Reference no: EM132503105

Question 1. Two projects are mutually exclusive. While they have equal lives, their investments differ by a large margin. The smaller project has the higher IRR, while the larger project has the larger NPV. In these kinds of situations, the firm should select

A. the project with the higher IRR.

B. the project with the higher NPV.

C. either project, since they are actually tied.

D. the project with the higher payback period.

Question 2. For a project with normal cash flows, if the NPV of the project is positive, then the project's IRR _________ the required rate of return.

A. must be less than

B. must be greater than

C. could be greater than or less than

Question 3. If the required rate of return for a project decreases, the project's NPV will

A. decrease.

B. increase.

C. remain unchanged.

Question 4. When evaluating Capital Budgeting projects, it is possible to arrive at more than one Internal Rate of Return, if which of the following conditions occurs?

A. A project has normal cash flows.

B. A project returns the original cost in less than three years.

C. A series of cash outflows is followed by a series of cash inflows.

D. A project has more than one sign change in the cash flows.

Question 5. If an investment project would make use of land that the firm currently owns and leases to a farmer, the project should be charged with:

A. A sunk cost.

B. An opportunity cost.

C. Amortization.

D. Interest.

Question 6. Last year, your firm spent $200,000 to renovate an old building. Now your firm is considering a capital budgeting project that would use that renovated building. Should you incorporate the cost of renovation into the current project's cash flows?

A. Yes, since the $200,000 is an opportunity cost for the new project.

B. Yes, since the $200,000 is a project externality.

C. No, since renovation costs are included in the cost of capital.

D. No, since the $200,000 is a sunk cost.

Question 7. Lost sales from a firm's existing product lines when a new product is introduced as part of a capital budgeting project is an example of a(n)

A. project externality.

B. opportunity cost.

C. sunk cost.

D. initial outlay.

Question 8. Changing one variable at a time to see the impact of changes in that variable on NPV or IRR is known as

A. simulation analysis.

B. sensitivity analysis.

C. scenario analysis.

D. pure play analysis.

Question 9. How is interest expense that is associated with a project treated in the capital budgeting process?

A. It is treated as a cash outflow when estimating the project's incremental cash flows.

B. It is built into the discount rate.

C. It is considered a synergistic incremental cash flow.

D. Interest expense is not relevant to any capital budgeting decisions.

Question 10. Taking into account potential value associated with a project that is both going very well and can be scaled up is considering a(n) __________ option.

A. abandonment

B. timing

C. expansion

D. input flexibility