Ch. 11

Question 1

True or False

Capital budgeting is the process of evaluating and planning for purchases of long-term assets.

Answer 1

true

Question 2

According to 11.1 reading, the most preferred evaluation technique we will discuss in this topic is:

• payback period.
• net present value
• internal rate of return.
• Profitability index.

Answer 2

net present value

Question 3

The ideal decision-making criteria for capital budgeting should:

• Include all cash flows that occur during the life of the project.
• Consider the time value of money.
• Incorporate the required rate of return (i.e., risk) on the project.
• All of the above.

Answer 3

All of the above

Question 4

What are the three key attributes that our capital budgeting methods should possess?

Answer 4

1. include ALL cash flows that occur during the life of the project
2. consider the timing of those future cash flows
3. be able to account for varying levels of risk between projects.

Question 5

What are the best methods for capital budgeting? (2)

Answer 5

1. Net Present Value (NPV)

2. Internal Rate of Return (IRR)

Question 6

What are the 3 evaluation methods?

Answer 6

1. Payback period
2. Net present value
3. Internal rate of return

Question 7

An ideal evaluation method would account for the time value of money by …

Answer 7

adjusting cash flows according to their timing.

Question 8

risk and return are ________ correlated

Answer 8

directly

Question 9

Which of the following is not an ideal criteria for the methods used to evaluate a capital investment project?

• The method must include all relevant cash flows
• The method must consider sales of previous products as a benchmark
• The method must account for the time value of money
• The method should account for the varying levels of risk
• None of the above

Answer 9

The method must consider sales of previous products as a benchmark

Question 10

Which of the following is not an ideal criteria for the methods used to evaluate a capital investment project?

• The method must include all relevant cash flows
• The method must consider the timing of the project’s cash flows
• The method must account for the time value of money
• The method should account for the varying levels of risk
• None of the above

Answer 10

None of the above

Question 11

Which of the following is an ideal criteria for the methods used to evaluate a capital investment project?

• All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs.
• The method must account for the success of previous projects
• The method should set required risk to be constant for all projects that will be considered
• The method should consider the timing of the project’s cash flows
• None of the above

Answer 11

The method should consider the timing of the project’s cash flows

Question 12

Which of the following is NOT introduced as an evaluation method?

• Payback period
• Net present value (NPV)
• Internal rate of return (IRR)
• All of the above are listed as evaluation methods.

Answer 12

All of the above are listed as evaluation methods.

Question 13

Exxon is used as an example in the text for what financial concept?

• Cash flow
• Ratio analysis
• Risk characterstics
• Hedging

Answer 13

Risk characterstics

Question 14

____________ is the most simple of the three potential capital project evaluation methods

Answer 14

Payback period

Question 15

A project’s payback period is

Answer 15

A project’s payback period is the number of years required to recover the initial cash outlay. In other words, the payback period is the amount of time it takes for the project to generate enough cash to pay for itself.

Question 16

How do you get the payback period for a project?

Answer 16

It is the number of years we have to wait to earn back our original $ investment.