Question 1

Present values have the value additivity property.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

The benefit-cost ratio is equal to the profitability index plus one.

Accepted Answer

A) True 
 B)False

Question 4

The IRR is defined as

Accepted Answer

A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate used in the discounted payback period method. 
A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate used in the discounted payback period method.

Question 5

The net present value of a project depends upon the

Accepted Answer

A) company's choice of accounting method. 
B) manager's tastes and preferences. 
C) project's cash flows and opportunity cost of capital. 
D) company's profitability index. 
A) company's choice of accounting method. 
B) manager's tastes and preferences. 
C) project's cash flows and opportunity cost of capital. 
D) company's profitability index.

Question 6

If the cash flows for project A are C0 = −1,000; C1 = +600; C2 = +400; and C3 = +1,500, calculate the payback period.

Accepted Answer

A) One year 
B) Two years 
C) Three years 
D) Cannot be determined 
A) One year 
B) Two years 
C) Three years 
D) Cannot be determined

Question 7

Discuss some of the advantages of using the payback method.

Accepted Answer

It tells you how quickly you c

Question 8

If the NPV of project A is + $120, that of project B is -$40, and that of project C is + $40, what is the NPV of the combined project?

Accepted Answer

A) +$100 
B) -$40 
C) +$70 
D) +$120 
A) +$100 
B) -$40 
C) +$70 
D) +$120

Question 9

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

The following are measures used by firms when making capital budgeting decisions except

Accepted Answer

A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value. 
A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value.

Question 11

The cost of a new machine is $250,000. The machine has a five-year life and no salvage value. If the cash flow each year is equal to 25 percent of the cost of the machine, calculate the payback period for the project.

Accepted Answer

A) 2.0 years 
B) 2.5 years 
C) 3.0 years 
D) 4.0 years 
A) 2.0 years 
B) 2.5 years 
C) 3.0 years 
D) 4.0 years

Question 12

Dry-Sand Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax)cash flows for three years. However, at the end of the fourth year, the project will generate -$500,000 of after-tax cash flow due to dismantling costs. Calculate the MIRR (modified internal rate of return)for the project if the cost of capital is 15 percent. The reinvestment rate is 12 percent.

Accepted Answer

A) 11.5 percent 
B) 12.6 percent 
C) 28.2 percent 
D) 20.4 percent 
A) 11.5 percent 
B) 12.6 percent 
C) 28.2 percent 
D) 20.4 percent

Question 13

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?

Accepted Answer

A) Accept project X as it has a positive NPV. 
B) Reject project X. 
C) Break up the project into its components: Accept A and C, but reject B. 
D) Break up the project into its components: Accept C. 
A) Accept project X as it has a positive NPV. 
B) Reject project X. 
C) Break up the project into its components: Accept A and C, but reject B. 
D) Break up the project into its components: Accept C.

Question 14

Accounting earnings from a firm's income statement, prepared according to generally accepted accounting principles (GAAP), are typically the best data source for calculating a project's NPV.

Accepted Answer

A) True 
 B)False

Question 15

Discuss some of the disadvantages of the payback rule.

Accepted Answer

The disadvantages are that it

Question 16

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

Accepted Answer

A) 23 percent 
B) 21 percent 
C) 19 percent 
D) 17 percent 
A) 23 percent 
B) 21 percent 
C) 19 percent 
D) 17 percent

Question 17

There can never be more than one value of the IRR for any sequence of cash flows.

Accepted Answer

A) True 
 B)False

Question 18

The following table gives the available projects (in $millions)for a firm.
 
The firm has only $20 million to invest. What is the maximum NPV that the company can obtain?

Accepted Answer

A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0 
A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0

Question 19

One can use the profitability index most usefully for which situation?

Accepted Answer

A) When capital rationing exists 
B) Evaluation of exceptionally long-term projects 
C) Evaluation of nonnormal projects 
D) When a project has unusually high cash flow uncertainty 
A) When capital rationing exists 
B) Evaluation of exceptionally long-term projects 
C) Evaluation of nonnormal projects 
D) When a project has unusually high cash flow uncertainty

Question 20

The profitability index of a positive NPV project is always positive.

Accepted Answer

A) True 
 B)False

Exam 5: Net Present Value and Other Investment Criteria

Present values have the value additivity property.

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

The benefit-cost ratio is equal to the profitability index plus one.

The IRR is defined as

The net present value of a project depends upon the

If the cash flows for project A are C0 = −1,000; C1 = +600; C2 = +400; and C3 = +1,500, calculate the payback period.

Discuss some of the advantages of using the payback method.

If the NPV of project A is + $120, that of project B is -$40, and that of project C is + $40, what is the NPV of the combined project?

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

The following are measures used by firms when making capital budgeting decisions except

The cost of a new machine is $250,000. The machine has a five-year life and no salvage value. If the cash flow each year is equal to 25 percent of the cost of the machine, calculate the payback period for the project.

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?

Accounting earnings from a firm's income statement, prepared according to generally accepted accounting principles (GAAP), are typically the best data source for calculating a project's NPV.

Discuss some of the disadvantages of the payback rule.

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

There can never be more than one value of the IRR for any sequence of cash flows.

The following table gives the available projects (in $millions)for a firm. The firm has only $20 million to invest. What is the maximum NPV that the company can obtain?

One can use the profitability index most usefully for which situation?

The profitability index of a positive NPV project is always positive.

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

If the cash flows for project A are C₀ = −1,000; C₁ = +600; C₂ = +400; and C₃ = +1,500, calculate the payback period.

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project.