Question 1

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

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)  None of the above 
A)  Discounted payback period method 
B)  Discounted cash-flow (DCF) rate of return method 
C)  Modified internal rate of return (MIRR) method 
D)  None of the above B

Question 2

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Accepted Answer

With the modified internal rate of return method, cash flows from the project are explicitly reinvested at the cost of capital, thus eliminating the reinvestment rate assumption problem. This eliminates the multiple IRR problems inherent in complex projects. Also reinvesting the cash flows from the project at the cost of capital is more realistic. But using NPV method is much better.

Question 3

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  False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The payback period rule accepts all projects for which the payback period is:

Accepted Answer

A)  Greater than the cut-off value 
B)  Less than the cut-off value 
C)  Is positive 
D)  An integer 
A)  Greater than the cut-off value 
B)  Less than the cut-off value 
C)  Is positive 
D)  An integer

Question 6

If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

Accepted Answer

A)  +$100 
B)  +$60 
C)  +$160 
D)  None of the above 
A)  +$100 
B)  +$60 
C)  +$160 
D)  None of the above

Question 7

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which 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 the firm's joint project as it has a positive NPV 
B)  Reject the joint project 
C)  Break up the project into its components: accept A and C and reject B 
D)  None of the above 
A)  Accept the firm's joint project as it has a positive NPV 
B)  Reject the joint project 
C)  Break up the project into its components: accept A and C and reject B 
D)  None of the above

Question 8

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Accepted Answer

A)  23% 
B)  21% 
C)  19% 
D)  None of the above 
A)  23% 
B)  21% 
C)  19% 
D)  None of the above

Question 9

Which of the following statements regarding the discounted payback period rule is true?

Accepted Answer

A)  The discounted payback rule uses the time value of money concept. 
B)  The discounted payback rule is better than the NPV rule. 
C)  The discounted payback rule considers all cash flows. 
D)  The discounted payback rule exhibits the value additive property. 
A)  The discounted payback rule uses the time value of money concept. 
B)  The discounted payback rule is better than the NPV rule. 
C)  The discounted payback rule considers all cash flows. 
D)  The discounted payback rule exhibits the value additive property.

Question 10

Benefit-cost ratio is defined as the ratio of:

Accepted Answer

A)  Net present value cash flow to initial investment 
B)  Present value of cash flow to initial investment 
C)  Net present value of cash flow to IRR 
D)  Present value of cash flow to IRR 
A)  Net present value cash flow to initial investment 
B)  Present value of cash flow to initial investment 
C)  Net present value of cash flow to IRR 
D)  Present value of cash flow to IRR

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Accepted Answer

A)  One year 
B)  Two years 
C)  Three years 
D)  None of the above 
A)  One year 
B)  Two years 
C)  Three years 
D)  None of the above

Question 13

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).

Accepted Answer

A)  2.4 million 
B)  1.2. million 
C)  0.80 million 
D)  0.20 million 
A)  2.4 million 
B)  1.2. million 
C)  0.80 million 
D)  0.20 million

Question 14

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest?
Project A: Cost = $120, NPV = 80
Project B: Cost = $100, NPV = 75

Accepted Answer

A)  .62 
B)  .67 
C)  .75 
D)  .79 
A)  .62 
B)  .67 
C)  .75 
D)  .79

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)  All of the above 
A)  NPV 
B)  Payback period 
C)  IRR 
D)  All of the above

Question 16

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

Accepted Answer

A)  14.6 % 
B)  16.4 % 
C)  18.2 % 
D)  22.1% 
A)  14.6 % 
B)  16.4 % 
C)  18.2 % 
D)  22.1%

Question 19

If the NPV of project A is + $120, and 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 20

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

Accepted Answer

A) True 
 B)False

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

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

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

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

The payback period rule accepts all projects for which the payback period is:

If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

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

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Which of the following statements regarding the discounted payback period rule is true?

Benefit-cost ratio is defined as the ratio of:

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

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest? Project A: Cost = $120, NPV = 80 Project B: Cost = $100, NPV = 75

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

A project will have only one internal rate of return if:

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

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

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

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

Goals and Governance of the Firm

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

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Financial Analysis

Financial Planning

Filters

Exam 5: Net Present Value and Other Investment Criteria

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

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

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

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

The payback period rule accepts all projects for which the payback period is:

If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

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

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Which of the following statements regarding the discounted payback period rule is true?

Benefit-cost ratio is defined as the ratio of:

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

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest? Project A: Cost = $120, NPV = 80 Project B: Cost = $100, NPV = 75

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

A project will have only one internal rate of return if:

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

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

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

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

Goals and Governance of the Firm

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

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Financial Analysis

Financial Planning

Filters