Which of the following statements is true? 1. Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions. 2. If the internal rate of return is less than the required rate of return for a project, then the net present value of that project is positive. 3. An investment project with a profitability index of 0.04 has an internal rate of return that is less than the discount rate. Multiple Choice Only statement 3 is true. All of the statements are true. None of the statements are true.

Which of the following statements is true? 1. Neither the net present value method nor the internal rate of return method can be used as a screening tool in capital budgeting decisions. 2. If the internal rate of return is less than the required rate of return for a project, then the net present value of that project is positive. 3. An investment project with a profitability index of 0.04 has an internal rate of return that is less than the discount rate. Multiple Choice Only statement 3 is true. All of the statements are true. None of the statements are true.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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7 In capital budgeting decisions, the profitability index and internal rate of return methods will rank projects in the same order of preference. True False
For a capital investment project to be acceptable, it must generate a rate of return A) Less than the required rate of returnB) Equal to or greater than the cost of capitalC) equal to the initial investmentD) none of the above
What capital budgeting rule is a simple but imperfect attempt to solve the capital rationing problem? a The profitability index b The accounting rate of return c The payback rule d The internal rate of return e The net present value rule
True or False: In solving a capital budgeting problem involving investment opportunities that are divisible (i.e., you can invest in portions of the opportunities instead of “all or nothing”), you rank the opportunities on thebasis of internal rate of return and add to the portfolio opportunities andfractions of opportunities, beginning with the largest internal rate of return,until “the investment bucket is filled.”
Which of the following statements is inaccurate under perfect capital markets? A. The NPV of a project determines whether it is worth investing in it B. How much an investor should invest in a particular project does not depend on the investor’s risk preferences C. Whether an investor should invest in a project or not does not depend on the investor’s intertemporal preferences D. Whether a long term project should be undertaken does not depend on whether the investor is patient or impatient
QUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the project
Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.
Which of the following statements are true? I At higher discount rate, a project is more likely to be rejected. II A project is acceptable if the IRR = 8% while the cost of capital = 5%. III IRR does not account for time value of money. Group of answer choices 1. All of the above. 2. I and II 3. I and III 4. II and III
Which of the projects according to capital budgeting are not selected Select one: a. Project with early discounted payback b. Project with lower Profitability index c. Project with early payback d. Project with higher Net Present value e. None of the option
If the net present value of a proposed investment is negative, what is the discount rate used? O Less than the project's internal rate of return. Less than the minimum required rate of return. Greater than the project's internal rate of return. Greater than the minimum required rate of return.
The internal rate of return is defined as the: OOO rate of return a project will generate if the project is financed solely with internal funds. maximum rate of return a firm expects to earn on a project. discount rate that equates the net cash inflows of a project to zero. discount rate that causes the profitability index for a project to equal zero. discount rate which causes the net present value of a project to equal zero.
Which of the following statements about the "payback method" of selecting capital projects is true? Question 15 options: A) The payback method considers all cash flows, even those that occur after the payback has been reached. B) In the payback method, all cash flows are disregarded. C) The payback method has many deficiencies. D) The payback method always leads to the same decision as the other investment selection methods.