Question 1

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

Accepted Answer

A) True 
 B)False

Question 2

How is the profitability index calculated, and how can it be used to choose between projects when funds are limited?

Accepted Answer

If there is a shortage of capi

Question 3

Majestic Corporation is planning a 12 year project that will have an initial cost of $900,000.During the first 3 years, there will be cash inflows of $80,000.Years 4-10 will see cash inflows of $350,000.Years 11-12 will see cash outflows of $20,000.If the company's required rate of return is 11%, determine the NPV of the project.

Accepted Answer

A) -$175,023 
B) -$25,890 
C) $227,320 
D) $489,366 
A) -$175,023 
B) -$25,890 
C) $227,320 
D) $489,366

Question 4

Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

Accepted Answer

A) NPV = $3,071.01 
B) NPV = $20,000 
C) IRR = 2.8 percent 
D) IRR is greater than 10 percent 
A) NPV = $3,071.01 
B) NPV = $20,000 
C) IRR = 2.8 percent 
D) IRR is greater than 10 percent

Question 6

When hard capital rationing exists, projects may be accurately evaluated by use of:

Accepted Answer

A) payback period. 
B) mutually exclusive IRRs. 
C) a profitability index. 
D) borrowing, rather than lending, projects. 
A) payback period. 
B) mutually exclusive IRRs. 
C) a profitability index. 
D) borrowing, rather than lending, projects.

Question 7

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

Accepted Answer

A) $22,638 
B) $85,815 
C) $12,638 
D) $32,638 
A) $22,638 
B) $85,815 
C) $12,638 
D) $32,638

Question 8

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:

Accepted Answer

A) equal to $50. 
B) less than 0 if the discount rate is less than 5 percent. 
C) zero if the discount rate is equal to 5 percent. 
D) positive if the discount rate is greater than 5 percent. 
A) equal to $50. 
B) less than 0 if the discount rate is less than 5 percent. 
C) zero if the discount rate is equal to 5 percent. 
D) positive if the discount rate is greater than 5 percent.

Question 9

A project's Profitability Index is.85 and its investment value of $250,000.Given this information, determine its NPV.

Accepted Answer

A) $12,500 
B) -$5,000 
C) -$12,500 
D) -$37,500 
A) $12,500 
B) -$5,000 
C) -$12,500 
D) -$37,500

Question 10

Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.

Accepted Answer

A) $25,000 
B) $75,000 
C) $200,000 
D) $250,000 
A) $25,000 
B) $75,000 
C) $200,000 
D) $250,000

Question 11

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10 percent?

Accepted Answer

A) $20,000.00 
B) $21,356.95 
C) $22,618.83 
D) $25,237.66 
A) $20,000.00 
B) $21,356.95 
C) $22,618.83 
D) $25,237.66

Question 12

When mutually exclusive projects have different lives, the project which should be selected will have the:

Accepted Answer

A) highest IRR. 
B) longest life. 
C) lowest equivalent annual cost. 
D) highest NPV, discounted at the opportunity cost of capital. 
A) highest IRR. 
B) longest life. 
C) lowest equivalent annual cost. 
D) highest NPV, discounted at the opportunity cost of capital.

Question 13

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

Accepted Answer

A) $3,397.57 
B) $4,473.44 
C) $16,100.00 
D) $35,000.00 
A) $3,397.57 
B) $4,473.44 
C) $16,100.00 
D) $35,000.00

Question 14

Which of the following best illustrates the problem imposed by capital rationing?

Accepted Answer

A) accepting projects with the highest NPVs first. 
B) accepting projects with the highest IRRs first. 
C) bypassing projects that have positive NPVs. 
D) bypassing projects that have positive IRRs. 
A) accepting projects with the highest NPVs first. 
B) accepting projects with the highest IRRs first. 
C) bypassing projects that have positive NPVs. 
D) bypassing projects that have positive IRRs.

Question 15

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10 percent: CF0 = -6,000, CF1 = +3,300, CF2 = +3,300.

Accepted Answer

A) accept, since IRR exceeds opportunity cost. 
B) reject, since opportunity cost exceeds IRR. 
C) accept, since opportunity cost exceeds IRR. 
D) reject, since IRR exceeds opportunity cost. 
A) accept, since IRR exceeds opportunity cost. 
B) reject, since opportunity cost exceeds IRR. 
C) accept, since opportunity cost exceeds IRR. 
D) reject, since IRR exceeds opportunity cost.

Question 16

If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n):

Accepted Answer

A) positive NPV. 
B) negative NPV. 
C) acceptable payback period. 
D) positive profitability index. 
A) positive NPV. 
B) negative NPV. 
C) acceptable payback period. 
D) positive profitability index.

Question 17

As the discount rate is increased, the NPV of a specific project will:

Accepted Answer

A) increase 
B) decrease 
C) remain constant 
D) decrease to zero, and then remain constant 
A) increase 
B) decrease 
C) remain constant 
D) decrease to zero, and then remain constant

Question 18

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

Accepted Answer

A) Project's initial cost. 
B) Project's NPV. 
C) Project's discounted cash flows. 
D) Soft capital rationing budget. 
A) Project's initial cost. 
B) Project's NPV. 
C) Project's discounted cash flows. 
D) Soft capital rationing budget.

Question 19

The use of a profitability index will always provide results consistent with selecting the project with the:

Accepted Answer

A) highest NPV. 
B) highest IRR. 
C) largest dollar invested per rate of return. 
D) largest return per dollar invested. 
A) highest NPV. 
B) highest IRR. 
C) largest dollar invested per rate of return. 
D) largest return per dollar invested.

Question 20

Why doesn't the payback rule always make shareholders better off?

Accepted Answer

The net present value rule and the rate

Exam 8: Net Present Value and Other Investment Criteria

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

How is the profitability index calculated, and how can it be used to choose between projects when funds are limited?

Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

When hard capital rationing exists, projects may be accurately evaluated by use of:

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:

A project's Profitability Index is.85 and its investment value of $250,000.Given this information, determine its NPV.

Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10 percent?

When mutually exclusive projects have different lives, the project which should be selected will have the:

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

Which of the following best illustrates the problem imposed by capital rationing?

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10 percent: CF0 = -6,000, CF1 = +3,300, CF2 = +3,300.

If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n):

As the discount rate is increased, the NPV of a specific project will:

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

The use of a profitability index will always provide results consistent with selecting the project with the:

Why doesn't the payback rule always make shareholders better off?

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

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