CHAPTER 11 14THE BASICS OF CAPITAL BUDGETING
Chapter 11: The Basics of Capital Budgeting
1. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC).
a. True
b. False
ANSWER: False
2. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.
a. True
b. False
ANSWER: False
3. Assuming that their NPVs based on the firm’s cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
a. True
b. False
ANSWER: False
4. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the project should be accepted.
a. True
b. False
ANSWER: False
5. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.
a. True
b. False
ANSWER: True
6. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR.
a. True
b. False
ANSWER: False
7. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
a. True
b. False
ANSWER: True
8. Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.
a. True
b. False
ANSWER: False
9. 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)
1. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC).
a. True
b. False
ANSWER: False
2. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.
a. True
b. False
ANSWER: False
3. Assuming that their NPVs based on the firm’s cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
a. True
b. False
ANSWER: False
4. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the project should be accepted.
a. True
b. False
ANSWER: False
5. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.
a. True
b. False
ANSWER: True
6. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR.
a. True
b. False
ANSWER: False
7. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
a. True
b. False
ANSWER: True
8. Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.
a. True
b. False
ANSWER: False
9. 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)