CAPITAL BUDGETING 2 Flashcards
There are several capital budgeting decision models that do not use discounted cash flows.
What is the name of the simple technique that calculates the total time it will take to recover,
using cash inflows from operations, the amount of cash invested in a project?
Payback model
The technique most concerned with liquidity is
Payback method.
Which of the following is a potential use of the payback method?
A. Help managers control the risks of estimating cash flows
B. Help minimize the impact of the investment on liquidity
C. Help control the risk of obsolescence
The cash payback technique:
is relatively easy to compute and understand.
Which of the following is NOT a defect of the payback method?
It ignores cash flows because it uses net income.
The payback method, as a capital budgeting technique, assumes that all intermediate cash
inflows are reinvested to yield a return equal to:
ZERO
Which of the following capital budgeting methods is the least theoretically correct?
payback method
Which of the following methods of evaluating capital investment projects incorporates the time
value of money?
Net present value and internal rate of return
Discounted cash flow analysis is used in which of the following techniques?
Net present value
The primary capital budgeting method that uses discounted cash flow techniques is the
Net present value method
The net present value (NPV) model can be used to evaluate and rank two or more proposed
projects. The approach that computes the total impact on cash flows for each option and then
converts these total cash flows to their present values is called the
total project approach.
The discount rate commonly used in present value calculations is the
weighted average return on assets adjusted for risk
Which is true of the net present value method of determining the acceptability of an investment?
The initial cost of the investment is subtracted from the present value of net cash flows
The profitability index
allows comparison of the relative desirability of projects that require differing initial
investments.
According to the reinvestment rate assumption, which method of capital budgeting assumes cash flows are reinvested at the project’s rate of return?
internal rate of return
The rate of interest that produces a zero net present value when a project’s discounted cash
operating advantage is netted against its discounted net investment is the:
Internal rate of return
A weakness of the internal rate of return method for screening investment projects is that it:
Implicitly assumes that the company is able to reinvest cash flows from the project at the
internal rate of return
Which of the following methods of evaluating capital investment projects do not use a
percentage as a measurement unit?
Payback period and net present value
If a company’s required rate of return is 12 percent and in using the profitability index method,
a project’s index is greater than 1.0, this indicates that the project’s rate of return is
greater than 12 percent.
If the present value of the future cash flows for an investment equals the required investment,
the IRR is
equal to the cutoff rate
The relationship between payback period and IRR is that
the payback period is the present value factor for the IRR.
When comparing NPV and IRR, which is not true?
NPV can be used to compare investments of various size or magnitude
In capital budgeting, sensitivity analysis is used
to see how a decision would be affected by changes in variables.
An approach that uses a number of outcome estimates to get a sense of the variability among
potential returns is
sensitivity analysis
