1. Most of the capital budgeting methods use

A. accrual accounting numbers.

B. cash flow numbers.

C. net income.

D. accrual accounting revenues.

E. not given.

2. The capital budgeting decision depends in part on the

A. availability of funds.

B. relationships among proposed projects.

C. risk associated with a particular project.

D. A, B, & C.

E. not given.

3. Projects that compete with one another, so that the acceptance of one eliminates the others from further

consideration are called

A. independent projects.

B. mutually exclusive projects.

C. replacement projects.

D. expansion projects.

E. not given.

4. The capital budgeting method that takes into account both the size of the original investment & the

discounted cash flows is the

A. cash payback method.

B. internal rate of return (IRR) method.

C. net present value (NPV) method.

D. profitability index (PI).

E. not given.

5. All of the following statements about the IRR method are correct except that it

A. recognizes the time value of money.

B. is widely used in practice.

C. is easy to interpret.

D. can be used only when the cash inflows are equal.

E. not given.

6. If a payback period for a project is greater than its expected useful life, the

A. project will always be profitable.

B. entire initial investment will not be recovered.

C. project would only be acceptable if the company's cost of capital was low.

D. project's return will always exceed the company's cost of capital.

E. not given. Page 3 of 4

7. An approach that uses a number of outcome estimates to get a sense of the variability among potential

returns is

A. the discounted cash flow technique.

B. the net present value method.

C. risk analysis.

D. sensitivity analysis.

E. not given.

8. In comparing the IRR & NPV methods of evaluation,

A. financial managers prefer NPV, because it is presented as a rate of return.

B. financial managers prefer NPV, because it measures benefits relative to the amount invested.

C. IRR is theoretically superior, but financial managers prefer NPV.

D. NPV is theoretically superior, but financial managers prefer to use IRR.

E. Not given.

9. The IRR of a project increases as the __________ decreases.

A. discount rate

B. incremental cash flow

C. initial outlay of the project

D. A & B

E. A, B, & C

10. The underlying cause of conflicts in ranking for projects by IRR & NPV methods is

A. the reinvestment rate assumption regarding intermediate cash flows.

B. that neither method explicitly considers the time value of money.

C. the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of

capital.

D. the assumption made by the NPV method that intermediate cash flows are reinvested at the IRR.

E. not given.