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Unformatted text preview: Old Exam Questions - Capital Budgeting - Solutions Page 1 of 113 Pages Capital Budgeting - Solutions 1. Firms that are comprised of multiple divisions of differing degrees of risk, but which use a corporate-wide cost of capital to evaluate projects, are likely to reject good (positive NPV), high risk and high rate of return projects while accepting bad (negative NPV), low risk and low rate of return projects A. True * B. False 2. The sensitivity of an NPV profile, at least in part, is a function of the timing of the cash flows. * A. True B. False 3. The NPV of a project will increase as the cost of capital decreases, even for projects with complex cash flows (multiple changes in sign). A. True * B. False 4. Simulation analysis is a computerized version of scenario analysis that, instead of using finite states of nature (or future states of the world/economy) like scenario analysis, uses continuous probability distributions of the input variables. * A. True B. False 5. If comparing two mutually exclusive projects that have “normal” cash flows, conflicts between NPV and IRR will arise if the cost of capital exceeds the discount rate at which their NV profiles cross. A. True * B. False 6. The net present value (NPV) method assumes that cash flows are reinvested at the cost of capital, while the internal rate of return (IRR) method assumes that cash flows are reinvested at the project’s IRR. * A. True B. False Old Exam Questions - Capital Budgeting - Solutions Page 2 of 113 Pages 7. A project’s rate of depreciation (for example, the use of MACRS versus straight line) can have an impact on the operating cash flows for the project, even though depreciation is not a cash expense. * A. True B. False 8. In general, the greater the strategic advantages of being the first competitor to enter a given market, the more attractive it may be to exercise an investment timing option and wait before making the investment. A. True * B. False 9. Changes in net operating working capital do not need to be considered in capital budgeting cash flow analysis as long as the nominal (undiscounted) values of the changes are identical in each time period. A. True * B. False 10. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. * A. True B. False 11. Assume that a project has a risky cash outflow at the end of the project’s life (e.g., a reclamation expenditure). If this outflow is riskier than the project’s cash inflows, then it should be discounted back at a higher risk-adjusted discount rate. A. True * B. False 12. Changes in net operating working capital do not need to be considered in capital budgeting cash flow analysis as long as the nominal (undiscounted) values of the changes are identical in each time period....
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