Question 1

The IRR is defined as

Accepted Answer

A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate used in the discounted payback period method. 
A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate used in the discounted payback period method.

Question 2

If the net present value (NPV) of project A is +$100 and that of project B is +$60, then the net present value of the combined projects is

Accepted Answer

A) +$100. 
B) +$60. 
C) +$160. 
D) +$6,000. 
A) +$100. 
B) +$60. 
C) +$160. 
D) +$6,000.

Question 3

Briefly explain the term soft rationing.

Accepted Answer

Management uses soft rationing to get be

Question 4

The benefit-cost ratio is defined as the ratio of

Accepted Answer

A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR. 
A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR.

Question 5

Decommissioning and clean-up costs for any project are always insignificant and should typically be ignored.

Accepted Answer

A) True 
 B)False

Question 6

The discounted payback method discounts cash flows at the opportunity cost of capital and then calculates the payback period.

Accepted Answer

A) True 
 B)False

Question 7

The denominator of the profitability index is the present value of the investment.

Accepted Answer

A) True 
 B)False

Question 8

Project Y has following cash flows: C0 = -800, C1 = +5,000, and C2 = -5,000.Calculate the IRRs for the project.

Accepted Answer

A) 25 percent and 400 percent. 
B) 125 percent and 500 percent. 
C) -44 percent and 11.6 percent. 
D) No IRRs exist for this project. 
A) 25 percent and 400 percent. 
B) 125 percent and 500 percent. 
C) -44 percent and 11.6 percent. 
D) No IRRs exist for this project.

Question 9

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Accepted Answer

A) $5,000 
B) $2,352 
C) $3,201 
D) $1,857 
A) $5,000 
B) $2,352 
C) $3,201 
D) $1,857

Question 10

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

Accepted Answer

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

Question 11

The payback period rule accepts all projects for which the payback period is

Accepted Answer

A) greater than the cut-off value. 
B) less than the cut-off value. 
C) positive. 
D) an integer. 
A) greater than the cut-off value. 
B) less than the cut-off value. 
C) positive. 
D) an integer.

Question 12

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

Accepted Answer

A) 23 percent 
B) 21 percent 
C) 19 percent 
D) 17 percent 
A) 23 percent 
B) 21 percent 
C) 19 percent 
D) 17 percent

Question 13

Which of the following statements regarding the discounted payback period measure is true?

Accepted Answer

A) The discounted payback measure uses the time value of money concept. 
B) The discounted payback measure is better than the NPV rule. 
C) The discounted payback measure considers all cash flows. 
D) The discounted payback measure exhibits the value additivity property. 
A) The discounted payback measure uses the time value of money concept. 
B) The discounted payback measure is better than the NPV rule. 
C) The discounted payback measure considers all cash flows. 
D) The discounted payback measure exhibits the value additivity property.

Question 14

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the NPV for the project if the cost of capital is 15 percent.

Accepted Answer

A) $169, 935 
B) $1,200,000 
C) $339,870 
D) $125,846 
A) $169, 935 
B) $1,200,000 
C) $339,870 
D) $125,846

Question 15

The discounted payback method will never accept a negative-NPV project.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

The main advantage of IRR is t

Question 17

Discuss some of the advantages of using the payback method.

Accepted Answer

It tells you how quickly you c

Question 18

There can never be more than one value of the IRR for any sequence of cash flows.

Accepted Answer

A) True 
 B)False

Question 19

The internal rate of return is the discount rate that makes the NPV of a project's cash flows equal to zero.

Accepted Answer

A) True 
 B)False

Question 20

The discounted payback method calculates the payback period and then discounts the payback period at the opportunity cost of capital.

Accepted Answer

A) True 
 B)False

Exam 5: Net Present Value and Other Investment Criteria

The IRR is defined as

If the net present value (NPV) of project A is +$100 and that of project B is +$60, then the net present value of the combined projects is

Briefly explain the term soft rationing.

The benefit-cost ratio is defined as the ratio of

Decommissioning and clean-up costs for any project are always insignificant and should typically be ignored.

The discounted payback method discounts cash flows at the opportunity cost of capital and then calculates the payback period.

The denominator of the profitability index is the present value of the investment.

Project Y has following cash flows: C0 = -800, C1 = +5,000, and C2 = -5,000.Calculate the IRRs for the project.

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

The payback period rule accepts all projects for which the payback period is

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

Which of the following statements regarding the discounted payback period measure is true?

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the NPV for the project if the cost of capital is 15 percent.

The discounted payback method will never accept a negative-NPV project.

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

Discuss some of the advantages of using the payback method.

There can never be more than one value of the IRR for any sequence of cash flows.

The internal rate of return is the discount rate that makes the NPV of a project's cash flows equal to zero.

The discounted payback method calculates the payback period and then discounts the payback period at the opportunity cost of capital.

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

Project Y has following cash flows: C₀ = -800, C₁ = +5,000, and C₂ = -5,000.Calculate the IRRs for the project.

If the cash flows for project A are C₀ = -3,000, C₁ = +500; C₂ = +1,500; and C₃ = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150.If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If the cash flows for Project M are C₀ = -1,000; C₁ = +200; C₂ = +700; and C₃ = +698, calculate the IRR for the project.