000B) $371,764C) $137,053D) None of the aboveAnswer: ATopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

22) What is the NPV for the following project if its cost of capital is 12 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4?A) $(1,494,336)B) $1,494,336C) $158,011D) Two of the aboveAnswer: ATopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

Table 10.1

23) Given the information in Table 10.1 and 15 percent cost of capital,(a) compute the net present value.(b) should the project be accepted?Answer: (a) NPV = (1,000/.15)x[1-1/(1.15)5] - 2,500

= 1,000 (3.352) - 2,500 = $852(b) Since NPV > 0, the project should be accepted.Topic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills


Table 10.2

24) Given the information in Table 10.2 and 15 percent cost of capital,(a) compute the net present value.(b) should the project be accepted?Answer: (a)

NPV = 98,820 - 100,000 = -$1,180 < 0(b) Since NPV < 0, the project should be rejected.Topic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

10.4 Calculate, interpret, and evaluate the internal rate of return (IRR).

1) The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.Answer: FALSETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

2) The IRR is the discount rate that equates the NPV of an investment opportunity with $0.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


3) The IRR is the compound annual rate of return that the firm will earn if it invests in a project and receives the estimated cash inflows.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

4) An internal rate of return greater than the cost of capital guarantees that the firm earns at least its required return. Investing in such an project would enhance the market value of the firm and therefore the wealth of its owners.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a projects inflows with the present value of its outflows is called net present value.Answer: FALSETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a projects inflows with the present value of its outflows is called internal rate of return.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

7) If its IRR is greater than $0.00, a project should be accepted.Answer: FALSETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

8) If its IRR is greater than 0 percent, a project should be accepted.Answer: FALSETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

9) If its IRR is greater than the cost of capital, a project should be accepted.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


10) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?A) 15.57%B) 0.00%C) 13.57%D) None of the aboveAnswer: CTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Analytic skills

11) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?A) 5.83%B) 9.67%C) 11.44%D) None of the aboveAnswer: ATopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Analytic skills

10.5 Use net present value profiles to compare NPV and IRR techniques.

1) For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision, but differences in their underlying assumptions can cause them to rank mutually exclusive projects differently.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

2) The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the required rate of returnAnswer: TRUETopic: Internal Rate of ReturnQuestion Status: NewAACSB Guidelines: Reflective thinking skills

3) A project's net present value profile is a graph that plots a project's NPV for various discount rates.Answer: TRUETopic: Net Present Value ProfileQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


4) A project's net present value profile is a graph that plots a project's IRR for various discount rates.Answer: FALSETopic: Net Present Value ProfileQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) Net present value profiles are most useful when selecting among independent projects.Answer: FALSETopic: Net Present Value ProfileQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) Net present value profiles are most useful when selecting among mutually exclusive projects.Answer: TRUETopic: Net Present Value ProfileQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

7) There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs whenA) the NPV is greater than the crossover point.B) the NPV is less than the crossover point.C) the cost of capital is to the right of the crossover point.D) the cost of capital is to the left of the crossover point.Answer: DTopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

8) Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?A) Project X.B) Project Y.C) Neither.D) Not enough information to tell.Answer: ATopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Analytic skills


9) Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?A) Project X.B) Project Y.C) Neither.D) Not enough information to tell.Answer: CTopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Analytic skills

10) Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and ($1,300,000) in year 4?(a) Calculate the project's NPV.(b) Calculate the project's IRR.(c) Should the firm make the investment?Answer:

No the firm should not accept the project.Topic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Analytic skills

10.6 Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach.

1) Conflicting rankings in the case of mutually exclusive projects using NPV and IRR often results from differences in the magnitude and/or timing of cash flows.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


2) Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost of capital and are therefore often acceptable at higher discount rates compared to projects with higher cash inflows that occur in the later years.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

3) On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because NPV implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

4) On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.Answer: FALSETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

5) Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have multiple IRRs; this problem does not occur with the NPV approach.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

6) Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

7) Since the cost of capital tends to be a reasonable estimate of the rate at which the firm could actually reinvest intermediate cash inflows, the use of NPV is in theory preferable to IRR.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


8) In general, projects with similar-sized investments and lower early-year cash inflows (lower cash inflows in the early years) tend to be preferred at higher discount rates.Answer: FALSETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

9) In general, the greater the difference between the magnitude and/or timing of cash inflows, the greater the likelihood of conflicting ranking between NPV and IRR.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

10) The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate equal to the firm's cost of capital.Answer: FALSETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

11) Although differences in the magnitude and timing of cash flows explain conflicting rankings under the NPV and IRR techniques, the underlying cause is the implicit assumption concerning the reinvestment of intermediate cash inflowscash inflows received prior to the termination of a project.Answer: TRUETopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

12) On a purely theoretical basis, NPV is a better approach when selecting among two mutually exclusive projects.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

13) On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.Answer: FALSETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


14) In spite of the theoretical superiority of NPV, financial managers prefer to use IRR.Answer: TRUETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

15) In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.Answer: FALSETopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

16) The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.A) payback periodB) average rate of returnC) cost of capitalD) internal rate of returnAnswer: DTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

