Chapter 9 Capital Budgeting Decision Models

1) ________
is at the heart of corporate finance, because it is concerned with making the
best choices about project selection.

A)
Capital budgeting B) Capital structure C) Payback period

D) Short-term budgeting

2) The
________ model is usually considered the best of the capital budgeting
decision-making models. A) Internal Rate of Return (IRR)

B) Net Present Value (NPV) C)
Profitability Index (PI)

D) Discounted Payback

3) We
can separate short-term and long-term decisions into three dimensions. Which of
the below is NOT one of these?

A) Degree of information gathering prior
to the decision B) Cost

C) Personality of CEO making the
decisions D) Length of impact

4) Because
money is limited, companies must be careful to choose projects that are
feasible and profitable.

5) Capital
budgeting decisions are typically long-term decisions.

6)
Name and describe three key observations that we can make about the capital
budgeting decision.
1)
.

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9.2 Payback Period

1) The
________ model answers one basic question: How soon will I recover my initial
investment? A) Payback Period

B) IRR C) NPV

D) Profitability Index

2)
The ________ model
determines at what point in time cash outflow is recovered by the corresponding
future cash inflow.

A) NPV
B) Buyback

C)
Net Present Value D) Payback Period

3) Consider
the following four-year project. The initial after-tax outlay or after-tax cost
is $1,000,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are:
$400,000, $300,000, $200,000 and $200,000, respectively. What is the payback
period without discounting cash flows?

A) 2.5 years B) 3.0 years C) 3.5 years
D) 4.0 years
.

4) Consider
the following tem-year project. The initial after-tax outlay or after-tax cost
is $1,000,000. The future after-tax cash inflows each year for years 1 through
10 are $200,000 per year. What is the payback period without discounting cash
flows?

A)
10 years B) 5 years C) 2.5 years D) 0.5 years
.

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5)
The initial outlay or
cost is $1,000,000 for a four-year project. The respective future cash inflows
for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is
the payback period without discounting cash flows?

A) About 2.50 years B) About 2.67 years
C) About 3.67 years D) About 4.50 years

6) Acme,
Inc. is considering a four-year project that has an initial outlay or cost of
$100,000. The respective future cash inflows from its project for years 1, 2, 3
and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if
its payback period is 31 months?

A) Yes, because it pays back in 25
months. B) Yes, because it pays back in 28 months.

C) No, because it pays back in over 31
months. D) No, because it pays back in over 35
.

7) Which
of the statements below is TRUE of the payback period method?
A) It
ignores the cash flow after the initial outflow has been recovered.
B) It is
biased against projects with early-term payouts.
C) It
incorporates time-value-of-money principles.

D) It
focuses on cash flows after the initial outflow has been recovered.
8)
Which of the statements below is FALSE?

A) Firms
rarely use the payback period for small-dollar decisions.

B) Many
companies use the payback period for small-dollar decisions because the time
spent gathering the accurate cash flow may be lowered substantially if it is
necessary to estimate only through the first few years.

C) Many
companies use the payback period for small-dollar decisions because the
accuracy of future cash flows on these smaller projects may be quite difficult
to estimate far into the future.

D) Many
companies use the payback period for small-dollar decisions because it does
prevent a serious error when the future cash flow is never sufficient to
recover the initial cash outlay.

9) The
initial outlay or cost for a four-year project is $1,000,000. The respective
cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and
$300,000. What is the discounted payback period if the discount rate is 10%?

A) About 2.67 years B) About 3.35 years
C) About 3.67 years D) About 4.50 years

10) Acme,
Inc. is considering a four-year project that has initial outlay or cost of
$100,000. The respective cash inflows for years 1, 2, 3 and 4 are: $50,000,
$40,000, $30,000 and $20,000. Acme uses the discounted payback period method,
and has a discount rate of 11.50%. Will Acme accept the project if its payback
period is 37 months?

A) Yes, because it pays back in less
than 37 months. B) No, because it pays back in over 37 months.

C) No, because it pays back in over 38
months. D) No, because it pays back in over 40