Question 1

NPV fails as a decision rule when:

Accepted Answer

A)  the firm faces capital rationing. 
B)  the firm faces mutually exclusive projects. 
C)  the firm faces long-lived projects. 
D) positive profitability index 
A)  the firm faces capital rationing. 
B)  the firm faces mutually exclusive projects. 
C)  the firm faces long-lived projects. 
D) positive profitability index A

Question 2

The payback rule always makes shareholders better off.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Accepted Answer

A)  internal rate of return. 
B)  opportunity cost of capital. 
C)  risk-free interest rate. 
D) accounting rate of return 
A)  internal rate of return. 
B)  opportunity cost of capital. 
C)  risk-free interest rate. 
D) accounting rate of return B

Question 4

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8%.By how much would the NPV change if the inflows were reduced to 30 years?

Accepted Answer

The answer of Calculate the NPV for a project costing...

Question 5

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, 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 6

For mutually exclusive projects,the IRR can be used to select the best project:

Accepted Answer

A)  by calculating the modified internal rate of return. 
B)  by calculating the IRR based on incremental cash flows. 
C)  by using the discount rate to calculate the IRR. 
D) never. IRR cannot be utilized for mutually exclusive projects. 
A)  by calculating the modified internal rate of return. 
B)  by calculating the IRR based on incremental cash flows. 
C)  by using the discount rate to calculate the IRR. 
D) never. IRR cannot be utilized for mutually exclusive projects.

Question 7

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years,and the cost of capital is 9%?

Accepted Answer

A)  $101,251.79 
B)  $109,200.00 
C)  $126,565.00 
D) $130,800.00 
A)  $101,251.79 
B)  $109,200.00 
C)  $126,565.00 
D) $130,800.00

Question 8

Find the IRR for a project costing $36,500 and returning $5,000 annually for the first 4 years,followed by $11,000 annually for 3 years.

Accepted Answer

The answer of Find the IRR for a project costing...

Question 9

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 10

One method that can be used to increase the NPV of a project is to decrease the:

Accepted Answer

A)  project's payback. 
B)  profitability index. 
C)  time until receipt of cash inflows. 
D) number of project IRRs. 
A)  project's payback. 
B)  profitability index. 
C)  time until receipt of cash inflows. 
D) number of project IRRs.

Question 11

The payback rule states that a project is acceptable if you get your money back within a specified period.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  with short lives. 
B)  with long lives. 
C)  with late cash inflows. 
D) that have negative NPVs. 
A)  with short lives. 
B)  with long lives. 
C)  with late cash inflows. 
D) that have negative NPVs.

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 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 payback method to avoid conflicting signals

Question 14

Which of the following best illustrates the problem imposed by capital rationing?

Accepted Answer

A)  Accepting projects with the highest NPVs first 
B)  Accepting projects with the highest IRRs first 
C)  Bypassing projects that have positive NPVs 
D) Bypassing projects that have positive IRRs 
A)  Accepting projects with the highest NPVs first 
B)  Accepting projects with the highest IRRs first 
C)  Bypassing projects that have positive NPVs 
D) Bypassing projects that have positive IRRs

Question 15

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

Accepted Answer

Sometimes a project may have a positive

Question 16

When using a profitability index (ratio of net present value to initial investment)to select projects,a value of 0.63 is preferred over a value of 0.21.

Accepted Answer

A) True 
 B)False

Question 17

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 18

When graphing NPV at different discount rates for mutually exclusive projects,the project with the lower IRR should be selected whenever:

Accepted Answer

A)  the rate corresponding to the crossover NPV exceeds the opportunity cost of capital. 
B)  the rate corresponding to the crossover NPV is less than the opportunity cost of capital. 
C)  that IRR exceeds the opportunity cost of capital. 
D) the NPV is negative when discounted at the IRR. 
A)  the rate corresponding to the crossover NPV exceeds the opportunity cost of capital. 
B)  the rate corresponding to the crossover NPV is less than the opportunity cost of capital. 
C)  that IRR exceeds the opportunity cost of capital. 
D) the NPV is negative when discounted at the IRR.

Question 19

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 20

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)  grow more rapidly than the cost of capital. 
C)  not decrease.
)remain stable. 
A)  grow more rapidly than the IRR. 
B)  grow more rapidly than the cost of capital. 
C)  not decrease.
)remain stable.

Exam 8: Net Present Value and Other Investment Criteria

NPV fails as a decision rule when:

The payback rule always makes shareholders better off.

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

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8%.By how much would the NPV change if the inflows were reduced to 30 years?

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

For mutually exclusive projects,the IRR can be used to select the best project:

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years,and the cost of capital is 9%?

Find the IRR for a project costing $36,500 and returning $5,000 annually for the first 4 years,followed by $11,000 annually for 3 years.

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

One method that can be used to increase the NPV of a project is to decrease the:

The payback rule states that a project is acceptable if you get your money back within a specified period.

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

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

Which of the following best illustrates the problem imposed by capital rationing?

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

When using a profitability index (ratio of net present value to initial investment)to select projects,a value of 0.63 is preferred over a value of 0.21.

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

When graphing NPV at different discount rates for mutually exclusive projects,the project with the lower IRR should be selected whenever:

Which of the following is incorrect for a borrowing 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:

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