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Principles of Managerial Finance, Brief 6e (Gitman)
Chapter 10 Capital Budgeting Techniques
10.1 Understand the key elements of the capital budgeting process.
1) In capital budgeting, the preferred approaches in assessing whether a project is acceptable are those
that integrate time value procedures, risk and return considerations, and valuation concepts.
Answer: TRUE
Topic: Capital Budgeting Techniques
Question Status: Revised
AACSB Guidelines: Reflective thinking skills
2) In capital budgeting, the preferred approaches in assessing whether a project is acceptable integrate
time value procedures, risk and return considerations, valuation concepts, and the required payback
period.
Answer: FALSE
3) Capital budgeting techniques are used to evaluate the firm's fixed asset investments which provide the
basis for the firm's earning power and value.
Answer: TRUE
Topic: Concept of Capital Budgeting
4) The purchase of additional physical facilities, such as additional property or a new factory, is an
example of a capital expenditure.
Answer: TRUE
Topic: Capital Budgeting Terminology
5) Capital budgeting is the process of evaluating and selecting short-term investments consistent with
the firm's goal of owner wealth maximization.
Answer: FALSE
6) A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure that
would appear as a current asset on the firm's balance sheet.
Answer: FALSE
1
Copyright © 2012 Pearson Education, Inc.
7) A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce
benefits over a period of time less than one year.
Answer: FALSE
8) An outlay for advertising and management consulting is considered to be a fixed asset expenditure.
Answer: FALSE
9) Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall
objectives and plans, and to evaluate their economic validity.
Answer: TRUE
10) The basic motives for capital expenditures are to expand, replace, or renew fixed assets or to obtain
some other, less tangible benefit over a long period.
Answer: TRUE
Topic: Motives for Capital Budgeting
11) The primary motive for capital expenditures is to refurbish fixed assets.
Answer: FALSE
12) Research and development is considered to be a motive for making capital expenditures.
Answer: TRUE
13) The capital budgeting process consists of five distinct but interrelated steps: proposal generation,
review and analysis, decision making, implementation, and follow-up.
Answer: TRUE
Topic: Steps in Capital Budgeting Process
2
14) The capital budgeting process consists of four distinct but interrelated steps: proposal generation,
review and analysis, decision making, and termination.
Answer: FALSE
15) Independent projects are projects that compete with one another for the firm's resources, so that the
acceptance of one eliminates the others from further consideration.
Answer: FALSE
Topic: Independent Projects
16) A non-conventional cash flow pattern associated with capital investment projects consists of an
initial outflow followed by a series of inflows.
Answer: FALSE
Topic: Conventional versus Nonconventional Cash Flows
17) If a firm has unlimited funds to invest in capital assets, all independent projects that meet its
minimum investment criteria should be implemented.
Answer: TRUE
18) The following three projects would seem to compete with one another form the firm's resources and
therefore would be examples of mutually exclusive projects.
(1) installing air conditioning in the plant
(2) acquiring a small supplier
(3) purchasing a new computer system
Answer: FALSE
Topic: Mutually Exclusive Projects
19) If a firm has unlimited funds to invest, all the mutually exclusive projects that meet its minimum
investment criteria can be implemented.
Answer: FALSE
3
20) Mutually exclusive projects are projects whose cash flows are unrelated to one another; the
acceptance of one does not eliminate the others from further consideration.
Answer: FALSE
21) To increase its production capacity, a firm is considering: 1) to expand its plant, 2) to acquire
another company, or 3) to contract with another company for production. These three projects would
appear to be good examples of independent projects.
Answer: FALSE
22) Independent projects are those whose cash flows are unrelated to one another; the acceptance of one
does not eliminate any others from further consideration.
Answer: TRUE
Topic: Independent versus Mutually Exclusive Projects
23) Mutually exclusive projects are those whose cash flows are unrelated to one another; the acceptance
of one does not eliminate any others from further consideration.
Answer: FALSE
24) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of
one does not eliminate any others from further consideration.
Answer: FALSE
25) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of
one eliminates others from further consideration.
Answer: TRUE
26) If a firm is subject to capital rationing, it is able to accept all independent projects that provide an
acceptable return.
Answer: FALSE
Topic: Capital Rationing
4
27) If a firm has unlimited funds, it is able to accept all independent projects that provide an acceptable
return.
Answer: TRUE
28) If a firm is subject to capital rationing, it has only a fixed number of dollars available for capital
expenditures, and numerous projects compete for these dollars.
Answer: TRUE
29) The ranking approach involves the ranking of capital expenditure projects on the basis of some
predetermined measure such as the rate of return.
Answer: TRUE
Topic: Accept-Reject versus Ranking Approaches
30) The accept-reject approach involves the ranking of capital expenditure projects on the basis of some
predetermined measure such as the rate of return.
Answer: FALSE
31) A conventional cash flow pattern is one in which an initial outflow is followed only by a series of
inflows.
Answer: TRUE
32) A nonconventional cash flow pattern is one in which an initial outflow is followed only by a series
of inflows.
Answer: FALSE
33) A nonconventional cash flow pattern is one in which an initial outflow is followed by a series of
both inflows and outflows.
Answer: TRUE
5
34) ________ is the process of evaluating and selecting long-term investments consistent with the firm's
goal of owner wealth maximization.
A) Recapitalizing assets
B) Capital budgeting
C) Ratio analysis
D) Restructuring debt
Answer: B
35) Fixed assets that provide the basis for the firm's profit and value are often called
A) tangible assets.
B) non-current assets.
C) earning assets.
D) book assets.
Answer: C
36) The most common motive for adding fixed assets to the firm is
A) expansion.
B) replacement.
C) renewal.
D) transformation.
Answer: A
Topic: Motives for Capital Budgeting Expenditures
37) The final step in the capital budgeting process is

A) implementation.
B) follow-up.
C) re-evaluation.
D) education.
Answer: B
38) The first step in the capital budgeting process is

A) review and analysis.
B) implementation.
C) decision-making.
D) proposal generation.
Answer: D
6
39) A $60,000 outlay for a new machine with a usable life of 15 years is called
A) capital expenditure.
B) operating expenditure.
C) replacement expenditure.
D) none of the above.
Answer: A
40) A capital expenditure is all of the following EXCEPT

A) an outlay made for the earning assets of the firm.
B) expected to produce benefits over a period of time greater than one year.
C) an outlay for current asset expansion.
D) commonly used to expand the level of operations.
Answer: C
41) All of the following are motives for capital budgeting expenditures EXCEPT
A) expansion.
B) replacement.
C) renewal.
D) invention.
Answer: D
Topic: Motives for Capital Budgeting Expenditures
42) All of the following are steps in the capital budgeting process EXCEPT
A) implementation.
B) follow-up.
C) transformation.
D) decision-making.
Answer: C
7
43) ________ projects do not compete with each other; the acceptance of one ________ the others from
consideration.
A) Capital; eliminates
B) Independent; does not eliminate
C) Mutually exclusive; eliminates
D) Replacement; does not eliminate
Answer: B
44) ________ projects have the same function; the acceptance of one ________ the others from
consideration.
A) Capital; eliminates
B) Independent; does not eliminate
C) Mutually exclusive; eliminates
D) Replacement; does not eliminate
Answer: C
45) A firm with limited dollars available for capital expenditures is subject to
A) capital dependency.
B) mutually exclusive projects.
C) working capital constraints.
D) capital rationing.
Answer: D
46) A conventional cash flow pattern associated with capital investment projects consists of an initial
A) outflow followed by a broken cash series.
B) inflow followed by a broken series.
C) outflow followed by a series of inflows.
D) inflow followed by a series of outflows.
Answer: C
8
47) A non-conventional cash flow pattern associated with capital investment projects consists of an
initial
A) outflow followed by a series of both cash inflows and outflows.
B) inflow followed by a series of both cash inflows and outflows.
C) outflow followed by a series of inflows.
D) inflow followed by a series of outflows.
Answer: A
48) ________ is a series of equal annual cash flows.

