ch13 - Chapter 13 Evaluating Business Investments...

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Chapter 13 Evaluating Business Investments TRUE-FALSE QUESTIONS T 1. Capital budgeting is the process of identifying, evaluating, and implementing a firm’s investment opportunities. F 2. The typical capital budgeting project involves a large up-front cash outlay, followed by a series of smaller net cash outflows. F 3. A capital budgeting project’s cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts. F 4. Capital budgeting decisions can only involve mutually exclusive projects. T 5. The net present value of an investment is the present value of a project’s cash flows minus its cost. F 6. The majority of capital budgeting projects are short-lived projects. T 7. Information generation develops three types of data: internal financial data, external economic and political data, and non-financial data. F 8. The profitability index is the least preferable method to use to evaluate capital budgeting projects because it does not take the time value of money into account. T 9. To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values. T 10. The internal rate of return is the return that caused the net present value to be zero. T 11. The net present value and internal rate of return methods will always agree on whether a project enhances or harms shareholder wealth. F 12. The profitability index is the ratio between the some of the cash flows and the projects’ cost.
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T 13. Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0. F 14. The net present value, internal rate of return and payback period methods always agree on which project would enhance shareholder wealth and which would diminish it. T 15. Independent projects are not in direct competition with one another. T 16. The identification stage in capital budgeting involves finding potential capital investment opportunities and identifying whether a project involves a replacement decision and/or revenue expansion. T 17. The selection stage involves applying the appropriate capital budgeting techniques to help make a final decision. F 18. A higher-risk project needs to be evaluated using a lower required rate of return. T 19. One weakness of the payback period method is that all cash flows beyond the payback period are ignored. T 20. Projects with negative net present values will lead to a decrease in the value of the firm. F 21. The internal rate of return measures the return on the funds originally invested in the project. F 22. The profitability index is calculated by subtracting the net investment from the present value of the cash flows. T
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This note was uploaded on 11/01/2011 for the course ACC 200 taught by Professor Minliu during the Spring '11 term at Universidad Europea de Madrid.

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ch13 - Chapter 13 Evaluating Business Investments...

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