Answer Options:
a. True
b. False
Answer: A. True
Question: Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.
Answer Options:
a. True
b. False
Answer: False
Question: Replacement chain or EAA analysis is required when analyzing projects that have different lives. This is true regardless of whether the projects are mutually exclusive or independent of one another.
Answer Options:
a. True
b. False
Answer: B. False
Question: Dalyrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?
Answer Options:
a. The firm’s existing debt on its balance sheet is a relevant factor.
b. The company would issue new equity to finance the new project.
c. Some of the equipment to be used in the new project is currently being used in another part of the company, and if it were used in the new project, the company would have to replace it at a cost of $1 million.
d. A new machine that is needed for the project would have to be purchased, and this machine would have a salvage value at the end of the project’s life.
e. None of these items should be included; they are all sunk costs and, therefore, should not affect the estimated cash flows.
Answer: A. The firm’s existing debt on its balance sheet is a relevant factor.
Question: The following are all examples of real options that are discussed in the text: (1) growth options, (2) flexibility options, (3) timing options, and (4) abandonment options.
Answer Options:
a. True
b. False
Answer: A. True
Question: When considering two mutually exclusive projects, the firm should always select the project whose internal rate of return is the highest, provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
Answer Options:
a. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
Answer: B. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
Question: In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm’s long-run cash flows.
Answer Options:
a. True
b. False
Answer: A. True
Question: Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project?
Answer Options:
a. Changes in net operating working capital.
b. Shipping and installation costs for machinery acquired.
c. Cannibalization effects.
d. Opportunity costs.
e. Sunk costs that have been expensed for tax purposes.
Answer: E. Sunk costs that have been expensed for tax purposes.
Question: Although the replacement chain approach is appealing for dealing with mutually exclusive projects that have different lives, it is not used in practice because not projects meet the assumptions the method requires.
Answer Options:
a. True
b. False
Answer: A. True
Question: Any cash flows that can be classified as incremental to a particular project—i.e., results directly from the decision to undertake the project—should be reflected in the capital budgeting analysis.
Answer Options:
a. True
b. False
Answer: A. True
Question: The two methods discussed in the text for dealing with unequal project lives are (1) the replacement chain approach and (2) the present value approach.
Answer Options:
a. True
b. False
Answer: B. False