A) A mixed stream
B) A conventional
C) A non-conventional
D) An annuity
Answer: D
Topic: Annuity Cash Flows
49) The cash flows of any project having a conventional pattern include all of the basic components
EXCEPT
A) initial investment.
B) operating cash outflows.
C) operating cash inflows.
D) terminal cash flow.
Answer: B
50) Projects that compete with one another, so that the acceptance of one eliminates the others from
further consideration are called
A) independent projects.
B) mutually exclusive projects.
C) replacement projects.
Answer: B
9
51) The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum
acceptance criteria is called
A) the ranking approach.
B) an independent investment.
C) the accept-reject approach.
D) a mutually exclusive investment.
Answer: C
52) Which pattern of cash flow stream is the most difficult to use when evaluating projects?
A) Mixed stream
B) Conventional flow
C) Nonconventional flow
D) Annuity
Answer: C
Table 10.1
53) The cash flow pattern depicted is associated with a capital investment and may be characterized as
(See Table 10.1)
A) an annuity and conventional cash flow.
B) a mixed stream and non-conventional cash flow.
C) an annuity and non-conventional cash flow.
D) a mixed stream and conventional cash flow.
Answer: A
10
Table 10.2
54) The cash flow pattern depicted is associated with a capital investment and may be characterized as
(See Table 10.2)
A) an annuity and conventional cash flow.
B) a mixed stream and non-conventional cash flow.
C) an annuity and non-conventional cash flow.
D) a mixed stream and conventional cash flow.
Answer: D
10.2 Calculate, interpret, and evaluate the payback period.
1) In the case of annuity cash inflows, the payback period can be found by dividing the initial
investment by the annual cash inflow.
Answer: TRUE
Topic: Payback Method
2) The payback period is the amount of time required for the firm to dispose of a replaced asset.
Answer: FALSE
3) The payback period is generally viewed as an unsophisticated capital budgeting technique, because it
does not explicitly consider the time value of money by discounting cash flows to find present value.
Answer: TRUE
4) By measuring how quickly the firm recovers its initial investment, the payback period gives implicit
(though not explicit) consideration to the timing of cash flows and therefore to the time value of money.
Answer: TRUE
11
5) One strength of payback period is that it fully accounts for the time value of money.
Answer: FALSE
6) One weakness of payback is its failure to recognize cash flows that occur after the payback period.
Answer: TRUE
7) A project must be rejected if its payback period is less than the maximum acceptable payback period.
Answer: FALSE
8) Since the payback period can be viewed as a measure of risk exposure, many firms use it as a
supplement to sophisticated decision techniques.
Answer: TRUE
9) The major weakness of payback period in evaluating projects is that it cannot specify the appropriate
payback period in light of the wealth maximization goal.
Answer: TRUE
10) If a project's payback period is less than the maximum acceptable payback period, we would reject
it.
Answer: FALSE
11) Which of the following capital budgeting techniques ignores the time value of money?
A) Payback
B) Net present value
C) Internal rate of return
D) Two of the above
Answer: A
12
12) If a project's payback period is less than the maximum acceptable payback period, we would accept
it.
Answer: TRUE
13) If a project's payback period is greater than the maximum acceptable payback period, we would
reject it.
Answer: TRUE
14) If a project's payback period is greater than the maximum acceptable payback period, we would
accept it.
Answer: FALSE
15) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of
$300 for the next three years is 3.33 years.
Answer: TRUE
AACSB Guidelines: Analytic skills
$300 each year for the next three years is 0.333 years.
Answer: FALSE
$3,000 each year for the next three years is 0.333 years.
Answer: TRUE
$3,000 each year for the next three years is 3.33 years.
Answer: FALSE
13
19) Examples of sophisticated capital budgeting techniques include all of the following EXCEPT
A) internal rate of return.
B) payback period.
C) annualized net present value.
D) net present value.
Answer: B
20) The ________ measures the amount of time it takes the firm to recover its initial investment.
A) average rate of return
B) internal rate of return
C) net present value
D) payback period
Answer: D
21) Unsophisticated capital budgeting techniques do not

A) examine the size of the initial outlay.
B) use net profits as a measure of return.
C) explicitly consider the time value of money.
D) take into account an unconventional cash flow pattern.
Answer: C
22) All of the following are weaknesses of the payback period EXCEPT
A) a disregard for cash flows after the payback period.
B) only an implicit consideration of the timing of cash flows.
C) the difficulty of specifying the appropriate payback period.
D) it uses cash flows, not accounting profits.
Answer: D
23) Many firms use the payback method as a guideline in capital investment decisions. Reasons they do
so include all of the following EXCEPT
A) it gives an implicit consideration to the timing of cash flows.
B) it recognizes cash flows which occur after the payback period.
C) it is a measure of risk exposure.
D) it is easy to calculate.
Answer: B
14
24) Payback is considered an unsophisticated capital budgeting because it
A) gives explicit consideration to the timing of cash flows and therefore the time value of money.
B) gives explicit consideration to risk exposure due to the use of the cost of capital as a discount rate.
C) gives explicit consideration to the timing of cash flows and therefore the time value of money.
Answer: D
25) Some firms use the payback period as a decision criterion or as a supplement to sophisticated
decision techniques, because
A) it explicitly considers the time value of money.
B) it can be viewed as a measure of risk exposure because of its focus on liquidity.
C) the determination of the required payback period for a project is an objectively determined criteria.
Answer: B
26) A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of
$10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is
A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.
Answer: D
27) A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of
$15,000 per year for five years. The payback period of the project is
A) 1.5 years.
B) 2 years.
C) 3.3 years.
D) 4 years.
Answer: C
15
28) Which of the following statements is false?
A) If the payback period is less than the maximum acceptable payback period, accept the project.
B) If the payback period is greater than the maximum acceptable payback period, reject the project.
C) If the payback period is less than the maximum acceptable payback period, reject the project.
D) Two of the above.
Answer: C
29) Which of the following statements is false?

A) If the payback period is greater than the maximum acceptable payback period, accept the project.
B) If the payback period is less than the maximum acceptable payback period, reject the project.
C) If the payback period is greater than the maximum acceptable payback period, reject the project.
D) Two of the above.
Answer: D
30) What is the payback period for Tangshan Mining company's new project if its initial after tax cost is
$5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1,
$1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
A) 4.33 years
B) 3.33 years
C) 2.33 years
D) none of the above
Answer: B
31) Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its
initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of
$1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
A) Yes.
B) No.
C) It depends.
D) None of the above
Answer: A
16
32) Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and
its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of
$1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
A) Yes.
B) No.
C) It depends.
D) None of the above
Answer: B
33) Evaluate the following projects using the payback method assuming a rule of 3 years for payback.
Year Project A Project B

0 -10,000 -10,000
1 4,000 4,000
2 4,000 3,000
3 4,000 2,000
4 0 1,000,000
A) Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted
because its payback period is longer than 3 years.
B) Project B should be accepted because even thought the payback period is 2.5 years for project A and
3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B.
C) Project B should be accepted because you get more money paid back in the long run.
D) Both projects can be accepted because the payback is less than 3 years.
Answer: A
Question Status: New
10.3 Calculate, interpret, and evaluate the net present value (NPV) and economic value added (EVA).
1) Net present value is considered a sophisticated capital budgeting technique since it gives explicit
consideration to the time value of money.
Answer: TRUE
Topic: Net Present Value
2) The discount rate (which is also known as the required return, cost of capital, or opportunity cost) is
the minimum return that must be earned on a project to leave the firm's market value unchanged.
Answer: TRUE
Topic: Project Required Return
17
3) If net present value of a project is greater than zero, the firm will earn a return greater than its cost of
capital. The acceptance of such a project would enhance the wealth of the firm's owners.
Answer: TRUE
4) The net present value is found by subtracting a project's initial investment from the present value of
its cash inflows discounted at a rate equal to the project's internal rate of return.
Answer: FALSE
5) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial
investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of
capital is called net present value.
Answer: TRUE
6) A sophisticated capital budgeting technique that can be computed by subtracting a project's initial
investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of
capital is called internal rate of return.
Answer: FALSE
7) If the NPV is greater than the cost of capital, a project should be accepted.
Answer: FALSE
8) If the NPV is greater than the initial investment, a project should be accepted.
Answer: FALSE
9) If the NPV is greater than $0.00, a project should be accepted.

