Question 1

How many IRRs are possible for the following set of cash flows? CF0 = -$1,000, C1 = $500, C2 = -$300, C3 = $1,000, C4 = $200.

Accepted Answer

A)  One 
B)  Two 
C)  Three 
D) Four 
A)  One 
B)  Two 
C)  Three 
D) Four

Question 2

Which of the following statements is true for a project with a $20,000 initial cost, cash inflows of $5,800 per year for 6 years, and a discount rate of 15%?

Accepted Answer

A)  Its payback period is 3.45 years. 
B)  Its NPV is $2,094. 
C)  Its IRR is 17.85%. 
D) Its profitability index is 0.104. 
A)  Its payback period is 3.45 years. 
B)  Its NPV is $2,094. 
C)  Its IRR is 17.85%. 
D) Its profitability index is 0.104.

Question 3

The internal rate of return is most reliable when evaluating:

Accepted Answer

A)  a single project with alternating cash inflows and outflows over several years. 
B)  mutually exclusive projects of differing sizes. 
C)  a single project with only cash inflows following the initial cash outflow. 
D) a single project with cash outflows at time 0 and the final year and inflows in all other time periods. 
A)  a single project with alternating cash inflows and outflows over several years. 
B)  mutually exclusive projects of differing sizes. 
C)  a single project with only cash inflows following the initial cash outflow. 
D) a single project with cash outflows at time 0 and the final year and inflows in all other time periods.

Question 4

Why might a firm want to impose soft capital rationing?

Accepted Answer

Soft capital rationing is a constraint i

Question 5

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

Accepted Answer

A)  $24,157.65 
B)  $56,861.80 
C)  $62,540.10 
D) $48,021.19 
A)  $24,157.65 
B)  $56,861.80 
C)  $62,540.10 
D) $48,021.19

Question 6

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 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 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

A project costs $200,000, produces annual cash inflows of $20,000, and has a discount rate of 8%. Explain how you can quickly determine the difference in the NPV of the project if the cash inflows last only 30 years rather than 40 years. Show the calculations needed to determine the amount of the NPV difference.

Accepted Answer

The difference must equal the

Question 10

Projects A and B are mutually exclusive lending projects. Project A has an IRR of 20% while Project B has an IRR of 30%. You would be most apt to select Project A if:

Accepted Answer

A)  Project B has a longer life than Project A. 
B)  Project A has more risk than Project B. 
C)  Project A is twice the size of Project B. 
D)  Project B has a larger cash inflow in Year 1 than Project A. 
A)  Project B has a longer life than Project A. 
B)  Project A has more risk than Project B. 
C)  Project A is twice the size of Project B. 
D)  Project B has a larger cash inflow in Year 1 than Project A.

Question 11

The "gold standard" of investment criteria refers to the:

Accepted Answer

A)  net present value. 
B)  internal rate of return. 
C)  payback period. 
D) profitability index. 
A)  net present value. 
B)  internal rate of return. 
C)  payback period. 
D) profitability index.

Question 12

What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

Accepted Answer

A)  $29,494 
B)  $30,000 
C)  $39,256 
D) $52,250 
A)  $29,494 
B)  $30,000 
C)  $39,256 
D) $52,250

Question 13

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

Accepted Answer

A)  may give up rate of return for NPV. 
B)  may give up NPV for rate of return. 
C)  have a tendency to select the largest project. 
D) focus on the payback method to avoid conflicting signals. 
A)  may give up rate of return for NPV. 
B)  may give up NPV for rate of return. 
C)  have a tendency to select the largest project. 
D) focus on the payback method to avoid conflicting signals.

Question 14

A project's payback period is the length of time necessary to generate an NPV of zero.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

The payback rule states that a project i

Question 16

Soft capital rationing:

Accepted Answer

A)  is costly to shareholders. 
B)  is used to evaluate 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 evaluate mutually exclusive projects. 
C)  should be costless to the shareholders of the firm. 
D) solves the problem of investment timing.

Question 17

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 4 more years. If your opportunity cost is 8%, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

Accepted Answer

A)  $1,625.40 
B)  $1,584.63 
C)  $1,469.08 
D) $1,409.54 
A)  $1,625.40 
B)  $1,584.63 
C)  $1,469.08 
D) $1,409.54

Question 18

A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years, followed by cash outflows of $1,000 annually for 2 years. At most, this project has ______ different IRR(s).

Accepted Answer

A)  one 
B)  two 
C)  three 
D) five 
A)  one 
B)  two 
C)  three 
D) five

Question 19

Calculate the payback period for each of the following mutually exclusive projects, then comment on the advisability of selection based on the payback period criterion: Project A has a cost of $15,000, returns $4,000 after-tax the first year with this amount increasing by $1,000 annually over a 5-year life; Project B costs $15,000 and returns $13,000 after-tax the first year, followed by 4 years of $2,000 per year. The firm uses a 10% discount rate.

Accepted Answer

Using payback period alone, Project B lo

Question 20

You are analyzing a project that is equivalent to borrowing money. This project's:

Accepted Answer

A)  NPV graph rises as discount rates decrease. 
B)  initial cash flow is an outflow of funds. 
C)  value increases when the cost of capital increases. 
D) acceptance requires its IRR to exceed the cost of capital. 
A)  NPV graph rises as discount rates decrease. 
B)  initial cash flow is an outflow of funds. 
C)  value increases when the cost of capital increases. 
D) acceptance requires its IRR to exceed the cost of capital.

Exam 8: Net Present Value and Other Investment Criteria

How many IRRs are possible for the following set of cash flows? CF0 = -$1,000, C1 = $500, C2 = -$300, C3 = $1,000, C4 = $200.

Which of the following statements is true for a project with a $20,000 initial cost, cash inflows of $5,800 per year for 6 years, and a discount rate of 15%?

The internal rate of return is most reliable when evaluating:

Why might a firm want to impose soft capital rationing?

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?

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

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

Projects A and B are mutually exclusive lending projects. Project A has an IRR of 20% while Project B has an IRR of 30%. You would be most apt to select Project A if:

The "gold standard" of investment criteria refers to the:

What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

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

A project's payback period is the length of time necessary to generate an NPV of zero.

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

Soft capital rationing:

A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years, followed by cash outflows of $1,000 annually for 2 years. At most, this project has ______ different IRR(s).

You are analyzing a project that is equivalent to borrowing money. This project's:

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

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How many IRRs are possible for the following set of cash flows? CF₀ = -$1,000, C₁ = $500, C₂ = -$300, C₃ = $1,000, C₄ = $200.