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Basics_in_Finance_9_Questions_Homework_WarmUps_Solutions

# Basics_in_Finance_9_Questions_Homework_WarmUps_Solutions -...

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Questions related to Chapter 9 International Management Programme – Basics in Finance – Prof. Dr. Marcus Labbé School of Business ± True/False Questions 4. 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. True 10. 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. True 14. 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. False 17. The IRR is the compound annual rate of return that the firm will earn if it invests in the project and receives the given cash inflows. True

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Questions related to Chapter 9 International Management Programme – Basics in Finance – Prof. Dr. Marcus Labbé School of Business 18. An internal rate of return greater than the cost of capital guarantees that the firm earns at least its required return. Such an outcome should enhance the market value of the firm and therefore the wealth of its owners. True 22. On a purely theoretical basis, NPV is the 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. True 24. Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have zero or more than one IRR; this problem does not occur with the NPV approach. True 25. 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. True 28. In general, the greater the difference between the magnitude and timing of cash inflows, the greater the likelihood of conflicting ranking between NPV and IRR. True
Questions related to Chapter 9 International Management Programme – Basics in Finance – Prof. Dr. Marcus Labbé School of Business 30. 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 inflows—cash inflows received prior to the termination of a project. True 32. If the payback period is less than the maximum acceptable payback period, we would reject a project. False 37. 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 0.333 years. False

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