Capital Budgeting

8 questions

1. 1. Which of the following statements best describes payback period?
   The number of years that it takes to earn a profit on a project.The number of periods required to pay for the original investment.The number of cash-flow periods of a project
2. 2. Consider two projects A and B. Both projects are similar except that project A is expected to have larger cash flows early in the life of the project while project B is expected to have larger cash flows late in the life of the project. What can we say about the NPV profile of these projects?
   The slope of NPV profile of both projects is equal.The slope of NPV profile of project A is flatter than slope of NPV profile of project B.The slope of NPV profile of project A is steep than slope of NPV profile of project B.
3. 3. Which of the following is NOT an advantage of the discounted payback period method of evaluating a capital investment project?
   Considers the time value of money.Ignores cash flows beyond the payback period.Provides a rough approximation of a projects liquidity and risk.
4. 4. Two projects are said to be independent if:
   Acceptance of one project means rejection of the other.Their cash flows are unrelated.They have different hurdle rates.
5. 5. Suppose that a project with an initial investment of $50,000 is expected to generate an annual cash flow of $4,000 for each of the next 7 years. What is the minimum cost of capital at which the project can be rejected?
   8 percent9 percent10 percent
6. 6. Suppose that a project with an initial investment of $30,000 has the following annual cash inflows:

   .

   If the cost of capital is 8 percent, then the net present value of the project is:

   -$3,506. The project should be rejected.-$2,679. The project should be rejected.$2,679. The project should be accepted.
7. 7. Project A and Project B are independent. Project A has an IRR of 12 percent. Project B has an IRR of 14 percent. If the marginal cost of capital is 10 percent, then:st of capital is 8 percent, then the net present value of the project is:
   Project B must have a higher NPV than Project A.The NPV of both projects must be negative.The NPV of both projects is positive.
8. 8. Suppose that a firm is considering several mutually exclusive projects. The firm should choose:
   The project with the highest NPV.The project with the lowest NPV.All projects with a positive NPV.