Multiple Choice Questions

1. A project that has a condition associated with its acceptance or rejection is known as:

(a) A mutually exclusive alternative

(b) A contingent project

(c) A dependent project

(d) Both (b) and (c)

2. An assumption inherent in capital budgeting is that all positive net cash flows are reinvested at the MARR from the time they are realized until:

(a) The end of the shortest-lived project

(b) The end of the longest-lived project

(c) The end of the respective project that generated the cash flow

(d) The average of the lives of the projects included in the bundle

3. All of the following are correct when a capital budgeting problem is solved using the 0-1 integer linear programming model except:

(a) Partial investment in a project is acceptable.

(b) The objective is to maximize the present worth of the investments.

(c) Budget constraints may be present for the first year only or for several years.

(d) Contingent and dependent project restrictions may be considered.

4. All of the following are true when formulating mutually exclusive bundles of independent projects except:

(a) One of the bundles is the do-nothing project.

(b) A bundle may consist of only one project.

(c) The capital limit may be exceeded as long as it is exceeded by less than 3%.

(d) A bundle may include contingent and dependent projects.

5. When there are 5 projects involved in a capital budgeting study, the maximum number of bundles that can be formulated is:

(a) 6

(b) 10

(c) 31

(d) 32

6. The independent projects shown below are under consideration for possible implementation by Renishaw Inc. of Hoffman Estates, Rhode Island. If the company’s MARR is 14% per year and it uses the IROR method of capital budgeting, the projects it should select under a budget limitation of $105,000 are:

(a) A, B, and C

(b) A, B, and D

(c) B, C, and D

(d) A, C, andD

Rate of Return, % Annual Income, $ per Year 4,000 1,900 2.600 10,000 6,000 Project First Cost, $ -20,000 -10,000 -15,000 -70,000 -50,000 20.0 19.0 17.3 14.3 12.0