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Which of the following describes how an externality can affect a market? A positive externality can...

Which of the following describes how an externality can affect a market?

A positive externality can lead to overproduction.

A negative externality can lead to over-production.

Prices in a competitive market reflect the full costs and benefits of production.

The cost of externalities can always be quantified and "internalized" by a party to the transaction.

Which of the following is a function of corporate capital budgeting?

To evaluate the performance of managers.

To encourage managers to consider problems before they arise.

To rank projects by profitability.

All of these answers.

You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects?

Internal Rate of Return.

Modified Internal Rate of Return.

Net Present Value.

Payback period method.

Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes?

The IRR method is clear an easy to understand.

Internal rate of return is an indicator of the efficiency, quality or yield of an investment.

All of these answers.

The IRR method recognizes the time value of money.

Which of the following is a correct definition of Net Present Value.

The sum of the present values of all a project's revenues and expenses.

NPV = PV_inflows + PV_outflows

All of these answers.

A means of evaluating a project's profitability.

Solutions

Expert Solution

Question: Which of the following is a function of corporate capital budgeting?

Answer: "To rank projects by profitability."

In Capital Budgeting Decision, We decide the projects are used and to be rejected based on an NPV, IRR, MIRR, Profitability index. In this case, the "To Rank projects by profitability" is one of the capital budgeting methods.

Question: You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects?

Answer: We will choose "Net Present Value" as we have different cash flows and we will be able to decide on the Net Present Value by calculating the present value of the different cash flows and the highest cashflows will be chosen.

Question: Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes?

Answer: "Internal rate of return is an indicator of the efficiency, quality or yield of an investment."

The appropriate minimum rate to maximize the value added to the firm is the cost of capital, i.e. the internal rate of return of a new capital project needs to be higher than the company's cost of capital.

Question: "Which of the following is a correct definition of Net Present Value."

Answer: "NPV = PV_inflows + PV_outflows"

The Net Present Value is Present Value of Cash Inflow + Present Value of Cash Outflow.

jeff jeffy answered 1 year ago

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