II. Multiple-Choice Questions

1. All but one of the following is NOT true about capital budgeting.

a. It involves identifying projects that will add to the firm's value.
b. It involves large capital investments.
c. The large capital investments can be reversed at any time.
d. It allows the firm's management to analyze potential business opportunities and decide on which ones to undertake.

2. Which of the following are aspects of independent projects?

a. Their cash flows are related.
b. Their cash flows are unrelated.
c. Selecting one would automatically eliminate accepting the other.
d. None of the above.

3. Two projects are considered to be independent if

a. selecting one would have no bearing on accepting the other.
b. their cash flows are unrelated.
c. Both a and b.
d. None of the above.

4. Two projects are considered to be mutually exclusive if

a. The projects perform the same function.
b. Selecting one would automatically eliminate accepting the other.
c. Both a and b.
d. None of the above.

5. Two projects are considered to be contingent projects if

a. Selecting one would automatically eliminate accepting the other.
b. The acceptance of one project is dependent on the acceptance of the other.
c. Rejection of one project does not eliminate the selection of the other.
d. None of the above.

6. Contingent projects would imply that

a. The acceptance of one project is dependent on the acceptance of the other.
b. The projects can be either mandatory or optional.
c. Both a and b.
d. None of the above.

The following information should be used for Questions 7 and 8.
A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport.

7. The firm's decision will be to

a. accept both projects because they are independent projects.
b. accept both projects because they are contingent projects.
c. pick the one that adds the most value because they are mutually exclusive projects.
d. pick neither project.

8. If both projects are positive-NPV projects, then the firm should

a. accept both projects because they are independent projects.
b. select the higher NPV project because they are mutually exclusive.
c. accept both projects because they are contingent projects.
d. Not enough information is given to make a decision.

9. The cost of capital is

a. the minimum return that a capital budgeting project must earn for it to be accepted.
b. the maximum return a project can earn.
c. the return that a previous project for the firm had earned.
d. none of the above.

10. Capital rationing implies that

a. the firm does not have enough resources to fund all of the available projects.
b. funding needs equal funding resources.
c. the available capital will be allocated equally to all available projects.
d. none of the above.

11. Capital rationing implies that

a. funding resources exceed funding needs.
b. funding needs exceed funding resources.
c. funding needs equal funding resources.
d. none of the above.

12. Which one of the following statements is NOT true?

a. Accepting a positive-NPV project increases shareholder wealth.
b. Accepting a negative-NPV project has no impact on shareholder wealth.
c. Accepting a negative-NPV project decreases shareholder wealth.
d. Managers are indifferent about accepting or rejecting a zero NPV project.

13. Which one of the following statements is NOT true?

a. Accepting a positive-NPV project increases shareholder wealth.
b. Accepting a negative-NPV project decreases shareholder wealth.
c. Accepting a zero NPV project has a negative impact on shareholder wealth.
d. Managers are indifferent about accepting or rejecting a zero NPV project.

14. In computing the NPV of a capital budgeting project, one should NOT

a. estimate the cost of the project.
b. discount the future cash flows over the project's expected life.
c. ignore the salvage value.
d. make a decision based on the project's NPV.

15. The net present value

a. uses the discounted cash flow valuation technique.
b. will provide a direct measure of how much the firm value will change because of the capital project.
c. is consistent with shareholder wealth maximization goal.
d. all of the above.