Question 1

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, then remain constant. 
A)  increase. 
B)  decrease. 
C)  remain constant. 
D) decrease to zero, then remain constant.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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 equals 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 equals the initial cost

Question 4

The "gold standard" of investment criteria refers to:

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 5

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10%: C0= -6,000,C1= +3,300,C2= +3,300.

Accepted Answer

A)  Accept, since IRR exceeds opportunity cost. 
B)  Reject, since opportunity cost exceeds IRR. 
C)  Accept, since opportunity cost exceeds IRR. 
D) Reject, since IRR exceeds opportunity cost. 
A)  Accept, since IRR exceeds opportunity cost. 
B)  Reject, since opportunity cost exceeds IRR. 
C)  Accept, since opportunity cost exceeds IRR. 
D) Reject, since IRR exceeds opportunity cost.

Question 6

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

Accepted Answer

A)  0.57% 
B)  2.00% 
C)  5.69% 
D) 56.87% 
A)  0.57% 
B)  2.00% 
C)  5.69% 
D) 56.87%

Question 7

Spending $40,000 on a new truck would increase delivery revenues by $18,000 annually over the truck's 4-year life.Graph the relationship between NPV and discount rate for this project.Hint: Assume for simplicity that the relationship is linear and find two points on the line's graph.Would you accept this project if the discount rate were 16%?

Accepted Answer

@#IMG-DLM& When discount rate = 0,
NPV = -$40,000

Question 8

Discuss reasons why a firm may want to impose soft capital rationing.

Accepted Answer

Soft capital rationing is a constraint i

Question 9

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years?

Accepted Answer

A)  19.9% 
B)  30.0% 
C)  32.3% 
D) 80.0% 
A)  19.9% 
B)  30.0% 
C)  32.3% 
D) 80.0%

Question 10

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 11

Which 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.

Question 12

When you have to choose between projects with different lives,you should put them on an equal footing by computing the equivalent annual annuity or benefit of the two projects.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Calculate the payback period for each of the following 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 and this amount increases by $1,000 annually over the 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 loo

Question 15

Which of the following statements is true for a project with $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 roughly 3 1/2 years. 
B)  Its NPV is $2,194. 
C)  Its IRR is 1.85%. 
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%. 
D) Its profitability index is 0.109

Question 16

Project A has an IRR of 20% while Project B has an IRR of 30%.Under which of the following situations might you be inclined to select Project A,assuming the projects to be mutually exclusive,lending projects?

Accepted Answer

A)  Project A is riskier. 
B)  Project A requires a smaller initial investment. 
C)  Project A requires a larger initial investment. 
D) Project A requires cash outflows in the final period. 
A)  Project A is riskier. 
B)  Project A requires a smaller initial investment. 
C)  Project A requires a larger initial investment. 
D) Project A requires cash outflows in the final period.

Question 17

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

Accepted Answer

A)  "A" has a small, but negative, NPV. 
B)  "B" has a positive NPV when discounted at 10%. 
C)  "C's" cost of capital exceeds its rate of return. 
D) "D" has a zero NPV when discounted at 14%. 
A)  "A" has a small, but negative, NPV. 
B)  "B" has a positive NPV when discounted at 10%. 
C)  "C's" cost of capital exceeds its rate of return. 
D) "D" has a zero NPV when discounted at 14%.

Question 18

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 19

Which of the following investment criteria takes the time value of money into consideration?

Accepted Answer

A)  Net present value 
B)  Profitability index 
C)  Internal rate of return for borrowing projects 
D) All of these 
A)  Net present value 
B)  Profitability index 
C)  Internal rate of return for borrowing projects 
D) All of these

Question 20

The opportunity cost of capital is equal to:

Accepted Answer

A)  the discount rate that makes project NPV equal zero. 
B)  the return offered by other projects of equal risk. 
C)  a project's internal rate of return. 
D) the average rate of return for a firm's projects 
A)  the discount rate that makes project NPV equal zero. 
B)  the return offered by other projects of equal risk. 
C)  a project's internal rate of return. 
D) the average rate of return for a firm's projects

Exam 8: Net Present Value and Other Investment Criteria

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

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

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

The "gold standard" of investment criteria refers to:

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10%: C0= -6,000,C1= +3,300,C2= +3,300.

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

Discuss reasons why a firm may want to impose soft capital rationing.

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years?

The decision rule for net present value is to:

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

When you have to choose between projects with different lives,you should put them on an equal footing by computing the equivalent annual annuity or benefit of the two projects.

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

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

Project A has an IRR of 20% while Project B has an IRR of 30%.Under which of the following situations might you be inclined to select Project A,assuming the projects to be mutually exclusive,lending projects?

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

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

Which of the following investment criteria takes the time value of money into consideration?

The opportunity cost of capital is equal to:

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10%: C₀= -6,000,C₁= +3,300,C₂= +3,300.

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