Chapter 10 Exam 4

Question 1

process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owner’s wealth.

Answer 1

Capital budgeting

Question 2

most common type of investment, which includes property (land) and equipment; often referred to as earning assets

Answer 2

fixed assets

Question 3

an outlay of funds by the firm that is expected to produce benefits over a period of time greater than 1 year.

Answer 3

capital expenditure

Question 4

an outlay of funds by the firm resulting in benefits received within 1 year.

Answer 4

operating expenditure

Question 5

five distinct but interrelated steps: proposal generation, review and analysis, decision making, _____ and _____

Answer 5

implementation and follow-up

Question 6

Projects whose cash flows are unrelated (or independent to) on another; the acceptance of one does not eliminate the others from further consideration.

Answer 6

Independent projects

Question 7

Projects that compete with one another so that the acceptance of one eliminates from further consideration of all projects that serve a similar function.

Answer 7

Mutually exclusive projects

Question 8

Financial situation in which a firm is able to accept all independent projects that provide an acceptable return.

Answer 8

Unlimited funds

Question 9

Financial situation in which a firm has only fixed number of dollars available for capital expenditure and numerous projects compete for these dollars.

Answer 9

Capital rationing

Question 10

Two standard approaches to capital budgeting decisions.

Answer 10

Accept-reject and ranking approach

Question 11

Evaluation of capital expenditure proposals to determine whether they meet the firms minimum acceptance criterion.

Answer 11

Accept-reject approach

Question 12

Ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return.

Answer 12

Ranking approach

Question 13

Small and medium sized firms often use the ____ _____ approach to evaluate proposed investments.

Answer 13

Payback period

Question 14

Amount of time required for a firm to recover its initial investment in a project as calculated from cash inflows.

Answer 14

Payback period.

Question 15

If payback period is less than maximum acceptable payback period, ____ the project. If payback period is greater than the maximum acceptable payback period, _____ the project.

Answer 15

Accept, reject

Question 16

Method used by most large companies to evaluate investment projects is the

Answer 16

Net present value

Question 17

NPV is more ____ than the payback period because it takes the investors time value into consideration.

Answer 17

Sophisticated

Question 18

PV of cash flows - initial investment

Answer 18

NPV

Question 19

If the NPV is greater than $0, ___ the project. If the NOV is less than $0, ____ the project.

Answer 19

Accept, reject

Question 20

Variation of the NPV rule. Found by taking the PV of cash inflows/initial cash outflow.

Answer 20

Profitability index

Question 21

Companies using PI should invest if it is greater than ___

Answer 21

1.0

Question 22

Profit above and beyond the normal competitive rate of return in a line of business.

Answer 22

Pure economic profits

Question 23

Discount rate that equates the NPV of an investment opportunity with $0; it is the rate of return that the firm will earn if it invests in the project and receives the given cash inflows.

Answer 23

Internal rate of return (IRR)

Question 24

If IRR is greater than the cost of capital, ____ the project. If IRR is less than the cost of capital, ____ the project.

Answer 24

Accept, reject

Question 25

Graph that depicts a projects NPV’s for various discount rates.

Answer 25

Net present value profile

Question 26

Conflicts in the ranking given a project by NPV and IRR, resulting from differences in the magnitudes and timing of cash flows.

Answer 26

Conflicting rankings

Question 27

Cash inflows received prior to the termination of a project.

Answer 27

Intermediate cash inflows

Question 28

On a purely theoretical approach, ___ is better approach to capital budgeting.

Answer 28

NPV

Question 29

More than one IRR resulting from a capital budgeting project with a non conventional cash flow pattern; the maximum number of IRRs is equal to the number of sign changes in its cash flows.

Answer 29

Multiple IRRs

Question 30

Capital budgeting is the process of

Answer 30

Evaluating a firms investment choices.

Question 31

Unlike the IRR criteria, the NPV approach assumes an interest rate equal to the

Answer 31

Firms cost of capital

Question 32

A conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by

Answer 32

A series of inflows.

Question 33

The minimum return that must be earned on a project in order to leave the firms value unchanged is

Answer 33

The discount rate

Question 34

One weakness of the payback period is that it

Answer 34

Ignores cash flows that occur after the end of the payback period.

Question 35

The first step in the capital budgeting process is

Answer 35

Proposal generation