Deck 8: Net Present Value and Other Investment Criteria

Question 1

When choosing among mutually exclusive projects,the choice is easy using the NPV rule.As long as at least one project has positive NPV,simply choose the project with the highest NPV.

Answer 1

True

Question 2

For most managers,discounted cash flow analysis is in fact the dominant tool for project evaluation.

Answer 2

True

Question 3

For mutually exclusive projects,the project with the higher IRR is the correct selection.

Answer 3

False

Question 4

A risky dollar is worth more than a safe one.

Question 5

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

Question 6

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

Question 7

The payback period considers all project cash flows.

Question 8

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

Question 9

Soft rationing should never cost the firm anything.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Because of deficiencies associated with the payback method,it is seldom used in corporate financial analysis today.

Question 15

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

Question 16

As the opportunity cost of capital increases,the net present value of a project increases.

Question 17

When calculating IRR with a trial and error process,one would raise discount rates in order to reach a zero NPV.

Question 18

When using a profitability index to select projects,a value of 0.63 is preferred over a value of 0.21.

Question 19

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

Question 20

Net present value subtracts the present value of the cash flows from the initial investment.

Question 21

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

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

Question 22

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years,and the cost of capital is 9 percent?

A) $101,251.79
B) $109,200.00
C) $117,871.97
D) $130,800.00

Question 23

A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.

A) $2,000
B) $9,607
C) $14,411
D) $24,018

Question 24

The acceptance of an investment project implies that: Its IRR is greater than 15 percent.
Its NPV is greater than its IRR.
Its NPV is greater than 0.

A) 1
B) 2
C) 3
D) Both 2 and 3

Question 25

Gordon Corporation is considering a 30 year project.The present value of all future cash flows from the project is $825,000.Its initial investment is $475,000.Calculate the Profitability Index on this project.

A) 0.74
B) 0.84
C) 1.14
D) 1.74

Question 26

The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:

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

Question 27

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

A) 8.69 years
B) 14.00 years
C) 27.51 years
D) An infinite number of years

Question 28

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 four more years.If your opportunity cost is 8 percent,by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

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

Question 29

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?

A) $33,520
B) $56,862
C) $62,540
D) $75,000

Question 30

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF₀ = ($1,000),CF₁ = $700,CF₂ = $700.

A) ($308.70)
B) ($138.00)
C) $138.00
D) $308.70

Question 31

Ajax Corporation is planning a 10 year project that will have an initial cost of $500,000.During the first 2 years,there will be cash outflows of $40,000.Years 3-6 will see cash inflows of $120,000.Years 7-10 will see cash inflows of $200,000.If the company's required rate of return is 9%,determine the NPV of the project.

A) $143,200
B) $225,650
C) $375,800
D) $500,000

Question 32

Majestic Corporation is planning a 12 year project that will have an initial cost of $900,000.During the first 3 years,there will be cash inflows of $80,000.Years 4-10 will see cash inflows of $350,000.Years 11-12 will see cash outflows of $20,000.If the company's required rate of return is 11%,determine the NPV of the project.

A) -$175,023
B) -$25,890
C) $227,320
D) $489,366

Question 33

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years,what is the equivalent annual cost of the tool?

A) $22,638
B) $85,815
C) $12,638
D) $32,638

Question 34

What is the minimum cash flow that could be received at the end of year three to make the following project "acceptable?" Initial cost = $100,000; cash flows at end of years one and two = $35,000; opportunity cost of capital = 10 percent.

A) $29,494
B) $30,000
C) $39,256
D) $52,250

Question 35

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

A) $3,397.57
B) $4,473.44
C) $16,100.00
D) $35,000.00

Question 36

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12 percent for each project.

A) "A" has a small, but negative, NPV
B) "B" has a positive NPV when discounted at 10 percent
C) "C's" cost of capital exceeds its rate of return
D) "D" has a zero NPV when discounted at 14 percent

Question 37

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

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

Question 38

How many IRRs are possible for the following set of cash flows? CF₀ = -1,000,CF₁ = + 500,CF₂ = -300,CF₃ = + 1,000,CF₄ = + 200.

A) 1
B) 2
C) 3
D) 4

Question 39

A project's Profitability Index is .85 and its investment value of $250,000.Given this information,determine its NPV.

A) $12,500
B) -$5,000
C) -$12,500
D) -$37,500

Question 40

Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.

A) $25,000
B) $75,000
C) $200,000
D) $250,000

Question 41

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

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 42

Norbert is considering a project with an initial value of $125,000.Cash inflows during the next 6 years will be $35,000 per year.Given this information,provide the project's payback.

A) 5.17 years
B) 4.57 years
C) 4.17 years
D) 3.57 years

Question 43

A company is considering a 5-year project with an initial investment of $90,000.Cash inflows will be $30,000 for the first two years and $25,000 for the next 3 years.If the company's required rate of return is 12%,determine its discounted payback.

