FIN 351 Quiz 8 Capital Budgeting Please write down your choice in the blank befo

Question

FIN 351 Quiz 8 Capital Budgeting Please write down your choice in the blank 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. 3. 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. 4.--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) d is correct. Common shares are not an example of capital assets.

2) d is correct. We need cash flows and cost of capital to compute NPV, IRR and Discounted cash flows.

3) d is correct. IRR is the rate at which NPV = 0, which means present value of cash inflows is equal to present value of cash outflows.

4) c is correct. NPV = PV of cash inflows - Initial cost. If the initial cost increases, NPV decreases.

5) d is correct.

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