a. True
b. False
Answer: False
Question: Project S has a pattern of high cash flows in its early life, while Project L has a longer life, with large cash flows late in its life. Neither has negative cash flows after Year 0, and at the current cost of capital, the two projects have identical NPVs. Now suppose interest rates and money costs decline. Other things held constant, this change will cause L to become preferred to S.
Answer Options:
a. True
b. False
Answer: True
Question: A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
Answer Options:
a. True
b. False
Answer: a. True
Question: The NPV method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements concerning the cash budget is CORRECT?
a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Answer Options:
a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Answer: a
Question: Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project’s life.
Answer Options:
a. True
b. False
Answer: True
Question: For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project’s life, summing those compounded cash flows to a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project’s cost.
Answer Options:
a. True
b. False
Answer: True
Question: The NPV method’s assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR’s assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
Answer Options:
a. True
b. False
Answer: True
Question: The IRR method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital.
Answer Options:
a. True
b. False
Answer: False
Question: The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.
Answer Options:
a. True
b. False
Answer: False