Capital Investment Decisions

Question 1

If there are no capital rationing constraints, what is the best way to evaluate different projects

Answer 1

Which project has the highest NPV

Question 2

The profitability index (excess present value over index) is

Answer 2

the ratio of the discounted net cash inflows to discounted cash outflows

Question 3

A company should use the profitability index instead of the net present value method to rank investment projects when the investments have

Answer 3

Different initial costs.

Question 4

A weakness of the internal rate of return (IRR) approach for determining the acceptability of investments is that it

Answer 4

Implicitly assumes that the firm is able to reinvest project cash flows at the project’s internal rate of return.

Question 5

Delaying cash outflows _________ a project’s net present value

Answer 5

increases