Answer: TRUE
18
10) The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash
flows of $300 per year for four years where the firm's cost of capital is 15 percent is $856.49.
Answer: FALSE
flows of $300 per year for four years where the firm's cost of capital is 15 percent is $143.51.
Answer: FALSE
flows of $300 per year for four years where the firm's cost of capital is 15 percent is -$143.51.
Answer: TRUE
13) Economic value added is the difference between an investment's net operating profit after taxes and
the cost of funds used to finance the investment, which is found by multiplying the dollar amount of the
funds used to finance the investment by the firm's weighted average cost of capital.
Answer: TRUE
Topic: Economic Value Added
14) The investment operating schedule is the difference between an investment's net operating profit
after taxes and the cost of funds used to finance the investment, which is found by multiplying the dollar
amount of the funds used to finance the investment by the firm's weighted average cost of capital.
Answer: FALSE
Topic: Economic Value Added
19
15) A firm is evaluating three capital projects. The net present values for the projects are as follows:
The firm should

A) accept Projects 1 and 2 and reject Project 3.
B) accept Projects 1 and 3 and reject Project 2.
C) accept Project 1 and reject Projects 2 and 3.
D) reject all projects.
Answer: A
16) Sophisticated capital budgeting techniques do not

A) examine the size of the initial outlay.
B) use net profits as a measure of return.
C) explicitly consider the time value of money.
D) take into account an unconventional cash flow pattern.
Answer: B
17) The minimum return that must be earned on a project in order to leave the firm's value unchanged is
A) the internal rate of return.
B) the interest rate.
C) the cost of capital.
D) the compound rate.
Answer: C
Topic: Internal Rate of Return
18) A firm would accept a project with a net present value of zero because
A) the project would maintain the wealth of the firm's owners.
B) the project would enhance the wealth of the firm's owners.
C) the return on the project would be positive.
D) the return on the project would be zero.
Answer: A
20
19) A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash
flows presently valued at $4,000. The net present value of the investment is ________.
A) -$1,000
B) $0
C) $1,000
D) $1.25
Answer: A
20) What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax
cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1,
$1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A) $1,700,000
B) $371,764
C) ($137,053)
Answer: C
cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1,
$1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A) $1,700,000
B) $371,764
C) $137,053
Answer: A
cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1,
$1,900,000 in year 2, $1,700,000 in year 3 and ($1,300,000) in year 4?
A) $(1,494,336)
B) $1,494,336
C) $158,011
D) two of the above
Answer: A
21
Table 10.1
23) Given the information in Table 10.1 and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?
Answer: (a) NPV = (1,000/.15)x[1-1/(1.15)5] - 2,500
= 1,000 (3.352) - 2,500 = $852
(b) Since NPV > 0, the project should be accepted.
Table 10.2
24) Given the information in Table 10.2 and 15 percent cost of capital,
(a) compute the net present value.
(b) should the project be accepted?
Answer: (a)
NPV = 98,820 - 100,000 = -$1,180 < 0

(b) Since NPV < 0, the project should be rejected.
22
10.4 Calculate, interpret, and evaluate the internal rate of return (IRR).
1) The internal rate of return (IRR) is defined as the discount rate that equates the net present value with
the initial investment associated with a project.
Answer: FALSE
2) The IRR is the discount rate that equates the NPV of an investment opportunity with $0.
Answer: TRUE
3) The IRR is the compound annual rate of return that the firm will earn if it invests in a project and
receives the estimated cash inflows.
Answer: TRUE
4) An internal rate of return greater than the cost of capital guarantees that the firm earns at least its
required return. Investing in such an project would enhance the market value of the firm and therefore
the wealth of its owners.
Answer: TRUE
5) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that
equates the present value of a projects inflows with the present value of its outflows is called net present
value.
Answer: FALSE
6) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that
equates the present value of a projects inflows with the present value of its outflows is called internal
rate of return.
Answer: TRUE
23
7) If its IRR is greater than $0.00, a project should be accepted.
Answer: FALSE
8) If its IRR is greater than 0 percent, a project should be accepted.

Answer: FALSE
9) If its IRR is greater than the cost of capital, a project should be accepted.
Answer: TRUE
10) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected
to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in
year 3 and $1,300,000 in year 4?
A) 15.57%
B) 0.00%
C) 13.57%
Answer: C
11) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected
to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in
year 3 and $2,300,000 in year 4?
A) 5.83%
B) 9.67%
C) 11.44%
Answer: A
24
10.5 Use net present value profiles to compare NPV and IRR techniques.
1) For conventional projects, both NPV and IRR techniques will always generate the same accept-reject
decision, but differences in their underlying assumptions can cause them to rank mutually exclusive
projects differently.
Answer: TRUE
Topic: NPV versus IRR
2) The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the
required rate of return
Answer: TRUE
Question Status: New
3) A project's net present value profile is a graph that plots a project's NPV for various discount rates.
Answer: TRUE
Topic: Net Present Value Profile
4) A project's net present value profile is a graph that plots a project's IRR for various discount rates.
Answer: FALSE
5) Net present value profiles are most useful when selecting among independent projects.
Answer: FALSE
6) Net present value profiles are most useful when selecting among mutually exclusive projects.
Answer: TRUE
25
7) There is sometimes a ranking problem among NPV and IRR when selecting among mutually
exclusive investments. This ranking problem only occurs when
A) the NPV is greater than the crossover point.
B) the NPV is less than the crossover point.
C) the cost of capital is to the right of the crossover point.
D) the cost of capital is to the left of the crossover point.
Answer: D
8) Consider the following projects, X and Y, where the firm can only choose one. Project X costs $600
and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if
the cost of capital is 10 percent?
A) Project X
B) Project Y
C) Neither
D) Not enough information to tell
Answer: A
9) Consider the following projects, X and Y where the firm can only choose one. Project X costs $600
and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if
the cost of capital is 25 percent?
A) Project X
B) Project Y
C) Neither
D) Not enough information to tell
Answer: C
26
10) Tangshan Mining Company is considering investing in a new mining project. The firm's cost of
capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000.
Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1,
$2,300,000 in year 2, $2,200,000 in year 3 and ($1,300,000) in year 4?
(a) Calculate the project's NPV.
(b) Calculate the project's IRR.
(c) Should the firm make the investment?
Answer:
No the firm should not accept the project.

