Question 1

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 2

Which one of the following changes will increase the NPV of a project?

Accepted Answer

A)  A decrease in the discount rate 
B)  A decrease in the size of the cash inflows 
C)  An increase in the initial cost of the project 
D)  A decrease in the number of cash inflows 
A)  A decrease in the discount rate 
B)  A decrease in the size of the cash inflows 
C)  An increase in the initial cost of the project 
D)  A decrease in the number of cash inflows

Question 3

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?

Accepted Answer

A)  $13,397.57 
B)  $14,473.44 
C)  $16,081.60 
D)  $33,748.58 
A)  $13,397.57 
B)  $14,473.44 
C)  $16,081.60 
D)  $33,748.58

Question 4

A firm is considering a project with the following cash flows: Time 0 = +$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 5

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 6

When projects are mutually exclusive,you should choose 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 7

When calculating a project's payback period,cash flows are:

Accepted Answer

A)  discounted at the opportunity cost of capital. 
B)  discounted at the internal rate of return. 
C)  discounted at the risk-free rate of return. 
D)  not discounted at all. 
A)  discounted at the opportunity cost of capital. 
B)  discounted at the internal rate of return. 
C)  discounted at the risk-free rate of return. 
D)  not discounted at all.

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

What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today?

Accepted Answer

A)  19.91% 
B)  16.67% 
C)  15.84% 
D)  22.09% 
A)  19.91% 
B)  16.67% 
C)  15.84% 
D)  22.09%

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero,and a $10,000 annual expense during each of the next 4 years,if the opportunity cost of capital is 10%?

Accepted Answer

A)  $20,000.00 
B)  $21,356.95 
C)  $22,618.83 
D)  $25,237.66 
A)  $20,000.00 
B)  $21,356.95 
C)  $22,618.83 
D)  $25,237.66

Question 13

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 14

Soft rationing should never cost the firm anything.

Accepted Answer

A) True 
 B)False

Question 15

If a project costs $72,000 and returns $18,500 per year for 5 years,what is its IRR?

Accepted Answer

A)  8.98% 
B)  7.39% 
C)  8.50% 
D)  7.67% 
A)  8.98% 
B)  7.39% 
C)  8.50% 
D)  7.67%

Question 16

What is the possible cost of capital rationing?

Accepted Answer

A)  The firm may have excess fixed assets. 
B)  The firm is likely to take too many risky projects. 
C)  The firm may miss out on positive NPV opportunities 
D)  The firm may have too high a cost of capital. 
A)  The firm may have excess fixed assets. 
B)  The firm is likely to take too many risky projects. 
C)  The firm may miss out on positive NPV opportunities 
D)  The firm may have too high a cost of capital.

Question 17

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 18

The decision rule for net present value is to:

Accepted Answer

A)  accept all projects with cash inflows exceeding the 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 the 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 19

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 20

Which one 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.

Exam 8: Net Present Value and Other Investment Criteria

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

Which one of the following changes will increase the NPV of a project?

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?

A firm is considering a project with the following cash flows: Time 0 = +$20,000,Years 1-5 = −$4,500.Should the project be accepted if the cost of capital is 10%?

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

When projects are mutually exclusive,you should choose the project with the:

When calculating a project's payback period,cash flows are:

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

What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today?

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

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

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero,and a $10,000 annual expense during each of the next 4 years,if the opportunity cost of capital is 10%?

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).

Soft rationing should never cost the firm anything.

If a project costs $72,000 and returns $18,500 per year for 5 years,what is its IRR?

What is the possible cost of capital rationing?

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

The decision rule for net present value is to:

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

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

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

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