Exam 8: Net Present Value and Other Investment Criteria

Which of the following statements is true for a project with $20,000 initial cost,cash inflows of $5,800 per year for six years,and a discount rate of 15 percent?

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

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

A firm considers a project with the following cash flows: time-zero = +20,000,years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10 percent?

Norton Corporation is considering a 6 year project having an initial investment of $150,000.The project will provide cash inflows of $25,000 for the first 3 years and $60,000 during the last 3 years.Given this information,calculate the project's payback.

Projects with an NPV of zero decrease shareholders' wealth by the cost of the project.

The opportunity cost of capital is equal to:

How many IRRs are possible for the following set of cash flows? CF₀ = -1,000,CF₁ = + 500,CF₂ = -300,CF₃ = + 1,000,CF₄ = + 200.

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero,then returns $20,000 annually for five years?

Discuss three reasons why a firm may want to impose soft capital rationing.

As the opportunity cost of capital increases,the net present value of a project increases.

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

Soft rationing should never cost the firm anything.

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?

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for six years?

For mutually exclusive projects,the project with the higher IRR is the correct selection.

The payback period considers all project cash flows.

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.

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 we compare assets with different lives,we should select the machine that has the lowest equivalent annual annuity.