In essence, capital budgeting is the process of - Deciding what to do with the firm’s money

Question 1

In essence, capital budgeting is the process of:

Deciding what to do with the firm’s money

Deciding how much capital the firm needs

Deciding where to get the money for capital investment projects

Deciding when to invest in a new project

Question 2 2 pts

Which of the following cash flows is an “incremental cash flow” for the purposes of capital budgeting?

Expenditures on plant and equipment for a new project

R& D expenditures for a new project during the last three years

Dividend payments

Reduction of a competitor’s sales as a result of the your company’s introduction of a new product

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Question 3 2 pts

In capital budgeting, the payback period is the:

Amount of time it takes to receive all the future cash flows from a project

Amount of time it takes to pay back any money borrowed to finance the project

Amount of time it take for the project to be completed

Amount if time it takes to recoup the initial investment for the project

Question 4 2 pts Skip to question text.

The Seattle Corporation has been presented with an investment opportunity, which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. At what point will the initial investment be paid back?

at the end of the 4th year

at the end of the 5th year

at the end of the 6th year

at the end of the 7th year

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Question 5 2 pts Skip to question text.

Consider the following income statement and answer the question that follows:

Sales (100 units)..............$200

Variable costs ($.20 ea)......20

Fixed Costs.......................80

EBIT................................100

Interest Expense................30

EBT.................................70

Income tax.......................24

Net Income.......................46

What is the firm’s Breakeven Point in units?

1

45

56

2,000

Question 6 2 pts

The net present value of an investment is its present value minus its future value.

True

False

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Question 7 2 pts

If the NPV of a proposed project is positive, the NPV amount represents:

The amount of profit the firm will make if it adopts the project

The amount of cash that the project will produce if adopted

The amount of value that will be added to the firm if the project is adopted

The project’s expected rate of return

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Question 8 2 pts Skip to question text.

Joe the cut-rate bond dealer has offered to sell you a ten year zero-coupon bond for $300. (Remember, zero-coupon bonds pay their owners $1,000 at maturity and involve no other cash flows other than the purchase price.) If your required rate of return for cut-rate bonds is 20%, what is the NPV of Joe's deal?

about $161

about -$138

about $700

about -$200

about $1096

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Question 9 2 pts

When using the IRR method to evaluate investments, those with positive IRRs are accepted and those with negative IRRs are rejected.

True

False

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Question 10 2 pts Skip to question text.

You've decided to give up playing the stock market and buy some zero-coupon bonds from Joe the cut-rate bond dealer instead. (Remember, zero-coupon bonds because they pay off a known amount, $1,000, at maturity and involve no other cash flows other than the purchase price.) Assume your required rate of return is 12%. If you buy some 10-year zero coupon bonds for $400 each today will the bonds meet your return requirements?

Yes

No

It depends