The Basics of Capital Budgeting

What is the term for the process of planning expenditures on assets with cash flows that are expected to extend beyond one year?

Which of the following project categories typically involves expenditures to replace worn-out or damaged equipment required in the production of profitable products?

What is the Net Present Value (NPV) of a project with an initial cost of 1,000, a cost of capital of 10 percent, and expected cash inflows of 500, 400, and 300 at the end of the next three years, respectively?

According to the NPV decision rule for two mutually exclusive projects, which project should be chosen?

What is the Internal Rate of Return (IRR)?

Under what condition is a project said to have non-normal cash flows, which can lead to the problem of multiple IRRs?

What is the key reinvestment rate assumption of the Internal Rate of Return (IRR) method?

What is the primary advantage of the Modified Internal Rate of Return (MIRR) over the regular IRR?

A project costs 1,000 and has cash inflows of 500 in Year 1, 400 in Year 2, and 300 in Year 3. What is the project's regular payback period?

What is a primary flaw of both the regular payback and the discounted payback methods?

A project has an initial cost of 1,000. Its expected cash inflows are 600, 400, and 200 over the next three years. The firm’s WACC is 10 percent. What is the project’s Modified IRR (MIRR)?

What is a crossover rate in the context of NPV profiles?

What two basic conditions can cause a conflict between the NPV and IRR methods when evaluating mutually exclusive projects?

According to the survey data presented in Table 11.2, which capital budgeting method has seen the most dramatic increase in usage as a primary criterion from 1960 to 1999?

Why is Net Present Value (NPV) considered the single best capital budgeting criterion?

Project L costs 65,000, its expected cash inflows are 12,000 per year for 9 years, and its WACC is 9 percent. What is the project’s NPV?

What is the primary reason that conflicts can arise between NPV and IRR when evaluating mutually exclusive projects?

A firm with a WACC of 14 percent is evaluating two projects. Project M requires an initial outlay of 30,000 and has inflows of 10,000 per year for 5 years. Project N requires an outlay of 90,000 and has inflows of 28,000 per year for 5 years. If the projects are mutually exclusive, which should be chosen?

What does a project's Net Present Value (NPV) profile graph show?

Which of the following capital budgeting techniques is defined as 'the discount rate that forces a project's NPV to equal zero'?

What is the primary criticism of the payback period as a capital budgeting tool?

If two mutually exclusive projects have a crossover rate of 10 percent, and the firm's WACC is 12 percent, which of the following statements is correct?

Which capital budgeting decision criterion is a measure of a project's percentage rate of return, comparable to the Yield to Maturity (YTM) on a bond?

How does the discounted payback method improve upon the regular payback method?

What is the Net Present Value (NPV) for Project L, which has an initial cost of 1,000, a WACC of 10 percent, and cash inflows of 100, 300, 400, and 675 in years 1 through 4, respectively?

A project is defined as a 'replacement: cost reduction' project. Which of the following best describes this type of project?

If a project has an NPV of zero, what is the relationship between its IRR and the WACC?

The IRR of a strip mining project is calculated to be both 25 percent and 400 percent. Which of the following is the most likely reason for these multiple IRRs?

A company is considering two mutually exclusive projects. Project A has an NPV of 50,000 and an IRR of 20 percent. Project B has an NPV of 60,000 and an IRR of 15 percent. Which project should be accepted?

If a firm uses the payback period as its sole decision criterion, what major flaw might cause it to reject a project that has a very large cash inflow late in its life?

What is the discounted payback period for a project that costs 1,000, has a WACC of 10 percent, and generates cash flows of 500, 400, 300, and 100 in years 1 through 4?

When comparing two mutually exclusive projects, S and L, the NPV for S is higher if the WACC is 15 percent, but the NPV for L is higher if the WACC is 8 percent. What does this suggest?

What is the terminal value (TV) in the context of the MIRR calculation?

If a firm is choosing between two mutually exclusive projects, one with a 3-year life and one with a 6-year life, and the projects are expected to be repeated, which capital budgeting technique is most appropriate?

The decision criterion that asks, 'How many years does it take to recover our initial investment?' is the:

An expansion into a new product or market is typically classified as which type of capital budgeting project, requiring a more detailed analysis?

What is the IRR of a project with an initial cost of 700 and cash inflows of 500, 300, and 100 over the next three years?

The NPV method is considered superior to the IRR method when evaluating mutually exclusive projects primarily because:

A project costs 1,000. Its WACC is 12 percent. It is expected to produce a single cash inflow of 1,500 at the end of 3 years. What is its NPV?

If two independent projects both have positive NPVs, what is the correct decision?

In the context of capital budgeting, what are mutually exclusive projects?

What is the payback period for a project that costs 200 and generates cash flows of 80 per year for 5 years?

Which statement best describes the relationship between a project's NPV and its IRR?

When using the NPV profile to compare two mutually exclusive projects with normal cash flows, a conflict in ranking between NPV and IRR occurs only if:

A project with an initial cost of 20,000 has an NPV of 5,155 when evaluated at a WACC of 12 percent. Its IRR is 25.2 percent. If the firm's WACC is 12 percent, should the project be accepted?

The NPV of Project S is 78.82 and the NPV of Project L is 100.40. If the projects are independent and the firm has sufficient capital, which project(s) should be accepted?

The MIRR is considered a better indicator of a project's true profitability than the IRR because:

A strategic business plan, as described in Chapter 11, is best defined as:

If Project A has an NPV of 128.10 and Project B has an NPV of 165.29, and they are mutually exclusive, which should be chosen?

Which of the following is considered a flaw of the regular payback period method?