Fundamentals Of Financial Management Concise Edition 9th Edition By Brigham – Test Bank

1. A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC).
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-1 An Overview of Capital Budgeting
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.01 – An Overview of Capital Budgeting
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: Capital budget
KEYWORDS: Bloom’s: Comprehension
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

2. Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-2 Net Present Value (NPV)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.02 – Net Present Value (NPV)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: PV of cash flows
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

3. 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.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-2 Net Present Value (NPV)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.02 – Net Present Value (NPV)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: NPV
KEYWORDS: Bloom’s: Comprehension
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

4. A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the project should be accepted.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-2 Net Present Value (NPV)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.02 – Net Present Value (NPV)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: NPV
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

5. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV.
a. True
b. False
ANSWER: True
DIFFICULTY: EASY
REFERENCES: 11-2 Net Present Value (NPV)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.02 – Net Present Value (NPV)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: Mutually exclusive projects
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

6. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-2 Net Present Value (NPV)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.02 – Net Present Value (NPV)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: Mutually exclusive projects
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

7. 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.
a. True
b. False
ANSWER: True
DIFFICULTY: EASY
REFERENCES: 11-3 Internal Rate of Return (IRR)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.03 – Internal Rate of Return (IRR)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: IRR
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

8. Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-3 Internal Rate of Return (IRR)
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.03 – Internal Rate of Return (IRR)
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: IRR
KEYWORDS: Bloom’s: Comprehension
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

9. Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project’s life.
a. True
b. False
ANSWER: True
DIFFICULTY: EASY
REFERENCES: 11-4 Multiple Internal Rates of Return
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.04 – Multiple Internal Rates of Return
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: Multiple IRRs
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM

10. The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects that have different lives are being compared.
a. True
b. False
ANSWER: False
DIFFICULTY: EASY
REFERENCES: 11-4 Multiple Internal Rates of Return
QUESTION TYPE: True / False
LEARNING OBJECTIVES: FOFM.BRIG.17.11.04 – Multiple Internal Rates of Return
NATIONAL STANDARDS: United States – BUSPROG.FOFM.BRIG.17.06 – Reflective thinking
STATE STANDARDS: United States – OH – DISC.FOFM.BRIG.17.03 – Capital budgeting and cost of capital
TOPICS: Multiple IRRs
KEYWORDS: Bloom’s: Knowledge
DATE CREATED: 6/23/2015 3:26 PM
DATE MODIFIED: 6/23/2015 3:26 PM