Question

Capital Budgeting:

1. T/F If the NPV<0, the WACC > the IRR

2.T/F Salvage value is added back in to the last years projects cash flows

3. T/F NPV is considered to be the superior method for choosing capital budget projects

4. T/F If projects are mutually exclusive, if one has a higher IRR choose that project over the NPV decision.

Cost of Capital

5. T/F external equity (new stock issuance) is less expensive since it will have a flotation cost

6. T/F The WACC is pivotal is making correct capital budgeting decisions as it lets a firm know if the cash flows from a new project are sufficient to cover the costs of acquiring that project.

Answer 1

Hello Sir/ Mam

Q - 1 - FALSE

IF NPV<0, then the IRR< WACC

Q - 2 - TRUE

If the asset is sold in the last year, salvage value is added to last years' cashflow.

Q - 3 - TRUE

NPV is considered superior than IRR, PBP, DPBP, PI for various different reasons.

Q - 4 - FALSE

Even if the projects are mutually exclusive, we should choose NPV decision over all others, rest depends upon our requirements.

Q - 5 - FALSE

Floating Costs decreases our inflow from external financing and hence external equit is more expensive.

Q - 6 - TRUE

I hope this solves your doubt.

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