Question 1

Which investment analysis technique is used the least by CFOs?

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) Payback 
D) Book rate of return 
A) Net present value 
B) Internal rate of return 
C) Payback 
D) Book rate of return D

Question 2

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Accepted Answer

A) +$30. 
B) -$60. 
C) -$30. 
D) -$1,800. 
A) +$30. 
B) -$60. 
C) -$30. 
D) -$1,800. C

Question 3

Briefly explain the value additivity property.

Accepted Answer

For example, the net present value (NPV) of a combined project-say A and B--is equal to the NPV(A) plus the NPV(B). Naturally, this property holds for present values also. This property is not shared by IRR. The IRR of a combined project does not equal the sum of the individual IRRs. The value additivity property is very useful when making comparative decisions among numerous projects.

Question 4

A project will have only one internal rate of return if

Accepted Answer

A) the net present value is positive. 
B) the net present value is negative. 
C) the cash flows decline over the life of the project. 
D) there is a one-sign change in the cash flows. 
A) the net present value is positive. 
B) the net present value is negative. 
C) the cash flows decline over the life of the project. 
D) there is a one-sign change in the cash flows.

Question 5

A project's internal rate of return depends on its level of risk.

Accepted Answer

A) True 
 B)False

Question 6

The following are some of the shortcomings of the IRR method except

Accepted Answer

A) IRR is conceptually easy to communicate. 
B) projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) it is very cumbersome to evaluate mutually exclusive projects using the IRR method. 
A) IRR is conceptually easy to communicate. 
B) projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) it is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Question 7

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.

Accepted Answer

A) 14.6 percent 
B) 16.4 percent 
C) 18.2 percent 
D) 22.1 percent 
A) 14.6 percent 
B) 16.4 percent 
C) 18.2 percent 
D) 22.1 percent

Question 8

Present values have the value additivity property.

Accepted Answer

A) True 
 B)False

Question 9

The payback period rule

Accepted Answer

A) varies the cut-off point with the interest rate. 
B) determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
C) requires an arbitrary choice of a cut-off point. 
D) varies the cut-off point with the interest rate and requires an arbitrary choice of a cut-off point. 
A) varies the cut-off point with the interest rate. 
B) determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
C) requires an arbitrary choice of a cut-off point. 
D) varies the cut-off point with the interest rate and requires an arbitrary choice of a cut-off point.

Question 10

How does modified internal rate of return (MIRR) differ from IRR?

Accepted Answer

A) MIRR does not consider cash flows occurring after the cut-off date. 
B) MIRR uses NPV, IRR does not. 
C) MIRR calculates the PV of cash inflows and then divides by the PV of the investment. 
D) MIRR reduces the number of sign changes in a cash flow sequence. 
A) MIRR does not consider cash flows occurring after the cut-off date. 
B) MIRR uses NPV, IRR does not. 
C) MIRR calculates the PV of cash inflows and then divides by the PV of the investment. 
D) MIRR reduces the number of sign changes in a cash flow sequence.

Question 11

What are some of the disadvantages of using the IRR method?

Accepted Answer

There are several disadvantages to the I

Question 12

The payback rule ignores all cash flows after the cut-off date.

Accepted Answer

A) True 
 B)False

Question 13

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Accepted Answer

A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years 
A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years

Question 14

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?

Accepted Answer

A) Accept project X as it has a positive NPV. 
B) Reject project X. 
C) Break up the project into its components: Accept A and C, but reject B. 
D) Break up the project into its components: Accept C. 
A) Accept project X as it has a positive NPV. 
B) Reject project X. 
C) Break up the project into its components: Accept A and C, but reject B. 
D) Break up the project into its components: Accept C.

Question 15

Soft rationing may be used to control managerial behavior.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following investment rules does not use the time value of money concept?

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index 
A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index

Question 17

The following are disadvantages of using the payback rule except the rule

Accepted Answer

A) ignores all cash flow after the cut-off date. 
B) does not use the time value of money. 
C) is easy to calculate and use. 
D) does not have the value additivity property. 
A) ignores all cash flow after the cut-off date. 
B) does not use the time value of money. 
C) is easy to calculate and use. 
D) does not have the value additivity property.

Question 18

Project X has the following cash flows: C0 = +2,000, C1 = -1,300, and C2 = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

Accepted Answer

A) accept the project. 
B) reject the project. 
A) accept the project. 
B) reject the project.

Question 19

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

Accepted Answer

A) $2.40 million 
B) $1.20 million 
C) $0.80 million 
D) $0.20 million 
A) $2.40 million 
B) $1.20 million 
C) $0.80 million 
D) $0.20 million

Question 20

Mass Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years.At the end of the fourth year, there will be a $1 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12 percent.

Accepted Answer

A) 17.8 percent 
B) 15.3 percent 
C) 23.8 percent 
D) 22.1 percent 
A) 17.8 percent 
B) 15.3 percent 
C) 23.8 percent 
D) 22.1 percent

Exam 5: Net Present Value and Other Investment Criteria

Which investment analysis technique is used the least by CFOs?

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Briefly explain the value additivity property.

A project will have only one internal rate of return if

A project's internal rate of return depends on its level of risk.

The following are some of the shortcomings of the IRR method except

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.

Present values have the value additivity property.

The payback period rule

How does modified internal rate of return (MIRR) differ from IRR?

What are some of the disadvantages of using the IRR method?

The payback rule ignores all cash flows after the cut-off date.

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?

Soft rationing may be used to control managerial behavior.

Which of the following investment rules does not use the time value of money concept?

The following are disadvantages of using the payback rule except the rule

Project X has the following cash flows: C0 = +2,000, C1 = -1,300, and C2 = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment Strategy and Economic Rents

Agency Problems Compensation and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

If the cash flows for project Z are C₀ = -1,000; C₁ = 600; C₂ = 720; and C₃ = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,300, and C₂ = -1,500.If the IRR of the project is 25 percent and if the cost of capital is 18 percent, you would