Question 1

The internal rate of return is most reliable when evaluating:

Accepted Answer

A)  a single project with alternating cash inflows and outflows over several years. 
B)  mutually exclusive projects of differing sizes. 
C)  a single project with only cash inflows following the initial cash outflow. 
D)  a single project with cash outflows at time 0 and the final year and inflows in all other time periods. 
A)  a single project with alternating cash inflows and outflows over several years. 
B)  mutually exclusive projects of differing sizes. 
C)  a single project with only cash inflows following the initial cash outflow. 
D)  a single project with cash outflows at time 0 and the final year and inflows in all other time periods.

Question 2

To justify postponing a project for one year,the NPV needs to increase over that year by a rate that is equal to or greater than:

Accepted Answer

A)  the project's IRR. 
B)  the risk-free rate. 
C)  the cost of capital. 
D)  zero. 
A)  the project's IRR. 
B)  the risk-free rate. 
C)  the cost of capital. 
D)  zero.

Question 3

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)  $126,564.73 
D)  $130,800.00 
A)  $101,251.79 
B)  $109,200.00 
C)  $126,564.73 
D)  $130,800.00

Question 4

The "gold standard" of investment criteria refers to the:

Accepted Answer

A)  net present value rule. 
B)  internal rate of return rule. 
C)  payback rule. 
D)  profitability index rule. 
A)  net present value rule. 
B)  internal rate of return rule. 
C)  payback rule. 
D)  profitability index rule.

Question 5

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 6

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%?

Accepted Answer

A)  0.139 
B)  0.320 
C)  0.500 
D)  0.861 
A)  0.139 
B)  0.320 
C)  0.500 
D)  0.861

Question 7

In simple cases when hard capital rationing exists,projects may be evaluated by :

Accepted Answer

A)  the payback period. 
B)  mutually exclusive IRRs. 
C)  a profitability index. 
D)  the modified internal rate of return. 
A)  the payback period. 
B)  mutually exclusive IRRs. 
C)  a profitability index. 
D)  the modified internal rate of return.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

When using a profitability index to select projects,a high value is preferred over a low value.

Accepted Answer

A) True 
 B)False

Question 11

A company owns a tract of timber that will keep growing for a number of years.It calculates that the timber's value less the cost of harvesting is currently $50,000 and that this figure will grow by 10% in the next year and by 5% in the following year.If the cost of capital is 8%,when should the company harvest the timber?

Accepted Answer

A)  today. 
B)  year 1. 
C)  year 2. 
D)  harvest a third of the timber each year. 
A)  today. 
B)  year 1. 
C)  year 2. 
D)  harvest a third of the timber each year.

Question 12

Which of the following statements is true for a project with a $20,000 initial cost,cash inflows of $6,667 per year for 6 years,and a discount rate of 15%?

Accepted Answer

A)  Its payback period is 3 years. 
B)  Its NPV is $2,094. 
C)  Its IRR is 17.85%. 
D)  Its profitability index is 0.104. 
A)  Its payback period is 3 years. 
B)  Its NPV is $2,094. 
C)  Its IRR is 17.85%. 
D)  Its profitability index is 0.104.

Question 13

When managers cannot determine whether to invest now or wait until costs decrease later,the rule should be to:

Accepted Answer

A)  postpone until costs reach their lowest level. 
B)  invest now to maximize the NPV. 
C)  postpone until the opportunity cost reaches its lowest level. 
D)  invest at the date that provides the highest NPV today. 
A)  postpone until costs reach their lowest level. 
B)  invest now to maximize the NPV. 
C)  postpone until the opportunity cost reaches its lowest level. 
D)  invest at the date that provides the highest NPV today.

Question 14

Two mutually exclusive projects have the same IRR.When will you be indifferent between them?

Accepted Answer

A)  When the IRR is equal to the cost of capital. 
B)  Always if they have the same IRR. 
C)  When the IRR is less than the cost of capital. 
D)  When there is only one change in the sign of the cash flows. 
A)  When the IRR is equal to the cost of capital. 
B)  Always if they have the same IRR. 
C)  When the IRR is less than the cost of capital. 
D)  When there is only one change in the sign of the cash flows.

Question 15

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 16

The payback period considers all project cash flows.

Accepted Answer

A) True 
 B)False

Question 17

When evaluating mutually exclusive projects,remember:

Accepted Answer

A)  the project with the higher IRR may have the higher NPV at one discount rate and a lower NPV at another . 
B)  cash flows cannot be discounted when considering mutually exclusive projects. 
C)  mutually exclusive projects produce negative IRR values. 
D)  mutually exclusive projects always have multiple IRRs. 
A)  the project with the higher IRR may have the higher NPV at one discount rate and a lower NPV at another . 
B)  cash flows cannot be discounted when considering mutually exclusive projects. 
C)  mutually exclusive projects produce negative IRR values. 
D)  mutually exclusive projects always have multiple IRRs.

Question 18

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

Accepted Answer

A)  Net present value only 
B)  Profitability index and net present value only 
C)  Internal rate of return and net present value only 
D)  Profitability index, internal rate of return, and net present value 
A)  Net present value only 
B)  Profitability index and net present value only 
C)  Internal rate of return and net present value only 
D)  Profitability index, internal rate of return, and net present value

Question 19

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

Accepted Answer

A) True 
 B)False

Exam 8: Net Present Value and Other Investment Criteria

The internal rate of return is most reliable when evaluating:

To justify postponing a project for one year,the NPV needs to increase over that year by a rate that is equal to or greater than:

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%?

The "gold standard" of investment criteria refers to the:

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

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%?

In simple cases when hard capital rationing exists,projects may be evaluated by :

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

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

When using a profitability index to select projects,a high value is preferred over a low value.

Which of the following statements is true for a project with a $20,000 initial cost,cash inflows of $6,667 per year for 6 years,and a discount rate of 15%?

When managers cannot determine whether to invest now or wait until costs decrease later,the rule should be to:

Two mutually exclusive projects have the same IRR.When will you be indifferent between them?

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

The payback period considers all project cash flows.

When evaluating mutually exclusive projects,remember:

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

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

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

Filters