Question 1

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

Accepted Answer

Instead of asking whether a project has

Question 2

When calculating a project's payback period, cash flows are discounted at:

Accepted Answer

A)  the opportunity cost of capital. 
B)  the internal rate of return. 
C)  the risk-free rate of return. 
D) a discount rate of zero. 
A)  the opportunity cost of capital. 
B)  the internal rate of return. 
C)  the risk-free rate of return. 
D) a discount rate of zero.

Question 3

When mutually exclusive projects have different lives, the project that 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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 level. 
B)  invest now to maximize the NPV. 
C)  postpone until the opportunity cost reaches its lowest level. 
D) invest at the date that provides the highest NPV today. 
A)  postpone until costs reach their lowest level. 
B)  invest now to maximize the NPV. 
C)  postpone until the opportunity cost reaches its lowest level. 
D) invest at the date that provides the highest NPV today.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the:

Accepted Answer

A)  project's IRR equals 10%. 
B)  project's rate of return is greater than 10%. 
C)  net present value of the cash inflows is $4,500. 
D) project's cash inflows total $25,000. 
A)  project's IRR equals 10%. 
B)  project's rate of return is greater than 10%. 
C)  net present value of the cash inflows is $4,500. 
D) project's cash inflows total $25,000.

Question 8

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

Accepted Answer

A)  It increases. 
B)  It decreases. 
C)  It is not affected. 
D) It depends on whether or not the projects are mutually exclusive. 
A)  It increases. 
B)  It decreases. 
C)  It is not affected. 
D) It depends on whether or not the projects are mutually exclusive.

Question 9

The payback rule always makes shareholders better off.

Accepted Answer

A) True 
 B)False

Question 10

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)  increase over that year. 
C)  not decrease. 
D) remain stable. 
A)  grow more rapidly than the IRR. 
B)  increase over that year. 
C)  not decrease. 
D) remain stable.

Question 11

Low-energy light bulbs typically cost $3.50, have a life of 9 years, and use about $1.60 of electricity a year. Conventional light bulbs are cheaper to buy, for they cost only $.50. On the other hand, they last only about a year and use about $6.60 of energy. If the real discount rate is 5%, what is the relative cost of the two products?

Accepted Answer

To answer this question, you need first

Question 12

Why may the IRR criterion lead to an incorrect decision when applied to mutually exclusive projects?

Accepted Answer

A)  The NPVs of mutually exclusive projects cross over at some discount rate. 
B)  Cash flows cannot be discounted when considering mutually exclusive projects. 
C)  Mutually exclusive projects produce negative IRR values. 
D) Mutually exclusive projects have multiple IRRs. 
A)  The NPVs of mutually exclusive projects cross over at some discount rate. 
B)  Cash flows cannot be discounted when considering mutually exclusive projects. 
C)  Mutually exclusive projects produce negative IRR values. 
D) Mutually exclusive projects have multiple IRRs.

Question 13

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.

Accepted Answer

Problems can occur with the use of IRR i

Question 14

What is the NPV for the following project cash flows at a discount rate of 15%? C0 = ($1,000), C1 = $700, C2 = $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 15

The payback period considers all project cash flows.

Accepted Answer

A) True 
 B)False

Question 16

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

Accepted Answer

A)  internal rate of return is positive. 
B)  payback period is greater than one. 
C)  rate of return exceeds the cost of capital. 
D) cash inflows equal the initial cost. 
A)  internal rate of return is positive. 
B)  payback period is greater than one. 
C)  rate of return exceeds the cost of capital. 
D) cash inflows equal the initial cost.

Question 17

A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then the project's payback period will:

Accepted Answer

A)  be reduced. 
B)  be increased. 
C)  be unchanged. 
D) change but the discount rate must be known to determine the nature of the change. 
A)  be reduced. 
B)  be increased. 
C)  be unchanged. 
D) change but the discount rate must be known to determine the nature of the change.

Question 18

Given a particular set of project cash flows, which one of the following statements must be correct?

Accepted Answer

A)  There can be only one NPV for the project, even with multiple discount rates. 
B)  There can be only one IRR for the project. 
C)  There can be more than one IRR for the project. 
D) There can be only one profitability index for the project, even with multiple discount rates. 
A)  There can be only one NPV for the project, even with multiple discount rates. 
B)  There can be only one IRR for the project. 
C)  There can be more than one IRR for the project. 
D) There can be only one profitability index for the project, even with multiple discount rates.

Question 19

When calculating IRR with a trial and error process, discount rates should be raised when NPV is positive.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  The IRR must be greater than 0. 
B)  Accepting the project has an indeterminate effect on shareholders. 
C)  The discount rate exceeds the cost of capital. 
D) The profitability index equals 1. 
A)  The IRR must be greater than 0. 
B)  Accepting the project has an indeterminate effect on shareholders. 
C)  The discount rate exceeds the cost of capital. 
D) The profitability index equals 1.

Exam 8: Net Present Value and Other Investment Criteria

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

When calculating a project's payback period, cash flows are discounted at:

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

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

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

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

If the net present value of a project that costs $20,000 is $5,000 when the discount rate is 10%, then the:

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

The payback rule always makes shareholders better off.

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

Why may the IRR criterion lead to an incorrect decision when applied to mutually exclusive projects?

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.

What is the NPV for the following project cash flows at a discount rate of 15%? C0 = ($1,000), C1 = $700, C2 = $700.

The payback period considers all project cash flows.

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

A project's payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in years 5 and 6, then the project's payback period will:

Given a particular set of project cash flows, which one of the following statements must be correct?

When calculating IRR with a trial and error process, discount rates should be raised when NPV is positive.

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

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

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

Filters

What is the NPV for the following project cash flows at a discount rate of 15%? C₀ = ($1,000), C₁ = $700, C₂ = $700.