1. The reason cash flow is used in capital budgeting is because: (Points: 5)
Cash rather than income is used to purchase new machines.
Cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.
To ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
All of the above
2. The first step in the capital budgeting process is: (Points: 5)
Collection of data.
Idea development.
Assign probabilities.
Determine cash flow.
3. Capital budgeting is primarily concerned with: (Points: 5)
Capital formation in the economy.
Planning future financing needs.
Evaluating investment alternatives.
Minimizing the cost of capital.
4. The longer the life of an investment: (Points: 5)
The more significant the discount rate.
The less significant the discount rate.
Makes no difference.
None of the above
5. If projects are mutually exclusive: (Points: 5)
They can only be accepted under capital rationing.
The selection of one alternative precludes the selection of other alternatives.
The payback method should be used.
The net present-value should be used.
6. The internal rate of return and net present value methods: (Points: 5)
Always give the same investment decision answer.
Never give the same investment decision answer.
Usually give the same investment decision answer.
always give answers different from the payback method.
7. A characteristic of capital budgeting is: (Points: 5)
A large amount of money is always involved.
The internal rate of return must be less than the cost of capital.
The internal rate of return must be greater than the cost of capital.
The time horizon is at least five years.
8. The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method: (Points: 5)
assumes that cash flows are reinvested at the project's internal rate of return.
Concentrates on the liquidity aspects of investment projects.
Assumes that cash flows are reinvested at the firm's weighted average cost of capital.
None of the above
9. The __________ assumes returns are reinvested at the cost of capital. (Points: 5)
Payback method
Internal rate of return
Net present value
Capital rationing
10. In using the internal rate of return method, it is assumed that cash flows can be reinvested at: (Points: 5)
10. In using the internal rate of return method, it is assumed that cash flows can be reinvested at: (Points: 5)
The cost of equity.
The cost of capital.
The internal rate of return.
The prevailing interest rate.
11. The term "risk averse" means that: (Points: 5)
An individual refuses to take risks.
Most investors and businessmen seek risk.
An individual will seek either to avoid risk or to be compensated with a higher return.
Only investment proposals with no risk should be accepted.
12. The coefficient of variation (V) can be defined as the: (Points: 5)
Expected value multiplied by the standard deviation.
Standard deviation divided by the expected value.
Expected value divided by the standard deviation.
Standard deviation squared, divided by the expected value.
13. In determining the appropriate discount rate for an individual project, the financial manager will be most influenced by the: (Points: 5)
Expected value.
Internal rate of return.
Standard deviation.
Coefficient of variation.
14. Which of the following is a characteristic of beta? (Points: 5)
Beta measures only the volatility of returns on an individual bond relative to a bond market index.
A beta of 1.0 is of equal risk with the market.
A beta of greater than 1.0 has less risk than the market.
Two of the above are true.
15. Which investment has the least amount of risk? (Points: 5)
Coefficient of variation =11%, expected return = $800
Coefficient of variation =11%, Standard deviation = $200
Standard deviation = $500, expected return = $5,000
Standard deviation = $100, expected return = $80
16. Risk may be integrated into capital budgeting decisions by: (Points: 5)
Adjusting the standard deviation of possible outcomes.
Determining the expected value.
Adjusting the discount rate.
Adjusting the time horizon.
17. The firm's highest risk-adjusted discount should be applied to: (Points: 5)
The repair of old machinery.
A new product in a related field.
A new product in a foreign market.
The purchase of new equipment.
18. Using the risk-adjusted discount rate approach, projects with high coefficients of variation will have __________ net present values than projects with low coefficients of variation. (Points: 5)
Somewhat higher
Substantially higher
Lower
Either A or B
19. Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with: (Points: 5)
Normal risk.
High risk.
No risk.
Low risk.
20. Using the risk-adjusted discount rate approach, the firm's weighted average cost of capital is applied to projects with: (Points: 5)
No risk.
Low risk.
Normal risk.
High risk.
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