Assignment 11
Assignment Chapter 11
Assignment Chapter 11
True/False
Indicate whether the statement is true or false.
____ 1. Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
____ 2. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
____ 3. Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
____ 4. If a project's NPV exceeds its IRR, then the project should be accepted.
____ 5. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
____ 6. The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
____ 7. One advantage of the payback method for evaluating potential investments is that it provides some information about a project's liquidity and risk.
____ 8. In theory, any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital. The rule itself should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.
____ 9. When considering two mutually exclusive projects, the firm should always select that project whose internal rate of return is the highest provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
____ 10. The primary reason that the NPV method
Assignment Chapter 11
True/False
Indicate whether the statement is true or false.
____ 1. Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life.
____ 2. The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
____ 3. Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
____ 4. If a project's NPV exceeds its IRR, then the project should be accepted.
____ 5. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
____ 6. The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
____ 7. One advantage of the payback method for evaluating potential investments is that it provides some information about a project's liquidity and risk.
____ 8. In theory, any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity cost of capital. The rule itself should not be affected by managers' tastes, the choice of accounting method, or the profitability of other independent projects.
____ 9. When considering two mutually exclusive projects, the firm should always select that project whose internal rate of return is the highest provided the projects have the same initial cost. This statement is true regardless of whether the projects can be repeated or not.
____ 10. The primary reason that the NPV method