Capital budgeting decisions

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Reference no: EM131137935

Answer the question in True or False 

1. The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm.
a. True
b. False

2. Capital budgeting decisions, once made, are not easy to reverse because of the huge investments involved.
a. True
b. False

3. The basis on which capital budgeting plans are made is a firm's three- to five-year strategic plan.
a. True
b. False

4. Most of the information required to make capital budgeting decisions are internally generated, beginning with the sales force.
a. True
b. False

5. All capital budgeting projects are independent projects.
a. True
b. False

6. When two projects have cash flows that are tied to each other, the projects may be classified as independent.
a. True
b. False

7. Projects are classified as independent when their cash flows are unrelated.
a. True
b. False

8. When two projects are independent, accepting one project implicitly eliminates the other.
a. True
b. False

9. When two projects are mutually exclusive, accepting one project implicitly eliminates the other.
a. True
b. False

10. Projects that are classified as contingent could be mandatory or optional projects.
a. True
b. False

11. All contingent projects are mandatory projects.
a. True
b. False

12. The cost of capital is the highest return a project can earn.
a. True
b. False

13. Capital rationing refers to the limiting of capital resources to underperforming divisions.
a. True
b. False


14. The net present value technique is an approach that goes against the goal of shareholder wealth maximization.
a. True
b. False

15. The NPV method determines how much the present value of cash inflows exceeds the present value of costs.
a. True
b. False

16. Accepting a positive-NPV project decreases shareholder wealth.
a. True
b. False

17. Accepting a positive-NPV project increases shareholder wealth.
a. True
b. False

18. Accepting a negative-NPV project increases shareholder wealth.
a. True
b. False

19. The discount rate used to determine the present value of future cash flows is called the cost of capital.
a. True
b. False

20. The payback method is called a discounted cash flow technique.
a. True
b. False


21. If the payback period for a project exceeds the firm's threshold period, then the project is accepted
a. True
b. False

22. The payback method is consistent with the goal of shareholder wealth maximization.
a. True
b. False

23. The discounted payback period calculation calls for the future cash flows to be discounted by the firm's cost of capital.
a. True
b. False

24. Unlike the regular payback method, the discounted payback method does not ignore cash flows beyond the firm's threshold period.
a. True
b. False

25. The accounting rate of return is not a true return because it simply utilizes some average figures from the firm's balance sheet and income statement.
a. True
b. False

26. The decision criterion for the accounting rate of return is consistent with the goal of shareholder wealth maximization.
a. True
b. False

27. The IRR and NPV decisions are consistent with each other when a project's cash flows follow a conventional pattern.
a. True
b. False

28. Unconventional cash flow patterns could lead to conflicting decisions by NPV and IRR.
a. True
b. False

29. When mutually exclusive projects are considered, both NPV and IRR will always produce the same acceptance decision.
a. True
b. False

30. When evaluating two projects that require different outlays, the IRR does not recognize the difference in the size of the investments.
a. True
b. False

Reference no: EM131137935

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