Chapter 10 Test Bank - Static

A disadvantage of using the payback period to compare investment alternatives is that it a. Ignores cash flows beyond the payback period. b. Cannot be used to compare alternatives with different initial investments. c. Cannot be used when cash flows are not uniform. d. Involves the time value of money. e. Cannot be used if a company records depreciation.

The cash payback technique: a. considers cash flows over the life of a project. b. may be useful as an initial screening device. c. is superior to the net present value method. d. cannot be used with uneven cash flows.

Which one of the following could be considered as an advantage of using the payback method of investment appraisal? Select one: O A. Cash flows rising after the payback period is reached are ignored O B. It is easy to understand and simple to calculate O C. Does not take risk fully into account O D. Not related to wealth maximisation objective

If an investment project will positively affect the cash flows of other products the firm currently sells (increasing the flows), this is cannibalization and therefore should be counted in the investment project’s expected cash flows. tRUE OR FALSE

Mastery Problem: Cash Payback and Average Rate of Return (Basic) Companies use capital investment analysis to evaluate long-term investments. Capital investment evaluation methods that do not use present values are (1) Average rate of return method and (2) Cash payback method. Methods That Do Not Use Present Value One category of capital investment evaluation methods does not use present value. The primary difference between the category of methods that do use present value and this category is that this category _________ (does/does not) take the time value of money into account. The basic premise of the time value of money is that a dollar today is worth __________ (less than, more than, the same as) a dollar tomorrow. True or False: Considering the fact that most firms use methods from each category, it can be concluded that both categories have value. ________    Cash Payback Method This method identifies how long it will take (in years) to recover the __________ (initial…

If a firm must forgo a cash flow, not leasing an owned building for example, in order to accept some investment project, are the lost cash flows included in the analysis?

Explain how the NPV investment appraisal method can be applied in situations where capital is rationed. Discuss the reasons why capital rationing may arise  Discuss the meaning of the term “relevant cash flow” in the context of investment appraisal, giving examples to illustrate your discussion.

Why the payback method is often considered inferior to discounted cash flow in capital investment appraisal? Select one: a. It is more difficult to calculate b. It does not calculate how long it will take to recoup the money invested c. It only takes into account the future income of a project d. None of the option e. It does not take account of the time value of money

Which of the following statements is most CORRECT? A. Some projects with normal cash flows have multiple IRRs. B. The IRR method is flawed because it assumes reinvestment of the cash flows at the cost of capital. C. If two,mutually exclusive normal projects have the same size and life, MIRR and NPV may not agree as to which project will add the most value to the firm. D. The MIRR assumes that cash flows are reinvested at the project's k E Projects with nonnormal cash flows can have multiple MIRRs.

A. it is very A disadvantage of the average rate of return method of capital investment analysis is that complex to compute B. it does not include the entire amount of income earned over the life of a project C. it does not emphasize accounting income, which is often used by investors and creditors in evaluating management performance D. it does not directly consider the timing of the expected cash flows

The financial market offers the investors a means to sell their financial asset thereby a. Increasing the wealth of investor b. Offering liquidity to such assets c. Decreasing the wealth of investor d. Diluting the liquidity of such assets

Relevant cash inflows and outflows in a discounted cash flow analysis are the differences in expected future cash flows as a result of making the investment. The income taxes saved as a result of depreciation deductions are relevant because they decrease cash outflows, but the depreciation itself is a noncash item. True False: Relevant cash inflows and outflows in a discounted cash flow analysis are the differences in past cash flows that resulted from making previous investments. False: neither the income taxes saved as a result of depreciation deductions nor the depreciation itself is considered relevant both B and C none of the above

he difference between a firm’s future cash flows with a project and without the project is called Blank______ cash flows. Multiple choice question. investing discounted incremental operating

Adjusted present value technique is a technique that A) adjusts conventional present value for nonconstant cash inflows B) suggests separating tax savings from interest in the cash flows within the valuation process C) is used to value a project for a multinational corporation D) simply adjusts the conventional present value for nominal interest

Which of the following statements concerning the payback period, is not true? a. The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment.incorrect b. the payback period involves a simple method c. the payback period takes into account the time value of money d. the payback period ignores cash flows

Under-capitalization of a business entity causes: Select one from the following options. a situation when long-term assets are financed from short term financial resources. a situation when the respective business entity is spending more capital than it is able to gain. a situation when current assets are financed from long-term capital. a situation when long-term assets are financed from short term receivables. The minimum selling price in the short run can be set at the level of: Select one from the following options. variable cost total cost fixed cost O total cost and profit

Identify the incorrect statement in connection to working capital management:       A. Conservative financing policies use short-term funds to finance only part of fluctuating current assets.         B. Long-term funds are more expensive and more risky than short-term funds .           C. The objectives of working capital management are profitability and liquidity.           D. Permanent current assets should be financed from long-term sources if a moderate policy is adopted.

Which of the following statements is true? O The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. O The internal rate of return method assumes that the cash flows generated by a project are reinvested at a rate of return that equals the company's cost of capital. O The profitability index and the internal rate of return will always result in the same preference ranking for investment projects. O In calculating the profitability index, the initial investment in the project should be reduced by any proceeds from the sale of old equipment. O None of the above statements is true.

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's NPV increases as the cost of capital declines. b. A project's MIRR is unaffected by changes in the cost of capital. c. A project's regular payback increases as the cost of capital declines. d. A project's discounted payback increases as the cost of capital declines. e. A project's IRR increases as the cost of capital declines.

Which of the following statements are true regarding the payback period of an investment? It does not account for the time value of money No objective criteria exists for what is an acceptable payback period Cash flows occurring after the payback period have no impact on the payback computation All of the above

A project is rejected under the net present value method when: a. The percentage return is greater than a predetermined minimum percentage b. Total net cash inflows exceed the purchase price of the asset c. The acquisition cost the asset is greater than than the present value of net cash inflows d. The present value of net cash inflows exceeds a predetermined minimum amount

A disadvantage of using the payback period to compare investmentalternatives is that it;

The capital investment is one that Select one: a. applies only to investment in fixed assets b. is only undertaken by large corporations c. has the prospect of long-term benefits d. None of the option e. has the prospect of short-term benefits

Which of the following statements is true about the internal rate of return?   a. It is the interest rate that sets a project's net present value at zero.   b. It is the minimal acceptable interest rate on an investment.   c. It is the difference between the present value of the cash inflows and outflows associated with a project.   d. It is the difference between the present value of a cash outflow and the depreciation associated with an asset.

Which of the following statements is true? I. In the payback method, depreciation is added back to net operating income when computing the annual net cash flow. II. When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. III. A shorter payback period does not necessarily mean that one investment is more desirable than another. Only statement III is true. O All of the statements are true. None of the statements are true. Only statement I is true.

In the aggressive approach to current asset financing, a. fixed assets and permanent current assets of a firm are financed with short-term nonspontaneous sources of funds b.all of the fixed assets and permanent current assets are financed with long-term sources of funds c.fixed assets of a firm are financed with long-term capital, but some of the firm's permanent current assets are financed with short-term sources of funds. d.fixed assets of a firm are financed with short-term nonspontaneous sources of funds, but some of the firm's permanent current assets are financed with long-term capital

What are the reinvestment rate assumptions for the NPV and the IRR? A.IRR: Risk Free Rate NPV: WACC B.IRR: The IRR itself NPV: WACC C.The cash flows generated by the project are not assumed to be reinvested. So they will not earn a rate of return. D.IRR: Risk free rate NPV: Risk free Rate E. IRR:WACC NPV: WACC