Multiple choice

1. The net present value (NPV) capital budgeting decision method: 

 can be directly compared between alternatives 

 incorporates the time value of money in the calculations 

 is based on accounting net income 

 indicates an acceptable capital project with a negative value 

2. On a capital project, a net present value of ($250): 

 indicates the capital project’s rate of return exceeds the company’s cost of capital 

 for one project is considered superior to another project with a net present value of $500 

 indicates the internal rate of return would be unacceptable 

 indicates cash outflows total $250 for the capital project 

3. A 13% internal rate of return (IRR) on a capital project indicates all of the following except: 

 the actual rate of return of all cash inflows and outflows 

 that a 13% discount rate will result in the calculation of a net present value of zero 

 a better indication of acceptable capital projects when there is limited capital than the net present value method 

 an acceptable capital project if the cost of capital is 14% 

4. Which of the following indicates an unacceptable capital project? 

The internal rate of return exceeds the cost of capital. 

The net present value of a project is 10. 

The profitability index of a project is 0.97. 

The accounting rate of return exceeds the target rate of return.