Question 1

The denominator of the profitability index is the present value of the investment.

Accepted Answer

A) True 
 B)False  True

Question 2

The discounted payback method will never accept a negative-NPV project.

Accepted Answer

A) True 
 B)False  True

Question 3

The discounted payback method calculates the payback period and then discounts the payback period at the opportunity cost of capital.

Accepted Answer

A) True 
 B)False  False

Question 4

What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?

Accepted Answer

A) .15 
B) .22 
C) .35 
D) .42 
A) .15 
B) .22 
C) .35 
D) .42

Question 5

Briefly explain the value additivity property.

Accepted Answer

For example, the net present value (NPV)

Question 6

Project Y has following cash flows: C0 = -800, C1 = +5,000, and C2 = -5,000. Calculate the IRRs for the project.

Accepted Answer

A) 25 percent and 400 percent. 
B) 125 percent and 500 percent. 
C) -44 percent and 11.6 percent. 
D) No IRRs exist for this project. 
A) 25 percent and 400 percent. 
B) 125 percent and 500 percent. 
C) -44 percent and 11.6 percent. 
D) No IRRs exist for this project.

Question 7

Which of the following investment rules does not use the time value of money concept?

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index 
A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index

Question 8

Decommissioning and clean-up costs for any project are always insignificant and should typically be ignored.

Accepted Answer

A) True 
 B)False

Question 9

What are some of the disadvantages of using the IRR method?

Accepted Answer

There are several disadvantages to the I

Question 10

Briefly discuss capital rationing.

Accepted Answer

There are two types of capital rationing

Question 11

Briefly explain the term soft rationing.

Accepted Answer

Management uses soft rationing to get be

Question 12

The following are some of the shortcomings of the IRR method except

Accepted Answer

A) IRR is conceptually easy to communicate. 
B) projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) it is very cumbersome to evaluate mutually exclusive projects using the IRR method. 
A) IRR is conceptually easy to communicate. 
B) projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) it is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Question 13

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

Accepted Answer

A) Payback period, discounted payback period, and net present value (NPV)only 
B) Discounted payback period, net present value (NPV), and internal rate of return only 
C) Net present value (NPV)and internal rate of return only 
D) Payback period, discounted payback period, net present value (NPV), and internal rate of return 
A) Payback period, discounted payback period, and net present value (NPV)only 
B) Discounted payback period, net present value (NPV), and internal rate of return only 
C) Net present value (NPV)and internal rate of return only 
D) Payback period, discounted payback period, net present value (NPV), and internal rate of return

Question 15

Which of the following investment rules may not use all possible cash flows in its calculations?

Accepted Answer

A) NPV 
B) Payback period 
C) IRR 
D) Profitability index 
A) NPV 
B) Payback period 
C) IRR 
D) Profitability index

Question 16

Project X has the following cash flows: C0 = +2,000, C1 = -1,300, and C2 = -1,500. If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

Accepted Answer

A) accept the project. 
B) reject the project. 
A) accept the project. 
B) reject the project.

Question 17

The IRR rule states that firms should accept any investment (normal)project offering an internal rate of return in excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 18

Mass Company is investing in a giant crane. It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years. At the end of the fourth year, there will be a $1 million disposal cost. Calculate the MIRR for the project if the cost of capital is 12 percent.

Accepted Answer

A) 17.8 percent 
B) 15.3 percent 
C) 23.8 percent 
D) 22.1 percent 
A) 17.8 percent 
B) 15.3 percent 
C) 23.8 percent 
D) 22.1 percent

Question 19

A project will have only one internal rate of return if

Accepted Answer

A) the net present value is positive. 
B) the net present value is negative. 
C) the cash flows decline over the life of the project. 
D) there is a one-sign change in the cash flows. 
A) the net present value is positive. 
B) the net present value is negative. 
C) the cash flows decline over the life of the project. 
D) there is a one-sign change in the cash flows.

Question 20

Internal rate of return (IRR)method is also called the

Accepted Answer

A) discounted payback period method. 
B) discounted cash flow (DCF)rate of return method. 
C) modified internal rate of return (MIRR)method. 
D) book rate of return method. 
A) discounted payback period method. 
B) discounted cash flow (DCF)rate of return method. 
C) modified internal rate of return (MIRR)method. 
D) book rate of return method.

Exam 5: Net Present Value and Other Investment Criteria

The denominator of the profitability index is the present value of the investment.

The discounted payback method will never accept a negative-NPV project.

The discounted payback method calculates the payback period and then discounts the payback period at the opportunity cost of capital.

What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?

Briefly explain the value additivity property.

Project Y has following cash flows: C0 = -800, C1 = +5,000, and C2 = -5,000. Calculate the IRRs for the project.

Which of the following investment rules does not use the time value of money concept?

Decommissioning and clean-up costs for any project are always insignificant and should typically be ignored.

What are some of the disadvantages of using the IRR method?

Briefly discuss capital rationing.

Briefly explain the term soft rationing.

The following are some of the shortcomings of the IRR method except

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

Which of the following investment rules may not use all possible cash flows in its calculations?

Project X has the following cash flows: C0 = +2,000, C1 = -1,300, and C2 = -1,500. If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

The IRR rule states that firms should accept any investment (normal)project offering an internal rate of return in excess of the cost of capital.

A project will have only one internal rate of return if

Internal rate of return (IRR)method is also called the

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000. Calculate the IRRs for the project.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500. If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would