Exam 8: Net Present Value and Other Investment Criteria

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 opportunity cost of capital is equal to:

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

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

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.

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

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

What is the present value of the tax shield for the following project? The initial investment is $300,000.The project will last for 6 years, at which time the asset will be sold for $90,000.The asset will be depreciated on a declining balance basis at a rate of 20 percent.The firm's marginal tax rate is 40 percent.The firm's required rate of return is 8 percent.

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

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?

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

Because of its age, your car costs $4,000 annually in maintenance expense.You could replace it with a newer vehicle costing $8,000.Both vehicles would be expected to last four more years.If your opportunity cost is 8 percent, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

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

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

If a project has multiple IRRs, the highest one is assumed to be correct.

If the IRR for a project is 15 percent, then the Project's NPV would be:

Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept-reject decision.

For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.

When projects are mutually exclusive, selection should be made according to the project with the:

The appropriate discount rate for a firm is: