9 - Chapter 9 Capital Budgeting Techniques Learning Goals 1...

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126 Gitman • Principles of Finance,  Eleventh Edition Chapter 9 Capital Budgeting Techniques Learning Goals 1. Understand the role of capital budgeting techniques in the capital budgeting process. 2. Calculate, interpret, and evaluate the payback period. 3. Calculate, interpret, and evaluate the net present value (NPV). 4. Calculate, interpret, and evaluate the internal rate of return (IRR). 5. Use net present value profiles to compare NPV and IRR techniques. 6. Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of  each approach. True/False 1. In capital budgeting, the preferred approaches in assessing whether a project is acceptable are those  that integrate time value procedures, risk and return considerations, and valuation concepts. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Capital Budgeting Techniques 2. In the case of annuity cash inflows, the payback period can be found by dividing the initial  investment by the annual cash inflow. Answer: TRUE Level of Difficulty: 1 Learning Goal: 2 Topic: Payback Method 3. The payback period is the exact amount of time required for the firm to recover the installed cost of  a new asset. Answer: FALSE Level of Difficulty: 1 Learning Goal: 2 Topic: Payback Method
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127 Gitman • Principles of Finance,  Eleventh Edition 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. Answer: TRUE Level of Difficulty: 2 Learning Goal: 2 Topic: Payback Method 5. By measuring how quickly the firm recovers its initial investment, payback period gives some  implicit consideration to the timing of cash flows and therefore to the time value of money. Answer: TRUE Level of Difficulty: 2 Learning Goal: 2 Topic: Payback Method 6. One strength of payback period is that it takes fully into account the time factor in the value of  money. Answer: FALSE Level of Difficulty: 2 Learning Goal: 2 Topic: Payback Method 7. One weakness of payback is its failure to recognize cash flows that occur after the payback period. Answer: TRUE Level of Difficulty: 2 Learning Goal: 2 Topic: Payback Method 8. A project must be rejected if its payback period is less than the maximum acceptable payback  period. Answer: FALSE Level of Difficulty: 2 Learning Goal: 2 Topic: Payback Method 9. Since the payback period can be viewed as a measure of risk exposure, many firms use it as a  decision criterion or as a supplement to sophisticated decision techniques.
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