Question 1

Which of the two approaches (IRR and NPV) takes account of the time value of money?

Accepted Answer

A)  Only IRR 
B)  Only NPV 
C)  Both IRR and NPV 
D)  Neither IRR nor NPV 
A)  Only IRR 
B)  Only NPV 
C)  Both IRR and NPV 
D)  Neither IRR nor NPV C

Question 2

Which of the following statements best explains how NPV can help decision makers?

Accepted Answer

A)  A negative NPV shows that a project is shareholder wealth enhancing but of high risk. 
B)  A positive NPV shows that a project is risk free and shareholder wealth enhancing. 
C)  A negative NPV shows that a project is shareholder wealth enhancing. 
D)  A positive NPV shows that a project is shareholder wealth enhancing. 
A)  A negative NPV shows that a project is shareholder wealth enhancing but of high risk. 
B)  A positive NPV shows that a project is risk free and shareholder wealth enhancing. 
C)  A negative NPV shows that a project is shareholder wealth enhancing. 
D)  A positive NPV shows that a project is shareholder wealth enhancing. D

Question 3

Which three of the following would you need to know when calculating the net present value of a five year project?

Accepted Answer

A)  The initial cash flow 
B)  The cash flow in year 1 
C)  The opportunity cost of capital 
D)  The real rate of return 
A)  The initial cash flow 
B)  The cash flow in year 1 
C)  The opportunity cost of capital 
D)  The real rate of return A, B, C

Question 4

What term is used for the present value of future cash flows after netting out the initial cash flow?

Accepted Answer

A)  Net future value 
B)  Gross future value 
C)  Gross present value 
D)  Net present value 
A)  Net future value 
B)  Gross future value 
C)  Gross present value 
D)  Net present value

Question 5

How much should an investor invest now to receive £250 in 3 years time if the interest rate is 5 per cent?

Accepted Answer

A)  £200.00 
B)  £225.45 
C)  £215.96 
D)  £291.59 
A)  £200.00 
B)  £225.45 
C)  £215.96 
D)  £291.59

Question 6

What is meant by the term 'annuity'?

Accepted Answer

A)  A series of payments or receipts of equal amounts 
B)  Bonds that pay a variable rate of interest 
C)  The annual total of a number of payments 
D)  Payments to a pension fund 
A)  A series of payments or receipts of equal amounts 
B)  Bonds that pay a variable rate of interest 
C)  The annual total of a number of payments 
D)  Payments to a pension fund

Question 7

Which of the following statements is true?

Accepted Answer

A)  Additivity of IRRs is always possible. 
B)  Additivity is never possible for NPVs or IRRs. 
C)  NPVs are additive. 
D)  Additivity of NPVs is always possible. 
A)  Additivity of IRRs is always possible. 
B)  Additivity is never possible for NPVs or IRRs. 
C)  NPVs are additive. 
D)  Additivity of NPVs is always possible.

Question 8

What term is used for the present value of the future cash flows after netting out the initial cash flow.

Accepted Answer

A)  Real value 
B)  Net discounted value 
C)  Discounted present value 
D)  Net present value 
A)  Real value 
B)  Net discounted value 
C)  Discounted present value 
D)  Net present value

Question 9

Which of the following correctly summarises one of the IRR investment rules?

Accepted Answer

A) k c r Reject B) k c r Accept C) k > r Accept D) k < r Accept A) k c r Reject B) k c r Accept C) k > r Accept D) k < r Accept

Question 10

What is the future value of a deposit of £200 in an account paying interest at 5 per cent over a four year period?

Accepted Answer

A)  £240.00 
B)  £220.00 
C)  £234.10 
D)  £243.10 
A)  £240.00 
B)  £220.00 
C)  £234.10 
D)  £243.10

Question 11

In discounted cash flow analysis, which of the following is a bad decision rule?

Accepted Answer

A)  If NPV < 0 then reject 
B)  If IRR < opportunity cost of capital then reject 
C)  If IRR c opportunity cost of capital then reject 
D)  If NPV c 0 then accept 
A)  If NPV < 0 then reject 
B)  If IRR < opportunity cost of capital then reject 
C)  If IRR c opportunity cost of capital then reject 
D)  If NPV c 0 then accept

Question 12

What term is used for the yield forgone on the best investment alternative?

Accepted Answer

A)  Discounted Net Value 
B)  Opportunity cost of capital 
C)  Net Loss of Value 
D)  Internal rate of return 
A)  Discounted Net Value 
B)  Opportunity cost of capital 
C)  Net Loss of Value 
D)  Internal rate of return

Question 13

In an assessment of the internal rate of return (r) of two projects the following results are obtained: r is 8% for Project A and 12% for Project B. What decisions should be followed if the opportunity cost of capital is 10%?

