1. The required rate of return represents the cost of capital for a project.
2. The IRR assumes that cash flows are reinvested at the cost of capital
3. If the NPV of a project is zero, then the profitability index should equal one.
4. The net present value profile is a graph showing how a project’s NPV changes as the IRR changes.
5. If the NPV of a project is positive, the profitability index must be greater than one.
6. It is possible for a project to have more than one IRR if there is more than one sign change in the after-tax cash flows due to the project.
7. If the project’s payback period is greater than or equal to zero, the project should be accepted.
8. The NPV of a project will equal zero whenever the payback period of a project equals the required rate of return.
9. The NPV of a project will equal zero whenever the average rate of return equals the required rate of return.
10. The IRR is the discount rate that equates the present value of the project’s future net cash flows with the project’s initial outlay.
11. If a project’s profitability index is less than 0.0, then the project should be rejected.
12. A single project can only have one NPV, PI, and IRR.
13. Competitive market forces make it imperative for a firm to have a systematic strategy for generating
14. Spending on capital equipment in the U.S. has been growing at an extremely rapid pace.
15. The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.
16. In recent years, more and more capital expenditures have been aimed at introducing new products, rather than being directed at cost-saving and productivity-improving projects.
17. Payback period is the least sophisticated capital-budgeting technique
18. The discounted payback period is superior to the traditional payback period; however, its use as a capital-budgeting tool is still limited.
19. An NPV of zero indicates that a project is expected to provide the required rate of return.
20. NPV is the most theoretically correct capital-budgeting method.
21. There are no disadvantages to the Net Present Value method.
22. Capital budgeting is the decision-making process with respect to investment in working capital.
23. NPV is a better capital-budgeting technique than IRR.
24. If NPV equals zero, then the discount rate used to calculate NPV must equal the project’s IRR.
25. If NPV is negative, then the project’s cost is less than the project’s expected benefit.
26. If NPV is positive, then the project is expected to return more than the required rate of return.
27. Currently, most firms use NPV and IRR as their primary capital-budgeting technique.
28. Most firms use the payback period as a secondary capital-budgeting technique, which in a sense allows them to control for risk.
29. Although discounted cash flow decision techniques have become widely accepted, their use depends to some degree on the size of the project and where within the firm the decision is being made.