10.6 Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths
of each approach.
1) Conflicting rankings in the case of mutually exclusive projects using NPV and IRR often results from
differences in the magnitude and/or timing of cash flows.
Answer: TRUE
2) Projects having higher cash inflows in the early years tend to be less sensitive to changes in the cost
of capital and are therefore often acceptable at higher discount rates compared to projects with higher
cash inflows that occur in the later years.
Answer: TRUE
3) On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because NPV
implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the
firm's cost of capital.
Answer: TRUE
27
4) On a purely theoretical basis, NPV is the better approach to capital budgeting than IRR because IRR
implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the
firm's cost of capital.
Answer: FALSE
5) Certain mathematical properties may cause a project with a nonconventional cash flow pattern to
have multiple IRRs; this problem does not occur with the NPV approach.
Answer: TRUE
6) Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital,
whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate
equal to the project's IRR.
Answer: TRUE
7) Since the cost of capital tends to be a reasonable estimate of the rate at which the firm could actually
reinvest intermediate cash inflows, the use of NPV is in theory preferable to IRR.
Answer: TRUE
8) In general, projects with similar-sized investments and lower early-year cash inflows (lower cash
inflows in the early years) tend to be preferred at higher discount rates.
Answer: FALSE
9) In general, the greater the difference between the magnitude and/or timing of cash inflows, the greater
the likelihood of conflicting ranking between NPV and IRR.
Answer: TRUE
10) The internal rate of return assumes that a project's intermediate cash inflows are reinvested at a rate
equal to the firm's cost of capital.
Answer: FALSE
28
11) Although differences in the magnitude and timing of cash flows explain conflicting rankings under
the NPV and IRR techniques, the underlying cause is the implicit assumption concerning the
reinvestment of intermediate cash inflows cash inflows received prior to the termination of a project.
Answer: TRUE
12) On a purely theoretical basis, NPV is a better approach when selecting among two mutually
exclusive projects.
Answer: TRUE
13) On a purely theoretical basis, IRR is a better approach when selecting among two mutually
exclusive projects.
Answer: FALSE
14) In spite of the theoretical superiority of NPV, financial managers prefer to use IRR.
Answer: TRUE
15) In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.
Answer: FALSE
16) The ________ is the discount rate that equates the present value of the cash inflows with the initial
investment.
A) payback period
B) average rate of return
C) cost of capital
D) internal rate of return
Answer: D
29
17) The ________ is the compound annual rate of return that the firm will earn if it invests in the project
and receives the given cash inflows.
A) discount rate
B) internal rate of return
C) opportunity cost
D) cost of capital
Answer: B
18) A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of
return are as follows:
The firm should

A) accept Project 2 and reject Projects 1 and 3.
B) accept Projects 2 and 3 and reject Project 1.
C) accept Project 1 and reject Projects 2 and 3.
D) accept Project 3 and reject Projects 1 and 2.
Answer: B
30
Table 10.4
A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as
follows:
19) If the firm in Table 10.4 has a required payback of two (2) years, it should
A) accept projects A and B.
B) accept project A and reject B.
C) reject project A and accept B.
D) reject both.
Answer: B
20) The new financial analyst does not like the payback approach (Table 10.4) and determines that the
firm's required rate of return is 15 percent. His recommendation would be to
A) accept projects A and B.
B) accept project A and reject B.
C) reject project A and accept B.
D) reject both.
Answer: C
31
Table 10.5
A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital
rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
21) Using the internal rate of return approach to ranking projects, which projects should the firm accept?
(See Table 10.5)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, and 5
C) 2, 3, 4, and 6
D) 1, 3, 4, and 6
Answer: B
Topic: IRR and Capital Rationing
22) Using the net present value approach to ranking projects, which projects should the firm accept?
(See Table 10.5)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, 5, and 6
C) 2, 3, 4, and 5
D) 1, 3, 5, and 6
Answer: D
Topic: NPV and Capital Rationing
23) When the net present value is negative, the internal rate of return is ________ the cost of capital.
A) greater than
B) greater than or equal to
C) less than
D) equal to
Answer: C
Topic: NPV and IRR
32
24) A firm is evaluating two independent projects utilizing the internal rate of return technique. Project
X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of
$25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next
four years of $40,000. The firm should
A) accept both if the cost of capital is at most 15 percent.
B) accept only Z if the cost of capital is at most 15 percent.
C) accept only X if the cost of capital is at most 15 percent.
Answer: C
25) The underlying cause of conflicts in ranking for projects by internal rate of return and net present
value methods is
A) the reinvestment rate assumption regarding intermediate cash flows.
B) that neither method explicitly considers the time value of money.
C) the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of
capital.
D) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal
rate of return.
Answer: A
26) On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all the
following reasons EXCEPT
A) that it measures the benefits relative to the amount invested.
B) for the reasonableness of the reinvestment rate assumption.
C) that there may be multiple solutions for an IRR computation.
D) that it maximizes shareholder wealth.
Answer: A
27) Comparing net present value and internal rate of return

A) always results in the same ranking of projects.
B) always results in the same accept/reject decision.
C) may give different accept/reject decisions.
D) is only necessary on mutually exclusive projects.
Answer: B
33
28) In comparing the internal rate of return and net present value methods of evaluation,
A) internal rate of return is theoretically superior, but financial managers prefer net present value.
B) net present value is theoretically superior, but financial managers prefer to use internal rate of return.
C) financial managers prefer net present value, because it is presented as a rate of return.
D) financial managers prefer net present value, because it measures benefits relative to the amount
invested.
Answer: B
29) Unlike the net present value criteria, the internal rate of return approach assumes an interest rate
equal to
A) the relevant cost of capital.
B) the project's internal rate of return.
C) the project's opportunity cost.
D) the market's interest rate.
Answer: B
30) When evaluating projects using internal rate of return,

A) projects having lower early-year cash flows tend to be preferred at higher discount rates.
B) projects having higher early-year cash flows tend to be preferred at higher discount rates.
C) projects having higher early-year cash flows tend to be preferred at lower discount rates.
D) the discount rate and magnitude of cash flows do not affect internal rate of return.
Answer: B
31) Which capital budgeting method is most useful for evaluating the following project? The project has
an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of
$1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
A) NPV
B) IRR
C) Payback
D) Two of the above
Answer: A
34
Table 10.7
Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the
firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20
percent cost of capital. A summary of key data about the proposed projects follows.
32) Use the NPV approach to select the best group of projects. (See Table 10.7)
Answer: Choose Projects C and D, since this combination maximizes NPV at $410,000 and only
requires $8,000,000 initial investment.
Topic: NPV and Capital Rationing
33) Use the IRR approach to select the best group of projects. (See Table 10.7)
Answer:
IRR Approach
Choose Projects B and C, resulting in a NPV of $380,000.

Topic: IRR and Capital Rationing
34) Which projects should the firm implement? (See Table 10.7)
Answer: Projects C and D
Topic: NPV versus IRR and Capital Rationing
35
35) Consider the following projects, X and Y where the firm can only choose one. Project X costs $600
and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. Sketch a net present value profile for each of
these projects. Which project should the firm choose if the cost of capital is 10 percent? What if the cost
of capital is 25 percent? Show all work.
Answer:
At a cost of capital of 10 percent, the firm would choose Project X. At a cost of capital of 25 percent, the
firm would choose neither.

