Question 1

Which of the following changes will increase the NPV of a project?

Accepted Answer

A) A decrease in the discount rate 
B) A decrease in the size of the cash inflows 
C) An increase in the initial cost of the project 
D) A decrease in the number of cash inflows 
A) A decrease in the discount rate 
B) A decrease in the size of the cash inflows 
C) An increase in the initial cost of the project 
D) A decrease in the number of cash inflows A

Question 2

Soft capital rationing:

Accepted Answer

A) is costly to shareholders 
B) Is used to determine mutually exclusive projects 
C) Should be costless to the shareholders of the firm 
D) Solves the problem of investment timing 
A) is costly to shareholders 
B) Is used to determine mutually exclusive projects 
C) Should be costless to the shareholders of the firm 
D) Solves the problem of investment timing C

Question 3

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 C

Question 4

Suppose project A has an IRR of 10 percent and project B has an IRR of 20 percent.One can then conclude that:

Accepted Answer

A) Project A is preferred to B 
B) Project A has a negative NPV while project B has a positive NPV 
C) Project B has a negative NPV while project A has a positive NPV 
D) It is impossible to rank the two projects without further information 
A) Project A is preferred to B 
B) Project A has a negative NPV while project B has a positive NPV 
C) Project B has a negative NPV while project A has a positive NPV 
D) It is impossible to rank the two projects without further information

Question 5

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(PVIFA_{14%, 10})

Question 6

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 7

Borrowing and lending projects usually can be distinguished by whether:

Accepted Answer

A) They have positive or negative IRRs 
B) The time-zero cash flow is positive or negative 
C) Their IRR increases as the discount rate increases 
D) Their rate of return is high or low 
A) They have positive or negative IRRs 
B) The time-zero cash flow is positive or negative 
C) Their IRR increases as the discount rate increases 
D) Their rate of return is high or low

Question 8

Which of the following is incorrect for a borrowing project?

Accepted Answer

A) Its NPV graph rises as discount rates increase 
B) Its cash flow at time zero is typically an inflow 
C) Its NPV is positive 
D) it's acceptable if IRR exceeds cost of capital 
A) Its NPV graph rises as discount rates increase 
B) Its cash flow at time zero is typically an inflow 
C) Its NPV is positive 
D) it's acceptable if IRR exceeds cost of capital

Question 9

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 10

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 11

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 12

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 0 = $40,000 
A) $101,251.79 
B) $109,200.00 
C) $117,871.97 
D) $130,800.00 0 = $40,000

Question 13

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?

Accepted Answer

A) Its payback period is roughly 3 1/2 years 
B) Its NPV is $2,194 
C) Its IRR is 1.85 percent 
D) Its profitability index is 0.109 
A) Its payback period is roughly 3 1/2 years 
B) Its NPV is $2,194 
C) Its IRR is 1.85 percent 
D) Its profitability index is 0.109

Question 14

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 15

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

Accepted Answer

A) Postpone until costs reach their lowest 
B) Invest now to maximize the NPV 
C) Postpone until the opportunity cost reaches its lowest 
D) Invest at the date that gives the highest NPV today 
A) Postpone until costs reach their lowest 
B) Invest now to maximize the NPV 
C) Postpone until the opportunity cost reaches its lowest 
D) Invest at the date that gives the highest NPV today

Question 16

The decision rule for net present value is to:

Accepted Answer

A) Accept all projects with cash inflows exceeding initial cost 
B) Reject all projects with rates of return exceeding the opportunity cost of capital 
C) Accept all projects with positive net present values 
D) Reject all projects lasting longer than 10 years 
A) Accept all projects with cash inflows exceeding initial cost 
B) Reject all projects with rates of return exceeding the opportunity cost of capital 
C) Accept all projects with positive net present values 
D) Reject all projects lasting longer than 10 years

Question 17

A company is considering a 5-year project with an initial investment of $90,000.Cash inflows will be $30,000 for the first two years and $25,000 for the next 3 years.If the company's required rate of return is 12%, determine its discounted payback.

Accepted Answer

A) 3.40 years 
B) 3.60 years 
C) 3.80 years 
D) 4.00 years 
A) 3.40 years 
B) 3.60 years 
C) 3.80 years 
D) 4.00 years

Question 18

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 19

Given a particular set of project cash flows, which of the following statements is correct?

Accepted Answer

A) There can be only one NPV for the project 
B) There can be only one IRR for the project 
C) There can be more than one NPV for the project 
D) There can be only one profitability index for the project 
A) There can be only one NPV for the project 
B) There can be only one IRR for the project 
C) There can be more than one NPV for the project 
D) There can be only one profitability index for the project

Question 20

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 NPV = PV of inflows - required investment
= $45,000 
A) $3,397.57 
B) $4,473.44 
C) $16,100.00 
D) $35,000.00 NPV = PV of inflows - required investment
= $45,000

Exam 8: Net Present Value and Other Investment Criteria

Which of the following changes will increase the NPV of a project?

Soft capital rationing:

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:

Suppose project A has an IRR of 10 percent and project B has an IRR of 20 percent.One can then conclude that:

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?

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

Borrowing and lending projects usually can be distinguished by whether:

Which of the following is incorrect for a borrowing project?

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?

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

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

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?

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?

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 managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

The decision rule for net present value is to:

A company is considering a 5-year project with an initial investment of $90,000.Cash inflows will be $30,000 for the first two years and $25,000 for the next 3 years.If the company's required rate of return is 12%, determine its discounted payback.

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

Given a particular set of project cash flows, which of the following statements is correct?

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?

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

Filters

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