A firm is considering only 2 projects, both of which have positive a NPV. The fi

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A firm is considering only 2 projects, both of which have positive a NPV. The firm only has enough capital to invest in one project. The firm should select the project with the lowest NPV.

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Question 2 (1 point)

While the payback period is not a measure based on the time value of money, a shorter payback period implies a less risky project (all else remaining the same).

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Question 3 (1 point)

A firm's WACC is often referred to as the 'hurdle rate' for new project profitability. All new projects must earn at least the firm WACC in order to add value to the company.

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Question 4 (1 point)

While the capital budgeting measures are easy to calculate, their results are only as good as the estimates of the future cash inflows provided as input.

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Question 5 (1 point)

The Profitability Index is calculated by summing all of the future estimated cash inflows generated by the project, and dividing that sum by the required investment amount.

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Question 6 (1 point)

A firm has two projects from which it is choosing. The firm should always select the project with the shortest Payback Period.

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Question 7 (1 point)

If a project has a positive NPV, the project IRR will exceed the firm's WACC.

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Question 8 (1 point)

The U.S. tax code has a system of accelerated depreciation referred to as:

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Straight line

MACRS

Sum-of-the-years-digits

Double-declining balance

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Question 9 (1 point)

Which of the below implies necessarily that a project is profitable?

Question 9 options:

The project has a payback period shorter than the firm's strategic planning horizon

The project has a profitability index less than 1

The project's IRR is greater than the firm's WACC

The project has an NPV equal to 0

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Question 10 (1 point)

Depreciation Expense has no impact on the incremental cash flows related to any given project because it is a non-cash expense.

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Question 11 (1 point)

A firm sells used equipment for $2,300 cash after owning it for 8 full years. The equipment had a useful life of 10 years and was depreciated on a straight-line basis. Originally, the equipment cost 7,500. Assuming a tax rate of 35%, what was the after-tax cash benefit of the sale?

Question 11 options:

800

520

1,495

280

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Question 12 (1 point)

A project's NPV is calculated by summing the future incremental cash flows of the project, and subtracting the amount of the required initial investment.

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Explanation / Answer

1. False - Firm should select the project with highest NPV.

2. True - A shorter payback period indicates that the capital invested is recovered at the earliest.

3. True - WACC is the cost of capital. Firm's should earn atleast this rate to be profitable.

4. True - The future cash flows are forecasted. Only when the forecasted cash flows are accurate, capital budgeting techniques hold true.

5. False - PI = (NPV + initial investment)/Initial investment

6. True - A shorter payback period indicates that the capital invested is recovered at the earliest.

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