36
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Consequent on this a brigade order was issued on the 8th August,
of which the following are extracts, and it may be as well to explain
here that all over the fighting front the soldiers had given names to
the different trenches in order to distinguish them, and that these
names, which were often those of London streets, but sometimes of
a comic nature, became officially recognized and used.
“The brigade will attack the enemy’s position at Hooge from the
crater to Q.20 inclusive.
“The York and Lancaster will attack on the left and the K.S.L.I. on
the right.
“1st Buffs’ 2 machine guns in southern branch of Oxford Street at
end east. D Company and 2 machine guns in F.2.
“A Company and 1 machine gun to dig themselves in in line eighty
yards in rear of Headquarters’ trench.
“B Company and Headquarters to occupy position end of Oxford
Street by 1.15 B and D.
“All companies to be in position 12.30 a.m., 9th.
“The 1st Leicesters will be in support in the ramparts of Menin
Gate, Ypres.
“The right attack is allotted to the 18th Brigade, and the 17th
Brigade will be in divisional reserve.
“The K.S.L.I. can call on C Company The Buffs for support, if
necessary, and the Y. and L. on D Company.
“Should the enemy drive us back and follow on, these two
companies must counter-attack at once without hesitation.”
The battalion took its places at 6.30 p.m. on the 8th. A Company,
so as to be ready to occupy the positions vacated by C and D should
they be called upon to move up, and B Company remaining as
battalion reserve. At 2.45 a.m. on the 9th the British bombardment
opened and a terrific fire was brought to bear on the hostile lines.
The infantry attack followed about 3.10, the assailants having
already crept up close to the enemy’s lines, and the brave men from
Yorkshire and Shropshire suffered pretty heavily, but were
completely successful. D Company of the Buffs was called up to help
by the York and Lancaster Regiment. The K.S.L.I. had rushed into
the crater with great rapidity and found much hand-to-hand fighting
to do when they got there. The telephone lines were soon useless,
being cut to pieces by the incessant fire. In the small hours of the
10th August the Buffs were ordered to relieve both the York and
Lancasters and the Shropshires. D Company, therefore, advanced
obliquely to its right flank and took over the crater and half the
recaptured line which belonged to its brigade, the remainder being
occupied by A Company, under Captain Gould, who placed one
platoon in support of both these advanced companies at H.12. C
Company remained where it was and B, with Battalion
Headquarters, came up to a ruined farm, a tactical point in the
neighbourhood. Heavy shelling occurred during the night, but the
expected German counter-attack did not eventuate. A and D
Companies found great difficulty in getting into touch with friends on
either flank. It is true that some troops of the neighbouring 18th
Brigade had, during the previous day, got into the crater and stables,
but these were themselves now adrift from their units.
Four machine guns had been placed at intervals along the whole
front, and these, to judge by German prisoners’ letters, had a
discouraging effect on the projected enemy counter-attack, but
nevertheless the position occupied by the two forward Buff
companies was very far from being a satisfactory or pleasant one:
the trenches and crater were full of dead and wounded, chiefly
German, but with many English, too, and this fact impeded free
movement; shell fire was heavy and continuous, and the Heavy
artillery enfilade fire from the direction of Hill 60 was in particular very
annoying and dangerous; while the supply of bombs, food and water
was precarious and difficult owing to the lack of proper
communication trenches to the rear. The want of water was
particularly felt, and made worse by the fact that the men were within
easy sight and distance of the Bellewaarde Lake.
The night of the 10th/11th was a very busy one. Every kind of
work was urgent and of great importance. The removal of the
wounded was no easy task, and great praise was due to Captain
Jones, the Buffs’ Medical Officer, who did wonders. Indeed, this
officer was remarkable for his coolness and gallantry, and continued
his business, though wounded twice himself, in a manner which has
become a sort of tradition amongst our army doctors. He was
admirably backed by the regimental stretcher-bearers. There were
dead to be buried everywhere; there was no doubt in anyone’s mind
of the urgency of this. Communications in rear were organized, the
trenches were improved, and many other matters made this night a
busy one. The night was, moreover, by no means peaceful. The
German bombers were persistent and dangerous on the left of A
Company, but a somewhat serious bomb attack just before midnight
in this quarter was repelled by Captain Gould, though not without
loss. D Company was also being heavily bombarded by high
explosive and shrapnel, and Captain R. W. Homan was struck on the
head and fatally wounded. He had exposed himself with great
gallantry in organizing the defence, and his death was much felt. The
11th August passed like the previous day and was a strenuous one.
There was abnormally heavy shelling. The parapets were destroyed
both in A and D Companies’ portions of the line, and one shell,
landing where the supporting platoon lay, demolished the telephone
dug-out and destroyed the operators, but not the instrument. Pte.
Wilson came forward and continued to work this, the nearest
telephone to the firing line, and as from here all messages had to be
carried, Corpl. Foote of A Company greatly distinguished himself at
this task. D Company was under a most accurate fire this day, but
was materially aided by the French artillery.
About 10 p.m. a violent bomb attack took place on the left of A
Company, both from a small side trench on the left of ours, which
was still in the enemy’s hands, and from Germans who had crawled
out from their retained line in rear. These latter were made to suffer
somewhat severely. 2nd Lieut. Ferguson led a counter-attack under
somewhat critical circumstances and was twice wounded. However,
the enemy’s attempt was repulsed, and at 11.30 a relief of the
battalion was successfully accomplished under company
arrangements, superintended by the commanding officer, Lt.-Colonel
Finch Hatton, aided by Captain Lucas (second-in-command) and
Lieut. Birrell (adjutant). The battalion retired to the ramparts of Ypres
by the Menin Gate, having lost since the 5th of the month 25 killed,
162 wounded and 5 missing.
At this period not only the Buffs, but the 16th Brigade generally,
were suffering badly from the lack of senior and experienced officers.
A considerable period of routine work was now the fate of the
battalion. As a rule, billets in or about Poperinghe alternated with
trench duty, generally at La Brique. This trench duty continued to
take its toll of casualties and was not without its deeds of daring,
notably the rescue and bringing in of the body of Captain Colville of
the Shropshire Light Infantry, who was killed in front of Forward
Cottage near La Brique on the 21st September, 1915, for which act
Lieut. Clouting and C.S.M. Baker received the M.C. and D.C.M.
respectively.
II. Loos
In order to understand the parts taken in the battle of Loos by the