Accepted Answer

A)  Accept A and reject B 
B)  Reject A and accept B 
C)  Reject both projects 
D)  Accept both projects 
A)  Accept A and reject B 
B)  Reject A and accept B 
C)  Reject both projects 
D)  Accept both projects

Question 14

Calculations of the IRR based on a value of r = 5% give a NPV value of £234,000. Trying the effect of increasing and decreasing r gives - £876,000 when r = 10% and £456,000 when r = 2%. Which of the following values of r is most likely to be correct?

Accepted Answer

A)  9.7% 
B)  6.2% 
C)  1.7% 
D)  2.5% 
A)  9.7% 
B)  6.2% 
C)  1.7% 
D)  2.5%

Question 15

Which three of the following statements correspond to limitations of the IRR method, when compared with the NPV approach?

Accepted Answer

A)  Limits on the accuracy of rankings 
B)  IRR does not give percentage results 
C)  Confusion between investing- type and financing- type decisions 
D)  The possibility of multiple solutions 
A)  Limits on the accuracy of rankings 
B)  IRR does not give percentage results 
C)  Confusion between investing- type and financing- type decisions 
D)  The possibility of multiple solutions

Question 16

Which of the following outcomes can result when IRR is used in appraising projects with unconventional cash flows?

Accepted Answer

A)  Inaccurate ranking positions 
B)  Mutual exclusivity 
C)  High apparent opportunity costs 
D)  Multiple solutions 
A)  Inaccurate ranking positions 
B)  Mutual exclusivity 
C)  High apparent opportunity costs 
D)  Multiple solutions

Question 17

A lender lends at an annual rate of 15%. What is the equivalent monthly rate?

Accepted Answer

A)  1.71% 
B)  1.51% 
C)  1.17% 
D)  1.07% 
A)  1.71% 
B)  1.51% 
C)  1.17% 
D)  1.07%

Question 18

An investor wants to invest at 9 per cent compound interest and receive a payment of £181.30 after 5 years. What initial investment is required?

Accepted Answer

A)  £142.21 
B)  £117.83 
C)  £125.68 
D)  £185.36 
A)  £142.21 
B)  £117.83 
C)  £125.68 
D)  £185.36

Question 19

An investor is comparing an account with Twelvers Bank that pays 12 per cent annually with one at Sixers Bank that pays 6 per cent semi- annually. What advice would you give?

Accepted Answer

A)  Returns from the two banks will be identical 
B)  Invest with Twelvers to get a better return 
C)  Invest with Sixers to get a better return 
D)  Invest with both and pay the interest from Sixers into the Twelvers account 
A)  Returns from the two banks will be identical 
B)  Invest with Twelvers to get a better return 
C)  Invest with Sixers to get a better return 
D)  Invest with both and pay the interest from Sixers into the Twelvers account

Question 20

Which of the following options describes IRR and NPV ranking in situations of mutual exclusivity?

Accepted Answer

A)  They are always the same. 
B)  They are always in the opposite order. 
C)  They may be in the opposite order. 
D)  They are never the same. 
A)  They are always the same. 
B)  They are always in the opposite order. 
C)  They may be in the opposite order. 
D)  They are never the same.

Exam 2: Project Appraisal: Net Present Value and Internal Rate of Return

Which of the two approaches (IRR and NPV) takes account of the time value of money?

Which of the following statements best explains how NPV can help decision makers?

Which three of the following would you need to know when calculating the net present value of a five year project?

What term is used for the present value of future cash flows after netting out the initial cash flow?

How much should an investor invest now to receive £250 in 3 years time if the interest rate is 5 per cent?

What is meant by the term 'annuity'?

Which of the following statements is true?

What term is used for the present value of the future cash flows after netting out the initial cash flow.

Which of the following correctly summarises one of the IRR investment rules?

What is the future value of a deposit of £200 in an account paying interest at 5 per cent over a four year period?

In discounted cash flow analysis, which of the following is a bad decision rule?

What term is used for the yield forgone on the best investment alternative?

In an assessment of the internal rate of return (r) of two projects the following results are obtained: r is 8% for Project A and 12% for Project B. What decisions should be followed if the opportunity cost of capital is 10%?

Calculations of the IRR based on a value of r = 5% give a NPV value of £234,000. Trying the effect of increasing and decreasing r gives - £876,000 when r = 10% and £456,000 when r = 2%. Which of the following values of r is most likely to be correct?

Which three of the following statements correspond to limitations of the IRR method, when compared with the NPV approach?

Which of the following outcomes can result when IRR is used in appraising projects with unconventional cash flows?

A lender lends at an annual rate of 15%. What is the equivalent monthly rate?

An investor wants to invest at 9 per cent compound interest and receive a payment of £181.30 after 5 years. What initial investment is required?

An investor is comparing an account with Twelvers Bank that pays 12 per cent annually with one at Sixers Bank that pays 6 per cent semi- annually. What advice would you give?

Which of the following options describes IRR and NPV ranking in situations of mutual exclusivity?

The Financial World

Project Appraisal: Cash Flow and Applications

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Valuing Shares

Capital Structure

Dividend Policy

Mergers

Derivatives

Managing Exchange-Rate Risk

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

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