FIN 351 Quiz 8 Capital Budgeting Pleaseritedownvourchoiceintheblank before the q
ID: 2793711 • Letter: F
Question
FIN 351 Quiz 8 Capital Budgeting Pleaseritedownvourchoiceintheblank before the question. Two points each and 10 points in total. 1. Which of the following assets is not a capital asset for Goodyear Tire & Rubber Company? a. The Goodyear headquarter building in Arkon, OH b. The Goodyear Service Centers fully owned by the company. The Goodyear factory in India. The Goodyear common shares the company has repurchased. d. 2. In order to conduct capital budgeting using which of the following methods, we do NOT need to estimate both the cash flows and cost of capital? a. b. c. d. NPV method. IRR method. Discounted payback period method None of the above. Which of the following statements is CORRECT? A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted. a. b. c A basic rule in capital budgeting is that if a project's IRR exceeds its NPV, then the project should be accepted. The internal rate of return is the discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows. d. Which of the following will DECREASE the net present value of a project? a. Increasing the value of each of the project's cash inflows. b. Moving each of the cash inflows forward to an earlier time period. c Increasing the project's initial cost at time zero. d. Decreasing the cost of capital. 5. Which of the following statements is CORRECT? a. 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 IRR.Explanation / Answer
1. Option d. The Goodyear common shares the compnay has repurchased is the correct answer. These are also known as treasury shares and redece the common equity of the compnay in the open market. In Balance sheet it it shown as reduction to common equity in Liability side.
2. Option b.In IRR Method, we need cash flows but not the cost of capital. IRR ethod finds out the rate at which NPV would be equal to 0. Hence, by hot and trial method rates are applied to find out this rate.
3. option d. Internal rate of Return is the rate which equate the present value of cash outflows with presentvalue of cash inflows. IRR is the rate at which NPV is zero, hence this would result only when present value of cash inflows is equal to the present value of cash outflows.
4. Option c. Increase the project's innitail cost at time 0. This would result in decreased NPV. In NPV method the innitial cost is reduced from the present value of the cash inflows, hence, any increase in innital project cost at time 0 would decrease NPV.
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