2nd, 6th and 8th Battalions of the Buffs, it would be well to have a
general idea of why the battle was fought. Turning, therefore, to Sir
John French’s despatches we find that after a serious consultation
with General Joffre and a full discussion of the military situation it
was arranged that the Allies should make a combined attack from
certain points of their line during the last week in September.
Very many brave soldiers died in the prolonged and desperate
struggle which followed, and which is known as the battle of Loos,
though it was in reality a series of bloody combats. It still remains a
question whether the British sacrifices there made were worth the
results obtained.
The reinforcements the British had recently received enabled our
Commander-in-Chief to comply with several requests that the French
had made as to taking over additional portions of their line.
“In fulfilment of the rôle assigned to it in these operations, our army
attacked the enemy on the morning of the 25th September. The main
attack was delivered by the 1st and 4th Corps between the La Bassee
Canal on the north and the village of Grenay on the south; at the
same time the 5th Corps making a subsidiary attack on Bellewaarde
Farm to the east of Ypres in order to hold the enemy to his ground;
other attacks with a similar object were made by the 3rd and Indian
Corps north of the canal and along the whole front of the second
army.
“In co-operation with the French 10th Army on the right, the 1st and
4th Corps went up to the attack. A strong reserve was kept in hand
owing to the great length of front to be assailed, and the general
commanding the Second Army was directed to draw back the 28th
Division to Bailleul and hold it in readiness to meet unexpected
eventualities.
“Opposite the front of the main line of attack the distance between
the enemy’s trenches and our own varied from about one hundred to
five hundred yards. The country over which the advance took place is
open and overgrown with long grass and self-sown crops. From the
canal southwards our trenches and those of the enemy ran roughly
parallel upon an almost imperceptible rise to the south-west. From the
Vermelles-Hulluch road southward the advantage of height is on the
enemy’s side as far as the Bethune-Lens road. There the two lines of
trenches cross a spur in which the rise culminates, and thence the
command lies on the side of the British trenches.
“To the east of the intersection of spur and trenches and a short
mile away stands Loos (which is about twenty-eight miles south of
Ypres). Less than a mile further south-east is Hill 70, which is the
summit of the gentle rise in the ground.
“Other notable tactical points on our front were:—
“Fosse 8 (a thousand yards south of Auchy) which is a coal mine
with a high and strongly defended slag heap.
“The Hohenzollern redoubt. A strong work thrust out nearly five
hundred yards in front of the German lines, and close to our own. It is
connected with their front line by three communication trenches
abutting into the defences of Fosse 8.
“Cite St. Elie. A strongly defended mining village lying fifteen
hundred yards south of Haisnes.
“The Quarries lying half-way to the German trenches west of the
Cite St. Elie.
“Hulluch. A village strung out along a small stream lying less than
half a mile south-east of Cite St. Elie and three thousand yards north-
east of Loos.
“Puits 14 Bis. Half a mile north of Hill 70; another coal mine
possessing great possibilities for defence when taken in conjunction
with a strong redoubt situated on the north-east side of Hill 70.”
The attack was admirably delivered, and it is noteworthy that a
complete division of the new armies took a distinguished part in it.
This was the 47th, a Scottish unit. Loos and Hill 70 were gained, and
altogether the first day was a success and caused Field-Marshal
French’s apprehension that a dangerous gap might occur between
ourselves and the French to be considerably modified. He now
ordered the Guards Division up from Nœux les Mines and the 28th
to move south from Bailleul. At nightfall, after a heavy day’s fighting
and numerous German counter-attacks, the line ran from the Double
Crassier south of Loos by the western part of Hill 70 to the western
exit of Hulluch, thence by the quarries and western end of Cite St.
Elie, east of Fosse 8, back to the original line.
Our hold on Fosse 8, backed as it was by the strong defences
and guns of Auchy, was distinctly precarious.
In the course of the night of 25th/26th September the enemy
delivered a series of heavy counter-attacks along our new front, and
near the Quarries they were more or less successful, though
repulsed elsewhere.
On the 26th the 7th Division retook the Quarries, but attacks on
Hulluch and on the redoubt on the east side of Hill 70 were
anticipated by the enemy, who organized a very strong offensive
from that direction. These attacks drove on the advanced troops of
the 21st and 24th Divisions (in the latter of which the 8th Buffs were
serving) which were then moving forward to attack. Sir John French
adds these words: “Reports regarding this portion of the action are
very conflicting, and it is not possible to form an entirely just
appreciation of what occurred on this part of the field.”
During the 29th and 30th September and the early days of
October, fighting was almost continuous along the northern part of
the new line, particularly about the Hohenzollern Redoubt and
neighbouring trenches, to which the enemy evidently attached great
value. His attacks, however, almost invariably broke down with very
heavy loss under the accurate fire of our infantry and artillery.
Nevertheless, the enemy recaptured part of the Hohenzollern
Redoubt on the 3rd October. There was particularly severe fighting in
this direction on the 8th and 9th, the hostile attack being repulsed
with enormous loss. The Commander-in-Chief reports in his
despatches that we attacked about noon on the 13th October, with
troops of the 11th and 4th Corps, against Fosse No. 8, the Quarries
and the German trenches on the Lens-La Bassee road. The
objective of the 12th Division (in which were serving the 6th Buffs)
was the Quarries.
The day began with an artillery bombardment of the objectives in
which the French assisted. Shortly before the attack was launched at
2 p.m. smoke was turned on all along our front, and under cover of
this smoke the attack was started. At the same time the heavy
artillery lifted to further objectives, while the enemy’s front trench
system was subjected to shrapnel fire. At 2.45 the 4th Corps
reported having captured 1,200 yards of trenches on the Lens-La
Bassee road, but as the left battalion of the corps had failed, the
Corps Commander did not consider it practicable to undertake any
further offensive towards Hulluch. The information received during
the remainder of the day was very conflicting, though it was known
that one battalion of the 12th Division had gained the south-west
edge of the Quarries. In the course of the next two days the whole
attack died down without attaining the objective aimed at, and the
situation on that part of the line remained much the same for some
considerable time.
III. 8th Battalion
The 8th Battalion of the Buffs, under Colonel Romer, C.B.,

