Question 1

In order for a manager to correctly decide to postpone an investment until one year into the future, the NPV of the investment should:

Accepted Answer

A) grow more rapidly than the IRR. 
B) grow more rapidly than the cost of capital. 
C) not decrease. 
D) remain stable. 
A) grow more rapidly than the IRR. 
B) grow more rapidly than the cost of capital. 
C) not decrease. 
D) remain stable.

Question 2

For most managers, discounted cash flow analysis is in fact the dominant tool for project evaluation.

Accepted Answer

A) True 
 B)False

Question 3

When the NPV of an investment is positive, then the IRR will be:

Accepted Answer

A) equal to the opportunity cost of capital. 
B) greater than the opportunity cost of capital. 
C) less than the opportunity cost of capital. 
D) less than or equal to the opportunity cost of capital. 
A) equal to the opportunity cost of capital. 
B) greater than the opportunity cost of capital. 
C) less than the opportunity cost of capital. 
D) less than or equal to the opportunity cost of capital.

Question 4

Which of the following statements is correct for a project with a positive NPV?

Accepted Answer

A) IRR exceeds the cost of capital. 
B) Accepting the project has an indeterminate effect on shareholders. 
C) The discount rate exceeds the cost of capital. 
D) The profitability index equals one. 
A) IRR exceeds the cost of capital. 
B) Accepting the project has an indeterminate effect on shareholders. 
C) The discount rate exceeds the cost of capital. 
D) The profitability index equals one.

Question 5

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9 percent?

Accepted Answer

A) $101,251.79 
B) $109,200.00 
C) $117,871.97 
D) $130,800.00 
A) $101,251.79 
B) $109,200.00 
C) $117,871.97 
D) $130,800.00

Question 6

Project A has an IRR of 20 percent while Project B has an IRR of 30 percent.Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects?

Accepted Answer

A) Project A is more risky. 
B) Project A requires a smaller initial investment. 
C) Project A requires a larger initial investment. 
D) Project A requires cash outflows in the final period. 
A) Project A is more risky. 
B) Project A requires a smaller initial investment. 
C) Project A requires a larger initial investment. 
D) Project A requires cash outflows in the final period.

Question 7

How is the internal rate of return of a project calculated and what must one look out for when using the internal rate of return rule?

Accepted Answer

Instead of asking whether a project has

Question 8

When a Project's internal rate of return equals its opportunity cost of capital, then:

Accepted Answer

A) the project should be rejected. 
B) the project has no cash inflows. 
C) the net present value will be positive. 
D) the net present value will be zero. 
A) the project should be rejected. 
B) the project has no cash inflows. 
C) the net present value will be positive. 
D) the net present value will be zero.

Question 9

Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects:

Accepted Answer

A) with short lives. 
B) with long lives. 
C) with early cash inflows. 
D) that have negative NPVs. 
A) with short lives. 
B) with long lives. 
C) with early cash inflows. 
D) that have negative NPVs.

Question 10

A risky dollar is worth more than a safe one.

Accepted Answer

A) True 
 B)False

Question 11

Use of a profitability index to select projects in the absence of capital rationing:

Accepted Answer

A) will provide the same rankings as an NPV criterion. 
B) will maximize NPV, but not IRR. 
C) can result in misguided selections. 
D) is technically impossible. 
A) will provide the same rankings as an NPV criterion. 
B) will maximize NPV, but not IRR. 
C) can result in misguided selections. 
D) is technically impossible.

Question 12

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF0 = ($1,000), CF1 = $700, CF2 = $700.

Accepted Answer

A) ($308.70) 
B) ($138.00) 
C) $138.00 
D) $308.70 
A) ($308.70) 
B) ($138.00) 
C) $138.00 
D) $308.70

Question 13

A project with an IRR that is less than the opportunity cost of capital should be:

Accepted Answer

A) accepted for all project types. 
B) accepted for all lending projects. 
C) accepted for all borrowing projects. 
D) rejected for all projects. 
A) accepted for all project types. 
B) accepted for all lending projects. 
C) accepted for all borrowing projects. 
D) rejected for all projects.

Question 14

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?

Accepted Answer

A) $33,520 
B) $56,862 
C) $62,540 
D) $75,000 
A) $33,520 
B) $56,862 
C) $62,540 
D) $75,000

Question 15

A project has a payback period of five years and the firm employs a 10 percent cost of capital.Which of the following statements is correct concerning this Project's discounted payback?

Accepted Answer

A) discounted payback will exceed five years. 
B) discounted payback will be less than five years. 
C) discounted payback will decrease if the Project's IRR exceeds 10 percent. 
D) discounted payback will increase if the Project's IRR is less than 10 percent. 
A) discounted payback will exceed five years. 
B) discounted payback will be less than five years. 
C) discounted payback will decrease if the Project's IRR exceeds 10 percent. 
D) discounted payback will increase if the Project's IRR is less than 10 percent.

Question 16

Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15 percent; Project A with three annual cash flows of $1,000, or Project B, with three years of zero cash flow followed by three years of $1,500 annually?

Accepted Answer

A) Project A 
B) Project B 
C) You are indifferent since the NPVs are equal 
D) Neither project should be selected 
A) Project A 
B) Project B 
C) You are indifferent since the NPVs are equal 
D) Neither project should be selected

Question 17

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources.

Accepted Answer

A) Internal; external 
B) Internal; internal 
C) External; internal 
D) External; external 
A) Internal; external 
B) Internal; internal 
C) External; internal 
D) External; external

Question 18

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8 percent.By how much would the NPV change if the inflows were reduced to 30 years? Describe the implications of both answers.

Accepted Answer

NPV = $20,000 @#IMG-DLM& - $200,000
= $20,000 [12.

Question 19

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed, which project should be selected?

Accepted Answer

A) select the project with the higher profitability index. 
B) select the project with the lower profitability index. 
C) without capital rationing, both projects can be selected. 
D) without capital rationing, select by NPV method. 
A) select the project with the higher profitability index. 
B) select the project with the lower profitability index. 
C) without capital rationing, both projects can be selected. 
D) without capital rationing, select by NPV method.

Question 20

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.

Accepted Answer

Problems can occur with the use of IRR i

Exam 8: Net Present Value and Other Investment Criteria

In order for a manager to correctly decide to postpone an investment until one year into the future, the NPV of the investment should:

For most managers, discounted cash flow analysis is in fact the dominant tool for project evaluation.

When the NPV of an investment is positive, then the IRR will be:

Which of the following statements is correct for a project with a positive NPV?

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9 percent?

Project A has an IRR of 20 percent while Project B has an IRR of 30 percent.Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects?

How is the internal rate of return of a project calculated and what must one look out for when using the internal rate of return rule?

When a Project's internal rate of return equals its opportunity cost of capital, then:

Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects:

A risky dollar is worth more than a safe one.

Use of a profitability index to select projects in the absence of capital rationing:

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF0 = ($1,000), CF1 = $700, CF2 = $700.

A project with an IRR that is less than the opportunity cost of capital should be:

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?

A project has a payback period of five years and the firm employs a 10 percent cost of capital.Which of the following statements is correct concerning this Project's discounted payback?

Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15 percent; Project A with three annual cash flows of $1,000, or Project B, with three years of zero cash flow followed by three years of $1,500 annually?

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources.

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8 percent.By how much would the NPV change if the inflows were reduced to 30 years? Describe the implications of both answers.

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed, which project should be selected?

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

Soft capital rationing is imposed upon a firm from _ sources, while hard capital rationing is imposed from _ sources.