Capital Budgeting Problems

True/False Questions

1. An investment project with a project profitability index of -0.02 has an internal rate of return that is larger than the discount rate.

2. Both the net present value method and the internal rate of return method can be used as a screening tool in capital budgeting decisions.

3. When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value.

4. When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.

5. Discounted cash flow techniques automatically provide for recovery of initial investment.

6. The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project.

7. Because of the uncertainty and large cost involved in investments in automated equipment, any intangible benefits from these projects should be ignored.

8. When the internal rate of return method is used to rank investment proposals, the lower the internal rate of return, the more desirable the investment.

9. When computing the project profitability index of an investment project, the investment required will include any investment made in working capital at the beginning of the project.

10. If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

11. In calculating payback where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.

12. In the payback method, depreciation is added back to net operating...