C.M.G., landed in France, as we have seen, on the 1st September,
or twenty-four days only before the battle of Loos. After two days at
Boulogne it went into billets at Maninghem, near Etaples, and there
remained a fortnight, completing divisional training, and marching on
the 21st to take part in the concentration prior to the battle of Loos
with the rest of the 72nd Brigade, which was commanded by Br.-
General B. M. Mitford, C.B., D.S.O., himself an old Buff. The march
to Bethune, which was reached in the very early morning of the 25th
September, was a trying one done by night, mostly over bad roads.
On the second night no less than twenty-two miles were covered and
the Buffs recorded only one man as falling out. Other battalions had
many more—even as many as two hundred.
At 11 a.m. on the day of arrival at Bethune the battalion formed up
and Colonel Romer addressed his men. “I am not going to make a
speech to you,” he said, “but only to ask you to remember that you
are ‘The Buffs.’” The battalion then moved forward towards the
fighting line, gradually approaching Vermelles. That very night it had
orders for a night attack on Hulluch, which was, however, stopped in
order to allow of artillery preparation. The first casualty occurred at
this time: 2nd Lieut. Hon. H. E. J. Robinson was so badly hit that he
died next day in hospital. The attack being thus postponed, the
battalion got into what were the original German second-line
trenches and remained there till 11 a.m. on the 26th.
At 10.30 a.m. orders came for the division to attack at 11, and
then this unit of the regiment went “over the top” to take its part in a
severe action only three weeks after arrival in France and without
having gone through the apprenticeship and instruction under fire in
the trenches, which was the rule in all cases of fresh troops arriving
in the country.
The brigade, in which our battalion was a unit, advanced from the
approach-trenches, which had been German and which it was then
holding, to the objective, which was the third line of the German
fortification running north from a point about a thousand yards east
of Hulluch, which place the 1st Division was to attack simultaneously,
while on the right the 21st Division had another portion of the
enemy’s third line assigned to it.
The 8th Buffs were in the second line, following the 9th East
Surrey, who were on the brigade right in touch with the above-named
division. On the left of the Surreys were the 8th Royal West Kent,
with the 8th Queen’s behind them.
There was a steady and persistent shelling on all these battalions
as they advanced, and when our men got down to the depression
running south of Hulluch they came under enfilade fire from several
guns and machine guns, and the further they advanced up the
eastern slope the more severe became the fire. All the battalions of
the 72nd Brigade reached the trenches which were their objective.
There they found the wire entanglement still quite intact, the wire
being abnormally thick and difficult to cut. Endeavours were made to
get over or under this obstacle, but to no purpose. Meanwhile the
division on the right retired, leaving our people to be heavily
enfiladed, with the result that the latter also had to fall back, which
they did to some trenches five or six hundred yards to the west and
south-west of Hulluch, and there, for four and a half hours, they were
heavily bombarded.
When night came on parties were sent out to remove the killed
and wounded, but the Germans after dark reoccupied their old
trenches along the Hulluch-Lens road and the rescue parties
therefore failed to get at the eastern slope of the shallow valley, in
which Hulluch lies: the fatal slope on which the greater number of
our casualties occurred. Only a dozen or so of the more lightly
wounded of the Buffs managed to crawl back after nightfall.
This assault was made in daylight and over open country, and the
German third-line trench which was the objective was nearly a mile
away.
The men had started in what is termed artillery formation, but the
lines, owing to the intensity of the fire encountered, had to be
extended almost at once. The advance was carried forward very
rapidly, and in half an hour the Buffs had arrived within twenty-five
yards of the enemy’s wire.
No gaps could be observed, and for twenty minutes the attempts
to cut it were continued without avail.
It was at 11.55 that an order came to withdraw, and from that
moment the hostile fire, especially from the left flank, became hotter
than ever and, of course, the casualties heavier. The Buffs—what
was left of them—were relieved during the night of the 26th/27th and
rested in a field close by Sailly la Bourse, remaining till 7 p.m. on the
latter date, when they marched to Nœux les Mines and bivouacked
in very wet weather.
The casualties in the awful fight briefly described above were
tremendous. That gallant old soldier Colonel Romer was early shot
in the shoulder, but continued in his place, showing an example to
all, till he was killed by a bullet through his heart. What a death for a
hero of sixty-four! Though he was not originally a Buff, he was one
indeed when he died, and his name will ever be remembered with
those of Lathom, Moyse and so many others, from Sir Philip Sidney
downwards, who have covered our regiment with glory in all quarters
of the globe. With their colonel were killed, or soon after died of
wounds, Captains Curtiss, A. M. C. Hollist, W. Howard, J. Kekewich
and T. R. M. Shervinton; Lieuts. E. F. Corner, B. H. Pickering, Hon.
H. E. J. Robinson and J. R. S. Pensley (R.A.M.C.), together with too
many of the gallant men who followed them so well. Lieut. E. T.
Smith was also killed in the trenches near Ypres on the 19th
October. Altogether, counting killed, wounded and missing, the
casualties amounted to the astounding figure of 24 officers and 610
other ranks.
Would any man a few years ago have believed that a time was
close at hand when a battalion of the regiment was to suffer more
casualties than fell to the lot of the Buffs at Albuera? Only one
officer, Lieut. J. Vaughan, came out of the hell untouched, and he
was given a right well-earned M.C. for bringing his unit out of action.
Four of the men’s names were sent in for distinguished bravery, but
were not accepted by the War Office because they were prisoners of
war; but the D.C.M.’s recorded later as bestowed on Sergt.-Major
Brooker and Pte. Peet were bravely earned upon this day.
The remnants of the battalion were somewhat cheered by being
informed, as they were on the morning of the 27th, that their attack
drew off sixteen battalions of the enemy who were reinforcing the
German line opposite the French, thus considerably helping the
latter to capture Souchey and 14,000 prisoners.
The battalion was removed by train to Mollinghem, thence to
Houtkerque, and later to Reninghelst. On the 4th October it was
inspected by the G.O.C. of the division, who spoke of the way in
which the regimental traditions had been maintained.
The usual instruction in trench warfare began on the 5th October,
and Major Trueman took over command on the 7th.
On the 18th of this month the battalion passed to the 17th Infantry
Brigade and two days afterwards took over the usual trench duty on
its own account, and began its long acquaintance with the filthy life
such duty meant: a life of danger, stinks, rats, lice, discomfort and
misery such as no Englishman had ever conceived it possible that
he should one day be called on to endure.
NEIGHBOURHOOD OF LOOS
IV. 2nd Battalion
In connection with this great battle of Loos, the 28th Division, with
which, it will be remembered, was the 2nd Battalion, had come, as
has been seen, from Bailleul and was, on the 27th September,
placed at the disposal of the First Army, arriving at Vermelles at 1
p.m.
The following description of the part the battalion played in the
struggle would be somewhat difficult to follow without the
accompanying sketch of the ground about the Hohenzollern Redoubt
and the Dump.
At 2 o’clock A and D Companies, under Major Beevor, were
ordered to relieve certain parties just north of Fosse 8, the situation
at which point, it may be remembered, was described by the
Commander-in-Chief as being “distinctly precarious.”
Finding that the position in question had been abandoned, these
companies were ordered by their brigadier, who accompanied them,
to establish themselves in the Hohenzollern Redoubt.
Finding that the normal approach to this, that is, the
communication trench, was too congested with troops to use, the
Buffs quitted it and reached their appointed place across country,
being very heavily shelled en route. In fact, both Br.-General Pereira
and his brigade major, Captain Flower, were wounded, as was Lieut.
Cory-Wright, who commanded D Company. On arrival, a platoon of
this company charged the enemy vigorously and accounted for a
score.
The companies remained in situation all night, during which our
bombers had to be very active, while the wounded—and there were
very many of different units—were being removed, a matter of great
difficulty on account of heavy rain and the distance they had to be
carried. During this night the rest of the 85th Brigade came up and B
and C Companies took up a position behind A and D.
After a contradictory order or two, an assault on the dump of
Fosse 8 was arranged for 9.30 a.m. on the 28th, to be preceded by
fifteen minutes’ artillery fire.
The Buffs began at the hour named to file up the trenches, A
Company leading, with D just behind.
The congested state of these avenues, due to dead, wounded
and troops waiting to be relieved, rendered progress very slow, and
many casualties were suffered from shell fire. The place from which
one of the companies was to start the attack was still in the hands of
the enemy, and all these circumstances prevented the men from
getting into their approximate positions till after 10 a.m. The
Middlesex Regiment was in support of the Buffs.
When the time came B and C Companies, followed by A, charged
across the open and were greeted with the fire from machine guns
massed on either flank, also shell and rifle fire. At least eleven
machine guns were afterwards counted firing from the Miners’
Cottages and Slag Alley. B and C Companies, every man cheering,
gained the edge of the Dump and, clambering up the crumbling
slopes of that 30-foot-high mound, gained the summit. On the way
Captain W. R. Davis (commanding B Company) was killed and Lieut.
S. C. Swayne and 2nd Lieut. M. Selby mortally wounded. Lieut. H.
Mantle, 2nd Lieuts. C. H. B. Budd, G. E. Boon, Captain M. M. Brice
(commanding C Company) and 2nd Lieut. G. E. A. Steggall were all
wounded and the latter taken prisoner.
The Dump was then plastered with shells of all descriptions both
from our own guns and those of the enemy and the attack was
broken. The companies crossed the large expanse of the Dump
summit and attempted to reach the enemy in the trenches at the
foot. It was a hopeless task, and those who attempted it were shot or
grenaded. The companies re-formed and returned to the original
trenches, leaving over one hundred men killed or wounded on the
Dump.
The guns ceased fire and the bomb fighting commenced. Making
use of all their trenches leading into their old lines, the Germans
advanced swiftly under cover of showers of bombs and their
machine guns. The enemy effected a gap (see sketch) between the
Middlesex and Buffs and from it bombed both ways. Thus the Buffs
found themselves to the south-east of the point where the enemy
had penetrated and separated from their supporting battalion, the
Middlesex, who were to the north-west of the gap. Here the struggle
was fought out for a long period chiefly by the use of bombs, which
were obtained with difficulty, having to be passed up the shallow
trench from troops in rear. Barricades had to be built at certain points
to keep the enemy in check.
Slag Alley was almost in complete possession of the Germans
when A Company, charging repeatedly and with the greatest vigour,
drove them back and accounted for about fifty. At this time 2nd Lieut.
F. A. Booth was shot dead while accepting the surrender of a
German officer. The enemy’s supply of bombs was so superior to our
own that the whole of A Company’s gains could not be retained, but
the men built a barricade across Slag Alley to secure the portion they
could hold.
The fiercest fighting now took place at the gap in Dump trench.
2nd Lieut. W. T. Williams took charge of the bombers at this point
and for 17½ hours kept the enemy in check. The greatest difficulty
was experienced in obtaining a sufficient supply of bombs. The
enemy’s machine guns and snipers were particularly active and the
advanced trenches were very shallow. Lt.-Colonel C. A. Worthington,
[14] commanding the battalion, and 2nd Lieut. T. Penington were
killed by the same bullet.
The command devolved on the adjutant, Captain J. V. R. Jackson,
in the absence of Major M. Beevor. The latter officer had been
ordered to remain at Point 35 until the two rear companies of the
Middlesex had filed past. As, however, the Germans had established
themselves so strongly in the gap, Major Beevor had perforce to
remain with the Middlesex. On the death of Colonel Neale of the
latter regiment, he conducted operations on the other side of the gap
and along South Face. As night fell the rain commenced again and
never ceased. Shell and rifle fire slackened, but the bomb throwing
was stronger than ever. Our bomb throwers were nearly all killed or
wounded, and others were borrowed from neighbouring units. Owing
to the rain, the fuses were damp, matches gave out, and the only
way to light the fuses was by means of keeping cigarettes alight. The
organization of the enemy as regards this weapon was astounding.
He threw at least five to our one and of a much more powerful
description. During the night every endeavour was made to get in the
wounded. Neither rations nor water were obtainable. Attempts were
made to dig in, but the mud rendered it a slow and laborious task.
Dawn showed no cessation in the bomb throwing. Captain Jackson
had sent messages for bombs and assistance: two messengers
were killed, and finally an answer came that two companies of the
York and Lancs were coming in relief and the Buffs were to make
their way to Big Willie. At 8.30 a.m. the relief was just entering the
Dump trenches at Point 50 when the supply of bombs gave out
altogether while the enemy kept up an incessant shower. The Buffs
were forced back to the fork and filed down the advanced trench,
whilst their relief filed in, leaped out of the trenches and held the
enemy. During this critical period a little ground was lost owing to
lack of bombs. Captain Jackson could not emerge from a deep dug-
out near the gap from which he was conducting operations, and he
was taken prisoner.
The balance of the regiment made its way back by Big Willie
trench to near its junction with the South Face. Here Major Beevor
took command. The Middlesex was being pressed back, and there
being no room between them and the 3rd Royal Fusiliers, the Buffs
filed back into the old front-line British trench, where they were able
to materially assist the units in front by means of rifle fire. The night
was spent in reorganizing and at midnight the battalion left the
trenches and marched to Annequin.
Casualties. Officers, killed:—Lt.-Colonel C. A. Worthington,
Captain W. R. Davis, 2nd Lieuts. F. A. Booth, T. Penington and N. E.
Wood. Died of wounds: Lieut. S. C. Swayne and 2nd Lieut. M. Selby.
Wounded: Captain M. M. Brice, Lieuts. G. Cory-Wright, H. Mantle;
2nd Lieuts. G. E. Boon, C. H. B. Budd and W. T. Williams. Taken
prisoner: Captain J. V. R. Jackson and 2nd Lieut. G. E. A. Steggall
(wounded).
Other ranks: killed, 57; wounded, 168; missing, 133. The majority
of the latter are believed to have been killed or wounded on the
Dump.
On the 1st October the battalion marched back to billets and
began to reorganize after its terrific experience. Drafts from England
arrived on the 2nd, 3rd, 9th and 15th of October, and a period of
training and instructional parades of all sorts commenced. A turn at
trench work, but a very short one, came on the 17th, but on the 21st
startling orders arrived: no less than instructions to entrain on the
following day for Marseilles for conveyance to the East.
No time was lost. On the 22nd the battalion marched to
Fouquereuil, near Bethune, entrained there, arrived at the great port
at 1.30 p.m. on Sunday 24th, and at 4 p.m. embarked, complete with
transport, animals, vehicles and all, on the troopship Transylvania for
conveyance to Egypt. Twenty-seven officers and 907 other ranks
reached Alexandria on the 30th and marched to Sidi Bishr Camp.
During the European tour of this battalion, which lasted only nine
months, 101 officers and 3,738 men had served in its ranks. Of
these, 22 officers and 298 other ranks had been killed; 34 officers
and 1,011 other ranks had been wounded; 5 officers and 199 other
ranks had been taken prisoners; and 2 officers and 297 other ranks
had been missing.
The stay in the land of Egypt was a very short one and was
mostly devoted to training and marching. The whole of the 28th
Division had moved and were to move again, for, on the 22nd
November, came the orders for Salonica, the new base for
operations against the Bulgarian forces. Salonica is a Greek port, but
the monarch of that country was in secret a friend of the Germans,
and the inhabitants proved none too friendly to the French and
English forces which were making so free with Salonica.
HOHENZOLLERN REDOUBT AND THE DUMP
The move of the division was a somewhat slow and gradual
business, but at last the infantry got into camp at Lembet, about four
and a half miles from the port. The weather was awful: heavy snow
and gales of wind, as well as a most persistent fog, which hung
about for days and which greatly interfered with reconnaissance.
Early in December the authorities were apparently very undecided
as to whether to remain at Salonica at all, and at one time all
arrangements were made for re-embarkation. The attitude of the
Greek officials was one of passive resistance and formal protest, but
they were civil enough. Road-making was the first job and a most
necessary one, for nothing but tracks were found inland. This work
was, however, varied by the building of long defence lines, which
were afterwards known as the bird-cage. The Buffs’ section of these
lines was near the village of Baldza, and the most important of the
works was called Beevor’s Redoubt, in honour of the commanding
officer who had succeeded the gallant Worthington.
So ended the most tremendous year in the history of the 2nd
Battalion of the Buffs, which had been raised in 1857 by Colonel F. F.
Maude, V.C., the father of the great general of whom we shall shortly
read.
V. 6th Battalion
We left the 6th Battalion at Meteren, near Bailleul, which place it

