CTP Long-Term Capital Investments 2

Question 1

A company is evaluating two mutually exclusive projects with different useful lives. Which technique is MOST appropriate for comparing them?

Accepted Answer

Equivalent annual annuity (EAA)

Answer

The equivalent annual annuity converts NPVs to annual terms, enabling valid comparison of projects with unequal lives.

Question 2

Which component is NOT included in the incremental cash flows used in capital budgeting analysis?

Accepted Answer

Sunk costs

Answer

Sunk costs are past expenditures that cannot be recovered and are irrelevant to future capital budgeting decisions.

Question 3

A project has an NPV of $0 when discounted at 12%. What does this indicate?

Accepted Answer

The project exactly meets the required rate of return

Answer

An NPV of zero means the project earns exactly the required rate of return (hurdle rate), making it marginally acceptable.

Question 4

The Modified Internal Rate of Return (MIRR) differs from IRR primarily because MIRR:

Accepted Answer

Assumes reinvestment at the cost of capital rather than the IRR

Answer

MIRR corrects the IRR's reinvestment rate assumption by assuming intermediate cash flows are reinvested at the firm's cost of capital.

Question 5

In capital budgeting, the terminal cash flow typically includes:

Accepted Answer

After-tax salvage value and recovery of net working capital

Answer

Terminal cash flows include after-tax proceeds from asset disposal and return of net working capital invested at the project's start.

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