finance data bank
191. Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because
A) it explicitly considers the time value of money.
B) it can be viewed as a measure of risk exposure because of its focus on liquidity.
C) the determination of the required payback period for a project is an objectively determined criteria.
D) none of the above.
192. A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is
A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.
193. If the NPV is greater than the initial investment, a project should be accepted.
194. If the NPV is greater than $0.00, a project should be accepted.
195. The NPV of an project with an initial investment of $1,000 that provides aftertax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is $856.49.
196. The NPV of an project with an initial investment of $1,000 that provides aftertax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is $143.51.
197. The NPV of an project with an initial investment of $1,000 that provides aftertax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is$143.51.
198. The riskadjusted discount rate (RADR) is the riskadjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.
199. The riskadjusted discount rate (RADR) is the rate of return that must be earned on a given project to compensate the firm's owners adequately, thereby resulting in the maintenance or improvement of share price
200. A market riskreturn function is a graphical presentation of the discount rates associated with each level of project risk.
201. Riskadjusted discount rates (RADRs) are the riskadjustment factors that represent the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.
202. What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide aftertax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A) $1,700,000.
B) $371,764.
C) ($137,053).
D) None of the above.
203. What is the NPV for the following project if its cost of capital is 0 percent and its initial after tax cost is $5,000,000 and it is expected to provide aftertax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A) $1,700,000.
B) $371,764.
C) $137,053.
D) None of the above.
204. What is the NPV for the following project if its cost of capital is 12 percent and its initial after tax cost is $5,000,000 and it is expected to provide aftertax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4?
A) $(1,494,336).
B) $1,494,336.
C) $158,011.
D) Two of the above.
205. The amount by which the required discount rate exceeds the riskfree rate is called
A) the opportunity cost.
B) the risk premium.
C) the risk equivalent.
D) the excess risk.
206. A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a projects inflows with the present value of its outflows is called internal rate of return
207. If its IRR is greater than $0.00, a project should be accepted.
208. If its IRR is greater than 0 percent, a project should be accepted.
209. If its IRR is greater than the cost of capital, a project should be accepted.
210. A firm's investment opportunities schedule (IOS) is a graphical presentation of the firm's collection of project IRRs in descending order against the total dollar investment.
211. Real options are opportunities that are embedded in capital budgeting projects that enable managers to alter their cash flows and risks in a way that affects project acceptability.
212. Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?
A) Project X.
B) Project Y.
C) Neither.
D) Not enough information to tell.
213. Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?
A) Project X.
B) Project Y.
C) Neither.
D) Not enough information to tell.
214. Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide aftertax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and ($1,300,000) in year 4?
(a) Calculate the project's NPV.
(b) Calculate the project's IRR.
(c) Should the firm make the investment?
Table 9.10
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
215. Using the internal rate of return approach to ranking projects, which projects should the firm accept? (See Table 9.10)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, and 5
C) 2, 3, 4, and 6
D) 1, 3, 4, and 6
216. Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 9.10)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, 5, and 6
C) 2, 3, 4, and 5
D) 1, 3, 5, and 6
217. When the net present value is negative, the internal rate of return is ________ the cost of capital.
A) greater than
B) greater than or equal to
C) less than
D) equal to
218. A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should
A) accept both if the cost of capital is at most 15 percent.
B) accept only Z if the cost of capital is at most 15 percent.
C) accept only X if the cost of capital is at most 15 percent.
D) none of the above

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