Question 1

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Accepted Answer

A) select the lowest IRR to be conservative. 
B) select the highest IRR to maximize the benefits. 
C) any or all of the IRRs are justified to use. 
D) evaluate the project according to NPV. 
A) select the lowest IRR to be conservative. 
B) select the highest IRR to maximize the benefits. 
C) any or all of the IRRs are justified to use. 
D) evaluate the project according to NPV.

Question 2

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years, how much did the project cost?

Accepted Answer

A) $44,617 
B) $52,200 
C) $60,000 
D) $72,747 
A) $44,617 
B) $52,200 
C) $60,000 
D) $72,747

Question 3

The NPV of an investment made today is $10,000.If postponed for one year, the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

Accepted Answer

A) postpone; the NPV increases by a positive amount. 
B) postpone; the NPV will be larger. 
C) invest now; NPV does not grow at a sufficient rate. 
D) invest now; always accept positive NPV projects. 
A) postpone; the NPV increases by a positive amount. 
B) postpone; the NPV will be larger. 
C) invest now; NPV does not grow at a sufficient rate. 
D) invest now; always accept positive NPV projects.

Question 4

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000, is expected to last for 10 years, and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent, should the project be accepted?

Accepted Answer

NPV = $44,503 (PVIFA14%, 10) -

Question 5

Net present value subtracts the present value of the cash flows from the initial investment.

Accepted Answer

A) True 
 B)False

Question 6

A project can have as many different internal rates of return as it has:

Accepted Answer

A) cash inflows. 
B) cash outflows. 
C) periods of cash flow. 
D) changes in the sign of the cash flows. 
A) cash inflows. 
B) cash outflows. 
C) periods of cash flow. 
D) changes in the sign of the cash flows.

Question 7

A Project's payback period is the length of time necessary to generate an NPV of zero.

Accepted Answer

A) True 
 B)False

Question 8

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

Accepted Answer

A) 8.69 years 
B) 14.00 years 
C) 27.51 years 
D) An infinite number of years 
A) 8.69 years 
B) 14.00 years 
C) 27.51 years 
D) An infinite number of years

Question 9

If two projects offer the same, positive NPV, then:

Accepted Answer

A) they also have the same IRR. 
B) they have the same payback period. 
C) they are mutually exclusive projects. 
D) they add the same amount to the value of the firm. 
A) they also have the same IRR. 
B) they have the same payback period. 
C) they are mutually exclusive projects. 
D) they add the same amount to the value of the firm.

Question 10

A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.

Accepted Answer

A) $2,000 
B) $9,607 
C) $14,411 
D) $24,018 
A) $2,000 
B) $9,607 
C) $14,411 
D) $24,018

Question 11

Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000.If the company's required return is 10%, determine its discounted payback.

Accepted Answer

A) 3.27years 
B) 3.43 years 
C) 3.79 years 
D) 4.01 years 
A) 3.27years 
B) 3.43 years 
C) 3.79 years 
D) 4.01 years

Question 12

What should occur when a Project's net present value is determined to be negative?

Accepted Answer

A) the discount rate should be decreased. 
B) the profitability index should be calculated. 
C) the present value of the project cost should be determined. 
D) the project should be rejected. 
A) the discount rate should be decreased. 
B) the profitability index should be calculated. 
C) the present value of the project cost should be determined. 
D) the project should be rejected.

Question 13

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

Accepted Answer

A) True 
 B)False

Question 14

A Project's opportunity cost of capital is:

Accepted Answer

A) the forgone return from investing in the project. 
B) the return earned by investing in the project. 
C) equal to the average return on all company projects. 
D) designed to be less than the project's IRR. 
A) the forgone return from investing in the project. 
B) the return earned by investing in the project. 
C) equal to the average return on all company projects. 
D) designed to be less than the project's IRR.

Question 15

One method that can be used to increase the NPV of a project is to decrease the:

Accepted Answer

A) project's payback. 
B) project's cost of capital. 
C) time until receipt of cash inflows. 
D) number of project IRRs. 
A) project's payback. 
B) project's cost of capital. 
C) time until receipt of cash inflows. 
D) number of project IRRs.

Question 16

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

Accepted Answer

A) the NPVs of these projects cross over at some discount rate. 
B) discounted cash flow is not considered with mutually exclusive projects. 
C) IRR performs better with accounting returns than with cash flows. 
D) mutually exclusive projects have multiple IRRs. 
A) the NPVs of these projects cross over at some discount rate. 
B) discounted cash flow is not considered with mutually exclusive projects. 
C) IRR performs better with accounting returns than with cash flows. 
D) mutually exclusive projects have multiple IRRs.

Question 17

When managers select correctly from among mutually exclusive projects, they:

Accepted Answer

A) may give up rate of return for NPV. 
B) may give up NPV for rate of return. 
C) have a tendency to select the largest project. 
D) focus on payback method to avoid conflicting signals. 
A) may give up rate of return for NPV. 
B) may give up NPV for rate of return. 
C) have a tendency to select the largest project. 
D) focus on payback method to avoid conflicting signals.

Question 18

Which of the following investment criteria takes the time value of money into consideration?

Accepted Answer

A) payback period only. 
B) profitability index only. 
C) internal rate of return for borrowing projects only. 
D) payback period, profitability index and IRR. 
A) payback period only. 
B) profitability index only. 
C) internal rate of return for borrowing projects only. 
D) payback period, profitability index and IRR.

Question 19

What is the net present value of an investment, and how do you calculate it?

Accepted Answer

The net present value of a project measu

Question 20

The appropriate discount rate for a firm is:

Accepted Answer

A) the bank rate. 
B) its opportunity cost of capital. 
C) the prime rate. 
D) its depreciation rate. 
A) the bank rate. 
B) its opportunity cost of capital. 
C) the prime rate. 
D) its depreciation rate.

Exam 8: Net Present Value and Other Investment Criteria

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years, how much did the project cost?

The NPV of an investment made today is $10,000.If postponed for one year, the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000, is expected to last for 10 years, and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent, should the project be accepted?

Net present value subtracts the present value of the cash flows from the initial investment.

A project can have as many different internal rates of return as it has:

A Project's payback period is the length of time necessary to generate an NPV of zero.

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

If two projects offer the same, positive NPV, then:

A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.

Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000.If the company's required return is 10%, determine its discounted payback.

What should occur when a Project's net present value is determined to be negative?

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

A Project's opportunity cost of capital is:

One method that can be used to increase the NPV of a project is to decrease the:

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

When managers select correctly from among mutually exclusive projects, they:

Which of the following investment criteria takes the time value of money into consideration?

What is the net present value of an investment, and how do you calculate it?

The appropriate discount rate for a firm is:

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Measuring Corporate Performance

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