FM14e-TB-CHAPTER 10 THE BASICS OF CAPITAL BUDGETING: EVALUATING CASH FLOWS
1. A firm should never accept a project if its acceptance would lead to an
... [Show More] increase in the
firm's cost of capital (its WACC).
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Capital budgeting and cost of capital LOC: TBA
TOP: Capital budget KEY: Bloom’s: Knowledge
2. Because "present value" refers to the value of cash flows that occur at different points
in time, a series of present values of cash flows should not be summed to determine the value of a
capital budgeting project.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Capital budgeting and cost of capital LOC: TBA
TOP: PV of cash flows KEY: Bloom’s: Knowledge
3. Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a
project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount
rate than the NPV of a project whose cash flows come in later in its life.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Capital budgeting and cost of capital LOC: TBA
TOP: NPV KEY: Bloom’s: Knowledge
4. A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the
project should be accepted.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Capital budgeting and cost of capital LOC: TBA
TOP: NPV KEY: Bloom’s: Knowledge
5. Conflicts between two mutually exclusive projects occasionally occur, where the NPV
method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts
should be resolved in favor of the project with the higher positive NPV.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Capital budgeting and cost of capital LOC: TBA
TOP: Mutually exclusive projects KEY: Bloom’s: Knowledge
6. Conflicts between two mutually exclusive projects occasionally occur, where the NPV
method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts
should be resolved in favor of the project with the higher positive IRR.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking [Show Less]