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Exam 11: Capital Budgeting

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Question 111

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What is divided into the present value of the cash inflows when calculating the profitability index?

A) the present value of the undiscounted profit before taxes
B) the net present value of the cash flow
C) the future value of the cash outflows
D) the present value of the cash outflows

E) B) and D)
F) B) and C)

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Question 112

True/False

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The net present value technique helps to establish whether a specific project will bring a return that is less than the cost of borrowed funds.

A) True
B) False

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Question 113

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The internal rate of return is a time-value-of-money yardstick that uses a specific interest rate used to discount all future cash inflows so that their present value equals the initial cash outflow.

The PI is an excellent method to ____________________ capital projects in a logical way because it looks at projects both in relation to budget constraints and in terms of which ones offer the highest total net present value.

Match the words with the term. -trade receivables

What two items does the net present value method measure?

Match the words with the term -buildings

The net present value technique measures the difference between the sum of all _______________________ and cash outflow discounted at a predetermined interest rate.

The payback reciprocal technique gives a rough estimate of the return on investment of a capital project.

Taylor Business is considering an investment of $ 210,000 in a capital project and $ 200,000 in working capital during the first year of operation. The yearly cash inflow for the project is as follows: Years 1 to 3 $ 50,000 Years 4 to 7 $ 70,000 Years 8 to 12 $ 80,000 At the end of the project, the company will sell the assets for $100,000 of its value and recover the 60% of its working capital. The company's weighted average cost of capital is 10%. -The present value of the cash inflow is ________________________.

The payback method measures time risk and NOT risk conditions.