What advantage does the discounted payback rule have over the normal payback rule?

Considers the time value of money

In the typical case, when do you accept a project according to the IRR rule?

Accept a project if the IRR exceeds the opportunity cost of capital

In what case can the IRR rule be misleading?

When there are multiple cash inflows and outflows

How do you calculate the project cash flows?

Project CF = Operating CF - Change in NWC - Capital Spending

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Capital Budgeting - Investment Decisions

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This Quiz is designed for first year students at Jacobs University Bremen to test their knowledge in Introduction to Finance (course CH-301). Prof. Dr. Andreas Seebeck Spring term 2022

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Questions 10

Answers

1
Accounting break-even uses which of the following measures for the break-even calculation?
Earnings before Interest and Taxes (EBIT)
Operating Cash Flow
Net Income
NPV
2
What is NOT considered a benefit of the NPV rule?
Acknowledges the time value of money
Depends on the forecasted cash flows and the cost of capital
Prefers early paybacks
Value additivity characteristic
3
What is the most used capital budgeting rule?
Payback
Degree of Operating Leverage
NPV
Discounted Payback
4
Which of the following is NOT an example of soft capital rationing?
Investors dont provide capital
Management does not know the opportunities in the future.
Management Worry about too much debt
Pursuit of predictive growth
5
What advantage does the discounted payback rule have over the normal payback rule?
Simpler and more intuitiv
Prefers early paybacks
Provides guidance on the appropriate cutoff date.
Considers the time value of money
6
In the typical case, when do you accept a project according to the IRR rule?
Acceot a project if the IRR is higher than the NPV
Accept a project if the IRR exceeds the opportunity cost of capital
Accept a project if the IRR is lower than the NPV
Accept a project if the IRR is lower than the opportunity cost of capital
7
Which of the following is NOT part of the pro forma financial statement process?
Calculate the break-even point
Investors dont provide capitaDerive the projected cash flows
Get a set of pro forma financial statements
Calculate the NPV
8
In scenario analysis, which of the following case is typially NOT included?
Base case
Null case
Worst case
Best case
9
In what case can the IRR rule be misleading?
When there are is one cash flow only
When there are multiple cash inflows and outflows
When there is an initial cash inflow and then cash outflows
When there is an initial cash outflow and then cash inflows
10
How do you calculate the project cash flows?
Project CF = Operating CF - Change in NWC + Capital Spending
Project CF = EBIT - Depreciation + Taxes
Project CF = EBIT + Depreciation - Taxes
Project CF = Operating CF - Change in NWC - Capital Spending

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