Question

With the improvement in the technology and understanding of discounting techniques, both the net present value (NPV) technique and internal rate of return (IRR) technique used in capital budgeting analyses have become more popular because these techniques provide decisions that help the firm to a. minimize its overall payback period b.maximize its value c. maximize the initial capital investment d. minimize the number of multiple IRRs computed for every project e.maximize it required rate of return QUESTION 10 Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the cost of investment in a project sooner rather than later? a. Net present value (NPV) O b. Modified internal rate of return (MIRR) c. Internal rate of return (IRR) d. Present value (PV) of cash flows Oe. Traditional payback period (PB)

Answer 1

9]

b - maximize its value.

The goal of financial management is to maximize the value of the firm

a is incorrect - minimizing payback period does not maximize firm value

c is incorrect - maximizing initial capital investment does not maximize firm value

d is incorrect - this is irrelevant to maximizing firm value

e is incorrect - firm value is maximized when required return is minimized

10]

e - traditional payback period

Payback period measure the time taken by the project's cash flows to recover the initial investment

13]

e is correct. Depreciation is tax deductible, and hence affects the project cash flows

a is incorrect - depreciation is a non cash expense

b is incorrect - sunk costs are irrelevant because they are already incurred and not incremental to the acceptance of the project

c is incorrect - these charges are added to the asset price

d is incorrect - it is generally assumed that after the project ends, the operating level returns to the level before the project was purchased