17) The ________ is the compound annual rate of return that the firm will earn if it invests in the project and receives the given cash inflows.A) discount rateB) internal rate of returnC) opportunity costD) cost of capitalAnswer: BTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


18) A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows:

The firm shouldA) accept Project 2 and reject Projects 1 and 3.B) accept Projects 2 and 3 and reject Project 1.C) accept Project 1 and reject Projects 2 and 3.D) accept Project 3 and reject Projects 1 and 2.Answer: BTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Analytic skills

Table 10.3

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

19) If the firm in Table 10.3 has a required payback of two (2) years, it shouldA) accept projects A and B.B) accept project A and reject B.C) reject project A and accept B.D) reject both.Answer: BTopic: Payback MethodQuestion Status: RevisedAACSB Guidelines: Analytic skills


20) The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. His recommendation would be toA) accept projects A and B.B) accept project A and reject B.C) reject project A and accept B.D) reject both.Answer: CTopic: Net Present ValueQuestion Status: RevisedAACSB Guidelines: Analytic skills

Table 10.4

A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.

21) Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 10.4)A) 1, 2, 3, 4, and 5B) 1, 2, 3, and 5C) 2, 3, 4, and 6D) 1, 3, 4, and 6Answer: BTopic: IRR and Capital RationingQuestion Status: RevisedAACSB Guidelines: Analytic skills

22) Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4)A) 1, 2, 3, 4, and 5B) 1, 2, 3, 5, and 6C) 2, 3, 4, and 5D) 1, 3, 5, and 6Answer: DTopic: NPV and Capital RationingQuestion Status: RevisedAACSB Guidelines: Analytic skills


23) When the net present value is negative, the internal rate of return is ________ the cost of capital.A) greater thanB) greater than or equal toC) less thanD) equal toAnswer: CTopic: NPV and IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

24) A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm shouldA) accept both if the cost of capital is at most 15 percent.B) accept only Z if the cost of capital is at most 15 percent.C) accept only X if the cost of capital is at most 15 percent.D) none of the aboveAnswer: CTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Analytic skills

25) The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods isA) the reinvestment rate assumption regarding intermediate cash flows.B) that neither method explicitly considers the time value of money.C) the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of capital.D) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal rate of return.Answer: ATopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

26) On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all the following reasons EXCEPTA) that it measures the benefits relative to the amount invested.B) for the reasonableness of the reinvestment rate assumption.C) that there may be multiple solutions for an IRR computation.D) that it maximizes shareholder wealth.Answer: ATopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


27) Comparing net present value and internal rate of returnA) always results in the same ranking of projects.B) always results in the same accept/reject decision.C) may give different accept/reject decisions.D) is only necessary on mutually exclusive projects.Answer: BTopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

28) In comparing the internal rate of return and net present value methods of evaluation,A) internal rate of return is theoretically superior, but financial managers prefer net present value.B) net present value is theoretically superior, but financial managers prefer to use internal rate of return.C) financial managers prefer net present value, because it is presented as a rate of return.D) financial managers prefer net present value, because it measures benefits relative to the amount invested.Answer: BTopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

29) Unlike the net present value criteria, the internal rate of return approach assumes an interest rate equal toA) the relevant cost of capital.B) the project's internal rate of return.C) the project's opportunity cost.D) the market's interest rate.Answer: BTopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills

30) When evaluating projects using internal rate of return,A) projects having lower early-year cash flows tend to be preferred at higher discount rates.B) projects having higher early-year cash flows tend to be preferred at higher discount rates.C) projects having higher early-year cash flows tend to be preferred at lower discount rates.D) the discount rate and magnitude of cash flows do not affect internal rate of return.Answer: BTopic: Internal Rate of ReturnQuestion Status: RevisedAACSB Guidelines: Reflective thinking skills


31) Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?A) NPV.B) IRR.C) Payback.D) Two of the above.Answer: ATopic: NPV versus IRRQuestion Status: RevisedAACSB Guidelines: Analytic skills

Table 10.5

Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows.

32) Use the NPV approach to select the best group of projects. (See Table 10.5)Answer: Choose Projects C and D, since this combination maximizes NPV at $410,000 and only requires $8,000,000 initial investment.Topic: NPV and Capital RationingQuestion Status: RevisedAACSB Guidelines: Analytic skills

33) Use the IRR approach to select the best group of projects. (See Table 10.5)Answer: IRR Approach

Choose Projects B and C, resulting in a NPV of $380,000.Topic: IRR and Capital RationingQuestion Status: RevisedAACSB Guidelines: Analytic skills


34) Which projects should the firm implement? (See Table 10.5)Answer: Projects C and DTopic: NPV versus IRR and Capital RationingQuestion Status: RevisedAACSB Guidelines: Analytic skills

35) Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Sketch a net present value profile for each of these projects. Which project should the firm choose if the cost of capital is 10 percent? What if the cost of capital is 25 percent? Show all work.Answer:

At a cost of capital of 10 percent, the firm would choose Project X. At a cost of capital of 25 percent, the firm would choose neither.

Topic: Net Present Value ProfileQuestion Status: RevisedAACSB Guidelines: Analytic skills


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