reached early in June, 1915.
On the 12th of that month it moved up to Armentieres to undergo
the usual instruction in trench warfare under a more experienced
unit, and here occurred the first casualty. The remainder of the
summer was passed in trench fighting, and many incidents might be
recorded in connection with mining operations and small but boldly
executed patrol adventures, particularly one by Corpl. Craven. Mines
were sprung by the enemy and the craters occupied, and these had
to be reconnoitred to ascertain for what further offensive work they
were to be used. It would be impossible, however, without publishing
long and somewhat monotonous journals, to describe fully the daily
trench work of the several battalions. This important service was
done, practically speaking, by half the troops engaged, the other half
resting, as it was called, in billets in rear. These billets were mostly
leaky barns with many of the tiles off the roofs, furnished with closely
packed tiers of beds one above the other, like bunks in a ship’s
cabin, each bunk being floored with fine wire-netting. There was not
quite such a dearth of munitions by this time, and on the last day of
July there was a very heavy and important burst of artillery fire on
our part, the battalion being then in the Ploegsteert Wood.
Life was fairly monotonous, however, until the 23rd September, on
which day careful instructions were given in the art of the production
of heavy smoke, from which it was hoped that an attacking party
would be able to emerge unseen. After much conference, detailed
instructions were issued on this same day regarding the proposed
occupation of the German salient at Le Touquet, and it seemed as if
the battalion, and indeed the whole brigade, was to take part in a
great battle immediately. The 12th Divisional operation orders
received at 9.30 a.m. on the 24th gave colour to this idea, and at 2
p.m. a trench-mortar bombardment of Le Touquet commenced, but
the result proved disappointing and, no damage being done to the
enemy’s wire, an attack in force proved impracticable. The 26th
brought an artillery bombardment on both sides and our people
raised a smoke curtain which appeared to be more or less
satisfactory, but the following night the whole brigade was relieved
by other troops and billeted in Armentieres, and, on the last day of
the month, the battalion was in Vermelles relieving the Coldstream
Guards, and it then moved into what had been the German line just
south of the Hulluch road.
On the 11th October the Germans recovered part of the
Hohenzollern Redoubt, an object they had been struggling for for
some days, and they made a resolute attack near Loos which was
repulsed with enormous loss.
Two days after this operation, orders were issued by the 12th
Division for an attack on Hulluch. These orders were very complete
and abounded in map references of the most detailed description.
They point to a well-organized advance to secure an advanced line
and put it in a state of defence.
The 37th Brigade, in which, it will be remembered, the 6th Buffs
were serving, was to be strengthened by one company of the
Northamptonshire Regiment and the 69th Field Company of the
Engineers, was awarded a distinct task and was to join up with the
35th Brigade.
The divisional and attached artillery to cover the whole operation.
The start to be made from the trenches.

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10.1 Understand the key elements of the capital budgeting process.

37) The final step in the capital budgeting process is

38) The first step in the capital budgeting process is

40) A capital expenditure is all of the following EXCEPT

48) ________ is a series of equal annual cash flows.

10.2 Calculate, interpret, and evaluate the payback period.

21) Unsophisticated capital budgeting techniques do not

29) Which of the following statements is false?

Year Project A Project B

9) If the NPV is greater than $0.00, a project should be accepted.

The firm should

16) Sophisticated capital budgeting techniques do not

NPV = 98,820 - 100,000 = -$1,180 < 0

8) If its IRR is greater than 0 percent, a project should be accepted.

No the firm should not accept the project.

The firm should

27) Comparing net present value and internal rate of return

30) When evaluating projects using internal rate of return,

Choose Projects B and C, resulting in a NPV of $380,000.

Topic: Net Present Value Profile

In order to understand the parts taken in the battle of Loos by the

III. 8th Battalion

The 8th Battalion of the Buffs, under Colonel Romer, C.B.,

We left the 6th Battalion at Meteren, near Bailleul, which place it

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