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
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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
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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
