IFM10 Ch 12 Test Bank

# IFM10 Ch 12 Test Bank - CHAPTER 12 CAPITAL BUDGETING...

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CHAPTER 12 CAPITAL BUDGETING: DECISION CRITERIA (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (12.2) PV of cash flows Answer: b Diff: E 1 . Because present value refers to the value of cash flows that occur at different points in time, present values cannot be added to determine the value of a capital budgeting project. a. True b. False (12.2) NPV Answer: b Diff: E 2 . Assuming that the total cash flows are equal, the NPV of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the NPV of a project whose cash flows come in more slowly. a. True b. False (12.3) IRR Answer: a Diff: E 3 . The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the present value of the cash inflows. a. True b. False (12.3) IRR Answer: a Diff: E 4 . Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life. a. True b. False (12.3) IRR Answer: b Diff: E 5 . Other things held constant, an increase in the cost of capital discount rate will result in a decrease in a project's IRR. a. True b. False Chapter 12: Capital Budgeting: Decision Criteria Page 1

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Answer: b Diff: E 6 . If a project's NPV exceeds the project's IRR, then the project should be accepted. a. True b. False (12.4) Ranking methods Answer: b Diff: E 7 . Given two mutually exclusive projects and a zero cost of capital, the payback method and NPV method of selecting investments will always lead to the same decision on which project to undertake. a. True b. False (12.4) Mutually exclusive projects Answer: a Diff: E 8 . Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV. a. True b. False (12.5) Multiple IRRs Answer: b Diff: E 9 . The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects which have different lives are being compared. a. True b. False (12.6) Modified IRR Answer: b Diff: E 10 . The modified IRR (MIRR) method has wide appeal to professors, but most business executives prefer the NPV method to either the regular or modified IRR. a. True b. False (12.6) Modified IRR Answer: b Diff: E 11 . The modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method. a. True b. False (12.6) Reinvestment rate assumption Answer: a Diff: E 12 . The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This makes the NPV method preferable to the IRR method. a. True
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IFM10 Ch 12 Test Bank - CHAPTER 12 CAPITAL BUDGETING...

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