Question 1

If a project has multiple IRRs,the highest one is assumed to be correct.

Accepted Answer

A) True 
 B)False

Question 2

When you are considering whether to replace an aging machine with a new one,you should compare the annual cost of operating the old one with the equivalent annual annuity of the new one.

Accepted Answer

A) True 
 B)False

Question 3

Use of a profitability index to select projects in the absence of capital rationing:

Accepted Answer

A)  will provide the same rankings as an NPV criterion. 
B)  will maximize NPV, but not IRR. 
C)  can result in misguided selections. 
D) is technically impossible. 
A)  will provide the same rankings as an NPV criterion. 
B)  will maximize NPV, but not IRR. 
C)  can result in misguided selections. 
D) is technically impossible.

Question 4

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 5

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:

Accepted Answer

A)  the project's payback period will be reduced. 
B)  the project's payback period will be increased. 
C)  the project's payback period will be unchanged. 
D) the discount rate must be known to determine whether the payback period changes. 
A)  the project's payback period will be reduced. 
B)  the project's payback period will be increased. 
C)  the project's payback period will be unchanged. 
D) the discount rate must be known to determine whether the payback period changes.

Question 6

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Accepted Answer

A)  Select the lowest IRR to be conservative. 
B)  Select the highest IRR to maximize the benefits. 
C)  Any or all of the IRRs are justified to use. 
D) Evaluate the project according to NPV. 
A)  Select the lowest IRR to be conservative. 
B)  Select the highest IRR to maximize the benefits. 
C)  Any or all of the IRRs are justified to use. 
D) Evaluate the project according to NPV.

Question 7

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)  $1,250 
B)  $1,585 
C)  $2,000 
D) $2,415 
A)  $1,250 
B)  $1,585 
C)  $2,000 
D) $2,415

Question 8

Sometimes,comparing project NPVs properly can be surprisingly tricky.What are three important,but often challenging decisions of such?

Accepted Answer

• The investment timing decision.Should

Question 9

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

Accepted Answer

A)  Select the project with the higher profitability index. 
B)  Select the project with the lower profitability index. 
C)  Without capital rationing, both projects can be selected. 
D) Without capital rationing, select by NPV method. 
A)  Select the project with the higher profitability index. 
B)  Select the project with the lower profitability index. 
C)  Without capital rationing, both projects can be selected. 
D) Without capital rationing, select by NPV method.

Question 10

The modified internal rate of return can be used to correct for:

Accepted Answer

A)  negative NPV calculations. 
B)  multiple internal rates of return. 
C)  undefined payback periods. 
D) the net present value will be zero 
A)  negative NPV calculations. 
B)  multiple internal rates of return. 
C)  undefined payback periods. 
D) the net present value will be zero

Question 11

When a project's internal rate of return equals its opportunity cost of capital,then:

Accepted Answer

A)  the project should be rejected. 
B)  the project has no cash inflows. 
C)  the net present value will be positive. 
D) the net present value will be zero 
A)  the project should be rejected. 
B)  the project has no cash inflows. 
C)  the net present value will be positive. 
D) the net present value will be zero

Question 12

The ratio of net present value to initial investment is known as 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 13

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

Accepted Answer

The net present value rule and the rate

Question 14

The IRR is the rate of return on the cash flows of the investment,also known as the opportunity cost of capital.

Accepted Answer

A) True 
 B)False

Question 15

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years,how much did the project cost?

Accepted Answer

A)  $44,617 
B)  $52,200 
C)  $60,000 
D) $72,747 
A)  $44,617 
B)  $52,200 
C)  $60,000 
D) $72,747

Question 16

If two projects offer the same positive NPV,then:

Accepted Answer

A)  they also have the same IRR. 
B)  they have the same payback period. 
C)  they are mutually exclusive projects. 
D) they add the same amount to the value of the firm 
A)  they also have the same IRR. 
B)  they have the same payback period. 
C)  they are mutually exclusive projects. 
D) they add the same amount to the value of the firm

Question 17

Evaluate the following mutually exclusive projects using IRR as a selection criterion.Assuming the discount rate to be 14%,which project-if either-would be selected? Project A costs $50,000 and returns $15,000 after-tax annually.Project B costs $35,000 and returns $11,000 after-tax annually.Both projects last 5 years.

Accepted Answer

@#IMG-DLM& Project B

Question 18

A firm considers a project with the following cash flows: time-zero = +20,000,years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10%?

Accepted Answer

A)  Yes, the IRR of the project is 4.06%. 
B)  Yes, the IRR of the project is 12.5%. 
C)  No, the IRR of the project is 4.06%. 
D) No, the IRR of the project is 12.5%. 
A)  Yes, the IRR of the project is 4.06%. 
B)  Yes, the IRR of the project is 12.5%. 
C)  No, the IRR of the project is 4.06%. 
D) No, the IRR of the project is 12.5%.

Question 19

ABC Corporation is experiencing hard capital rationing and will not be able to invest more than $1,000,000 this year.Develop a profitability index for the following four projects and state that would be selected: All four projects will last 3 years and the firm uses a 10% discount rate.

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Select projects C,B,and A fo

Question 20

If the IRR for a project is 15%,then the project's NPV would be:

Accepted Answer

A)  negative at a discount rate of 10%. 
B)  positive at a discount rate of 20%. 
C)  negative at a discount rate of 20%. 
D) positive at a discount rate of 15%. 
A)  negative at a discount rate of 10%. 
B)  positive at a discount rate of 20%. 
C)  negative at a discount rate of 20%. 
D) positive at a discount rate of 15%.

Exam 8: Net Present Value and Other Investment Criteria

If a project has multiple IRRs,the highest one is assumed to be correct.

When you are considering whether to replace an aging machine with a new one,you should compare the annual cost of operating the old one with the equivalent annual annuity of the new one.

Use of a profitability index to select projects in the absence of capital rationing:

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

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:

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Sometimes,comparing project NPVs properly can be surprisingly tricky.What are three important,but often challenging decisions of such?

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

The modified internal rate of return can be used to correct for:

When a project's internal rate of return equals its opportunity cost of capital,then:

The ratio of net present value to initial investment is known as the:

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

The IRR is the rate of return on the cash flows of the investment,also known as the opportunity cost of capital.

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years,how much did the project cost?

If two projects offer the same positive NPV,then:

A firm considers a project with the following cash flows: time-zero = +20,000,years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10%?

ABC Corporation is experiencing hard capital rationing and will not be able to invest more than $1,000,000 this year.Develop a profitability index for the following four projects and state that would be selected: All four projects will last 3 years and the firm uses a 10% discount rate.

If the IRR for a project is 15%,then the project's NPV would be:

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Using Discounted Cash-Flow Analysis to Make Investment Decisions

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Introduction to Risk,Return,and the Opportunity Cost of Capital

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The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

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