Question

1. The net present value method assumes that cash flows are reinvested at the ____. Whereas the internal rate of return method assumes that cash flows are reinvested at the____.
   1. discount rate, required rate of return
   2. cost of capital, market rate of return
   3. firm’s cost of capital, computed internal rate of return
   4. marginal cost of capital , discount rate.
2. In terms of the capital budgeting process, the dollar amount of interest charges is
   1. always considered in the net cash flow calculation
   2. normally not considered in the net cash flow calculation
   3. always considered a s a part of the net investment
   4. never a consideration
3. The relationship between Net Present Value (NPV) and Internal rate of return is such that
   1. both approaches always provide the same ranking of alternative investment projects
   2. if the NPV of a project is negative, the IRR must be greater than the cost of capital
   3. the IRR of a project is equal to the firm’s cost of capital if the NPV of a project is $0
   4. none of these
4. Depreciation is based on the asset cost plus all of the following except
   1. training costs so that workers can use the machinery installed
   2. shipping and handling cost
   3. installation
   4. purchase cost of the new equipment
5. In capital budgeting analysis, which of the following ignores the time value of money?
   1. Payback Period
   2. Net present Value
   3. Profitability index
   4. Internal Rate of return

Answer 1

1) The answer of first question is option c i.e. firm’s cost of capital, computed internal rate of return.

2) The answer of second question is option b i.e. normally not considered in the net cash flow calculation.

3) The answer of third question is option c i.e. the IRR of a project is equal to the firm’s cost of capital if the NPV of a project is $0.

4) The answer of fourth question is option a i.e. training costs so that workers can use the machinery installed.

5) The answer of fifth question is option a i.e. Payback Period.