Question 1

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

Accepted Answer

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

Question 2

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 t

Question 3

For mutually exclusive projects,the project with the higher IRR (and not the number of profitable years)is the correct selection.

Accepted Answer

A) True 
 B)False

Question 4

Soft rationing should never cost the firm anything.

Accepted Answer

A) True 
 B)False

Question 5

What should occur when a project's net present value is determined to be negative?

Accepted Answer

A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D)  The project should be rejected. 
A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D)  The project should be rejected.

Question 6

Which of the following investment decision rules tends to improperly reject long-lived projects?

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 7

The investment timing decision is aimed at analyzing whether the:

Accepted Answer

A)  cash flows occur at the beginning or end of each time period. 
B)  payback period or NPV analysis should be used. 
C)  project is a borrowing or lending project. 
D) investment should occur now or at some future point. 
A)  cash flows occur at the beginning or end of each time period. 
B)  payback period or NPV analysis should be used. 
C)  project is a borrowing or lending project. 
D) investment should occur now or at some future point.

Question 8

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

Accepted Answer

A) True 
 B)False

Question 9

A project has a payback period of 5 years and the firm employs a 10% cost of capital.Which of the following statements is correct concerning this project's discounted payback?

Accepted Answer

A)  Discounted payback will exceed 5 years. 
B)  Discounted payback will be less than 5 years. 
C)  Discounted payback will decrease if the project's IRR exceeds 10%. 
D)  Discounted payback will increase if the project's IRR is less than 10%. 
A)  Discounted payback will exceed 5 years. 
B)  Discounted payback will be less than 5 years. 
C)  Discounted payback will decrease if the project's IRR exceeds 10%. 
D)  Discounted payback will increase if the project's IRR is less than 10%.

Question 10

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

Accepted Answer

A)  $33,520 
B)  $56,860 
C)  $62,540 
D) $75,000 
A)  $33,520 
B)  $56,860 
C)  $62,540 
D) $75,000

Question 11

What is the net present value of an investment,and how do you calculate it?

Accepted Answer

The net present value of a project measu

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

Accepted Answer

A)  longer life. 
B)  larger initial size. 
C)  highest IRR. 
D) highest NPV. 
A)  longer life. 
B)  larger initial size. 
C)  highest IRR. 
D) highest NPV.

Question 14

When we compare assets with different lives,we should select the machine that has the lowest equivalent annual annuity.

Accepted Answer

A) True 
 B)False

Question 15

Borrowing and lending projects usually can be distinguished by whether:

Accepted Answer

A)  they have positive or negative IRRs. 
B)  the time-zero cash flow is positive or negative. 
C)  their IRR increases as the discount rate increases. 
D) their rate of return is high or low. 
A)  they have positive or negative IRRs. 
B)  the time-zero cash flow is positive or negative. 
C)  their IRR increases as the discount rate increases. 
D) their rate of return is high or low.

Question 16

When choosing among mutually exclusive projects,the choice is easy using the NPV rule.As long as at least one project has positive NPV,simply choose the project with the highest NPV.

Accepted Answer

A) True 
 B)False

Question 17

If a project has a cost of $50,000 and a profitability index of 0.4,then:

Accepted Answer

A)  its cash inflows are $70,000. 
B)  the present value of its cash inflows is $30,000. 
C)  its IRR is 20%. 
D) its NPV is $20,000. 
A)  its cash inflows are $70,000. 
B)  the present value of its cash inflows is $30,000. 
C)  its IRR is 20%. 
D) its NPV is $20,000.

Question 18

The NPV of an investment made today is $10,000.If postponed for one year,the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12%?

Accepted Answer

A)  Postpone; the NPV increases by a positive amount. 
B)  Postpone; the NPV will be larger. 
C)  Invest now; NPV does not grow at a sufficient rate. 
D) Invest now; always accept positive NPV projects. 
A)  Postpone; the NPV increases by a positive amount. 
B)  Postpone; the NPV will be larger. 
C)  Invest now; NPV does not grow at a sufficient rate. 
D) Invest now; always accept positive NPV projects.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

A project's opportunity cost of capital is:

Accepted Answer

A)  the forgone return from investing in the project. 
B)  the return earned by investing in the project. 
C)  equal to the average return on all company projects. 
D)  designed to be less than the project's IRR. 
A)  the forgone return from investing in the project. 
B)  the return earned by investing in the project. 
C)  equal to the average return on all company projects. 
D)  designed to be less than the project's IRR.

Exam 8: Net Present Value and Other Investment Criteria

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

For mutually exclusive projects,the project with the higher IRR (and not the number of profitable years)is the correct selection.

Soft rationing should never cost the firm anything.

What should occur when a project's net present value is determined to be negative?

Which of the following investment decision rules tends to improperly reject long-lived projects?

The investment timing decision is aimed at analyzing whether the:

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

A project has a payback period of 5 years and the firm employs a 10% cost of capital.Which of the following statements is correct concerning this project's discounted payback?

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

What is the net present value of an investment,and how do you calculate it?

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

When we compare assets with different lives,we should select the machine that has the lowest equivalent annual annuity.

Borrowing and lending projects usually can be distinguished by whether:

When choosing among mutually exclusive projects,the choice is easy using the NPV rule.As long as at least one project has positive NPV,simply choose the project with the highest NPV.

If a project has a cost of $50,000 and a profitability index of 0.4,then:

The NPV of an investment made today is $10,000.If postponed for one year,the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12%?

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

A project's opportunity cost of capital is:

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