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# Capital Budgeting Models

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Which one of the following is TRUE?
IRR is superior to NPV for choosing between different projects.
The NPV decision rule says to accept an investment if the NPV is negative.
Payback ignores the project s cost.
The IRR decision rule states that a project should be accepted if its IRR exceeds the required return.
The discount rate that causes the net present value of a project to equal zero is called the market rate.

"The market portfolio is currently generating a rate of return of 15%. You are analyzing portfolio XYZ for which you ve measured the required return to be 18%. Based on this information, which one of the following must be true? "
The beta of the market portfolio must be 2.0
The beta of portfolio XYZ must be greater than 1.0
Portfolio XYZ is not affected by swings in the market.
The risk free rate of return must be 3%.

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Which one of the following is TRUE?

The IRR decision rule states that a project should be accepted if its IRR exceeds the ...

#### Solution Summary

Solution selects the most appropriate answer in the given cases.

\$2.19

## Make capital budgeting decisions utilizing various capital budgeting models.

Make capital budgeting decisions utilizing various capital budgeting models.

1. Payback method
2. Net Present Value method
3. Internal Rate of Return method

Muscatel, Inc. is evaluating whether to build a bridge that will take two years to construct, or use a ferry to transport ore across a river. The cost of each alternative is a follows:

Bridge Ferry
Investment year 0 \$4,000,000 \$1,000,000
Annual revenue
Year 1 0 \$750,000
Year 2 0 \$750,000
Years 3-10 \$1,500,000 \$750,000
Annual operating cost \$250,000 \$100,000
Cost of capital 10% 10%

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