Question 6) Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?

6) Which of the following may be TRUE regarding mutually exclusive capital budgeting projects?

A) There is need for only one project, and both projects can fulfill that current need.

B) By using funds for one project, there are not enough funds available for the other project.

C) There is a scarce resource that both projects would need.

D) All of the above

8) Which of the statements below is FALSE?

A) The net present value decision model is an economically sound model when comparing different projects across a wide variety of products, services, and activities under capital constraint.

B) The greater the NPV of a project, the greater the “bag of money” for doing the project, and more money is better. If a company is short of capital, it would choose those projects that provide the largest “bag of money.”

C) Despite all of the advantages of using the NPV Model, it is inconsistent with the concept of the time-value-of-money.

D) By discounting all future cash flows to the present, adding up all inflows, and subtracting all outflows, we are determining the current value of the project.

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9) There are two ways to correct for projects with unequal lives when using the NPV approach. Which of the answers below is one of these ways?

A) One way is to find a common life, without the need to extend the projects to the least common multiple of their lives.

B) One way is to find the present value factors and then compare them.

C) One way is to compare the lengths of the projects and take the project with the shortest life.

D) One way is to find a common life by extending the projects to the least common multiple of their lives.

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10) Which of the statements below is FALSE?

A) We calculate the equivalent annual annuity by taking the NPV of the project and find the annuity stream that equates to the NPV, using the appropriate discount rate for the project and life of the project.

B) In dealing with mutually exclusive projects of unequal lives, we can compute the EAA for the NPV of the project over the life of the project.

C) One of the advantages of NPV over other decision models is that we can select the appropriate discount rate for each individual project and still compare the resulting NPVs across different projects.

D) By using the EAA approach for mutually exclusive projects, we overcome all potential problems.

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11) Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project?

A) Dweller accepts the project because the NPV is greater than $30,000.

B) Dweller rejects the project because the NPV is less than -$4,000.

C) Dweller rejects the project because the NPV is -$3,021.

D) Dweller accepts the project because the NPV is greater than $28,000.

12) Lincoln Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Lincoln accept the project?

A) Lincoln accepts the project because it has an NPV greater than $5,000. B) Lincoln rejects the project because it has an NPV less than $0.

C) Lincoln accepts the project because it has an NPV greater than $18,000. D) There is not enough information to make a decision.

13) Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of

$220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?

A) Geronimo accepts the project because the NPV is greater than $10,000.00.

B) Geronimo rejects the project because the NPV is about -$22,375.73.

C) Geronimo rejects the project because the NPV is about -$12,375.60.

D) Geronimo rejects the project because the NPV is about -$2,375.60.

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