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29. The weighted average cost of capital that is used to evaluate a specific project
should bebased on thea. mix of capital components that was used to finance a
project from last year.b. overall capital structure of the corporation.c. cost of capital
for other corporations with similar investments.d. mix of capital components for all
capital acquired in the most recent fiscal year.ANSWER: b EASY30. Debt in the capital
structure could be treated as if it were common equity in computingthe weighted
average cost of capital if the debt werea. callable.b. participating.c. cumulative.d.
convertible.ANSWER: d MEDIUM31. The weighted average cost of capital approach
to decision making is
not
directly affectedby thea. value of the common stock.b. current budget for capital
expansion.c. cost of debt outstanding.d. proposed mix of debt, equity, and existing
funds used to implement the project.ANSWER: b EASY32. The
___________________ is the highest rate of return that can be earned from the
mostattractive, alternative capital project available to the firm.a. accounting rate of
returnb. internal rate of returnc. hurdle rated. opportunity cost of capitalANSWER: d
MEDIUM

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33. If an analyst desires a conservative net present value estimate, she will assume
that allcash inflows occur ata. mid year.b. the beginning of the year.c. year end.d.
irregular intervals.ANSWER: c EASY34. The salvage value of an old lathe is zero. If
instead, the salvage value of the old lathe was$20,000, what would be the impact on
the net present value of the proposal to purchase anew lathe?a. It would increase
the net present value of the proposal.b. It would decrease the net present value of
the proposal.c. It would not affect the net present value of the proposal.d.
Potentially it could increase or decrease the net present value of the new
lathe.ANSWER: a EASY35. The net present value method of evaluating proposed
investmentsa.

measures a project’s internal rate of return.

b. ignores cash flows beyond the payback period.c. applies only to mutually
exclusive investment proposals.d. discounts cash flows at a minimum desired rate of
return.ANSWER: d EASY36. Which of the following statements is
true
regarding capital budgeting methods?a.

The Fisher rate can never exceed a company’s cost of capital.

b. The internal rate of return measure used for capital project evaluation has
moreconservative assumptions than the net present value method, especially
forprojects that generate a positive net present value.c. The net present value
method of project evaluation will always provide the sameranking of projects as the
profitability index method.d. The net present value method assumes that all cash
inflows can be reinvested at

the project’s cost of capital.

ANSWER: d EASY

MAS-CAPITAL BUDGETING PROF. EG L37. A company is evaluating three possible


investments. Information relating to the companyand the investments follow:Fisher
rate for the three projects 7%Cost of capital 8%Based on this information, we know
thata. all three projects are acceptable.b. none of the projects are acceptable.c. the
capital budgeting evaluation techniques profitability index, net present value,and
internal rate of return will provide a consistent ranking of the projects.d. the net
present value method will provide a ranking of the projects that is superiorto the
ranking obtained using the internal rate of return method.ANSWER: c MEDIUM38. If
a project generates a net present value of zero, the profitability index for the
projectwilla. equal zero.b. equal 1.c. equal -1.d. be undefined.ANSWER: b EASY39.

If the profitability index for a project exceeds 1, then the project’s

a. net present value is positive.b.

internal rate of return is less than the project’s discount rate.

c. payback period is less than 5 years.d. accounting rate of retur

n is greater than the project’s internal rate of return.


ANSWER: a EASY40.

If a project’s profitability index is less than 1, the project’s

a. discount rate is above its cost of capital.b. internal rate of return is less than
zero.c. payback period is infinite.d. net present value is negative.ANSWER: d EASY

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41. The profitability index isa. the ratio of net cash flows to the original investment.b.
the ratio of the present value of cash flows to the original investment.c. a capital bu

dgeting evaluation technique that doesn’t use discounted values.

d. a mandatory technique when capital rationing is used.ANSWER: b EASY42.


Which method of evaluating capital projects assumes that cash inflows can be
reinvestedat the discount rate?a. internal rate of returnb. payback periodc.
profitability indexd. accounting rate of returnANSWER: c MEDIUM43. If the total

cash inflows associated with a project exceed the total cash outflows

associated with the project, the project’s

a. net present value is greater than zero.b. internal rate of return is greater than
zero.c. profitability index is greater than 1.d. payback period is acceptable.ANSWER:
b EASY44. The net present value and internal rate of return methods of decision
making in capitalbudgeting are superior to the payback method in that theya. are
easier to implement.b. consider the time value of money.c. require less input.d.
reflect the effects of sensitivity analysis.ANSWER: b EASY

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45. If an investment has a positive net present value, thea. internal rate of return is
higher than the discount rate.b. discount rate is higher than the hurdle rate of
return.c. internal rate of return is lower than the discount rate of return.d. hurdle
rate of return is higher than the discount rate.ANSWER: a EASY46.
The rate of interest that produces a zero net present value when a project’s
discounted
cash operating advantage is netted against its discounted net investment is thea.
cost of capital.b. discount rate.c. cutoff rate.d. internal rate of return.ANSWER: d
EASY47. For a profitable company, an increase in the rate of depreciation on a
specific projectcoulda.

increase the project’s profitability index.

b. increase the proj

ect’s payback period.

c.

decrease the project’s net present value.

d.

increase the project’s internal rate of return.

ANSWER: d MEDIUM48. Which of the following capital expenditure planning and


control techniques has beencriticized because it might mistakenly imply that
earnings are reinvested at the rate of return earned by the investment?a. payback
methodb. accounting rate of returnc. net present value methodd. internal rate of
returnANSWER: d EASY

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49. If the discount rate that is u

sed to evaluate a project is equal to the project’s internal rateof return, the
project’s _____________ is zero.

a. profitability indexb. internal rate of returnc. present value of the investmentd.


net present valueANSWER: d EASY50. As the marginal tax rate goes up, the benefit
from the depreciation tax shielda. decreases.b. increases.c. stays the same.d.

can move up or down depending on whether the firm’s cost of capital is high or

low.ANSWER: b MEDIUM51. When a profitable corporation sells an asset at a loss,


the after-tax cash flow on the salewilla. exceed the pre-tax cash flow on the sale.b.
be less than the pre-tax cash flow on the sale.c. be the same as the pre-tax cash flow
on the sale.d. increase the corpora

tion’s overall tax liability.

ANSWER: a MEDIUM52. In a typical (conservative assumptions) after-tax


discounted cash flow analysis,depreciation expense is assumed to accrue ata. the
beginning of the period.b. the middle of the period.c. the end of the period.d.
irregular intervals over the life of the investment.ANSWER: c EASY