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Chapter 13:   Capital Budgeting Techniques

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1. For two conventional projects whose cumulative cash flows are identical, the higher the discount rate, the more valuable will be the proposal with the early cash flows.

2. A firm short of cash might well give greater emphasis to the payback period in evaluating a project.

3. An investment with a short payback period is almost certain to have a positive net present value.

4. The net present value of a project generally decreases as the required rate of return increases.

5. A mutually exclusive project is one whose acceptance does not preclude the acceptance of alternative projects.

6. Use of the IRR method implicitly assumes that the project's intermediate cash inflows are reinvested at the required rate of return used under the NPV method.

7. If a project's cash flows are discounted at the internal rate of return, the NPV will be zero.

8. All three major discounted cash flow methods of evaluation will consistently give the same desirability ranking to a series of projects.

9. Capital rationing occurs when funds are unlimited.

10. For graduation you've been offered your choice of receiving either a Maserati or a Porsche. This is an example of INDEPENDENT projects.

11. Sensitivity analysis provides useful knowledge about the sensitivity of a project's NPV to a change in one (or more) input variables.

12. Sensitivity analysis indicates whether a project should be accepted or rejected.

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