A) 4.40years
B) 3.60 years
C) 3.80 years
D) 4.00 years

Question 44

A project with an IRR that is less than the opportunity cost of capital should be:

A) accepted for all project types.
B) accepted for all lending projects.
C) accepted for all borrowing projects.
D) rejected for all projects.

Question 45

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10 percent: CF₀ = -6,000,CF₁ = +3,300,CF₂ = +3,300.

A) accept, since IRR exceeds opportunity cost.
B) reject, since opportunity cost exceeds IRR.
C) accept, since opportunity cost exceeds IRR.
D) reject, since IRR exceeds opportunity cost.

Question 46

When hard capital rationing exists,projects may be accurately evaluated by use of:

A) payback period.
B) mutually exclusive IRRs.
C) a profitability index.
D) borrowing, rather than lending, projects.

Question 47

Jamieson is considering a 5-year,$250,000 project with annual cash flows of $90,000.If the company's required return is 10%,determine its discounted payback.

A) 3.27years
B) 3.43 years
C) 3.79 years
D) 4.01 years

Question 48

PariCorporation is planning a 20 year project with an initial investment of $10 million.The project will have $50,000 cash outflows per year in years 1-4; $300,000 cash inflows in years 5-15,and $15,000 cash inflows in years 16-20.Determine the projects rate of return.

A) -10.57%
B) -9.81%
C) -5.51%
D) 10.92%

Question 49

Which of the following can be deduced about a three-year investment project that has a two-year payback period?

A) the NPV is positive.
B) the IRR is greater than the cost of capital.
C) Both the NPV is positive and the IRR is greater than the cost of capital can be deduced.
D) Neither the NPV is positive nor the IRR is greater than the cost of capital can be deduced.

Question 50

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

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 51

A project has a payback period of five years and the firm employs a 10 percent cost of capital.Which of the following statements is correct concerning this Project's discounted payback?

A) discounted payback will exceed five years.
B) discounted payback will be less than five years.
C) discounted payback will decrease if the Project's IRR exceeds 10 percent.
D) discounted payback will increase if the Project's IRR is less than 10 percent.

Question 52

Which of the following best illustrates the problem imposed by capital rationing?

A) accepting projects with the highest NPVs first.
B) accepting projects with the highest IRRs first.
C) bypassing projects that have positive NPVs.
D) bypassing projects that have positive IRRs.

Question 53

Norton Corporation is considering a 6 year project having an initial investment of $150,000.The project will provide cash inflows of $25,000 for the first 3 years and $60,000 during the last 3 years.Given this information,calculate the project's payback.

A) 3.75 years
B) 4.00 years
C) 4.25 years
D) 4.50 years

Question 54

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

A) 0.57 percent
B) 2.00 percent
C) 5.69 percent
D) 56.87 percent

Question 55

If the opportunity cost of capital for a project exceeds the Project's IRR,then the project has a(n):

A) positive NPV.
B) negative NPV.
C) acceptable payback period.
D) positive profitability index.

Question 56

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

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 57

Dons Corporation is planning a 15 year project with an initial investment of $2,500,000.The project will have $400,000 cash inflows per year in years 1-5; $200,000 cash inflows in years 6-10,and $40,000 cash inflows in years 11-15.Determine the projects rate of return.

A) 12.67%
B) 9.35%
C) 5.15%
D) 3.67%

Question 58

The decision rule for net present value is to:

A) accept all projects with cash inflows exceeding 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 59

The opportunity cost of capital is equal to:

A) the discount rate that makes project NPV equal zero.
B) the return offered by other projects of equal risk.
C) a project's internal rate of return.
D) the average rate of return for a firm's projects.

Question 60

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for six years?

A) 19.9 percent
B) 30.0 percent
C) 32.3 percent
D) 80.0 percent

Question 61

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

A) payback period only.
B) profitability index only.
C) internal rate of return for borrowing projects only.
D) payback period, profitability index and IRR.

Question 62

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

A) project's IRR equals 10 percent.
B) project's internal rate of return is greater than 10 percent.
C) net present value of the cash inflows is $4,500.
D) project's cash inflows total $25,000.

Question 63

When mutually exclusive projects have different lives,the project which should be selected will have the:

A) highest IRR.
B) longest life.
C) lowest equivalent annual cost.
D) highest NPV, discounted at the opportunity cost of capital.

Question 64

Soft capital rationing is imposed upon a firm from _____ sources,while hard capital rationing is imposed from _____ sources.

A) Internal; external
B) Internal; internal
C) External; internal
D) External; external

Question 65

When projects are mutually exclusive,selection should be made according to the project with the:

A) longer life.
B) larger initial size.
C) highest IRR.
D) highest NPV.

Question 66

If a project has a cost of $50,000 and a profitability index of 0.4,then:

A) its cash inflows are $70,000
B) the present value of its cash inflows is $30,000
C) its IRR is 20 percent
D) its NPV is $20,000

Question 67

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

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

Question 68

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

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 payback method to avoid conflicting signals.

Question 69

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

A) NPV = $3,071.01
B) NPV = $20,000
C) IRR = 2.8 percent
D) IRR is greater than 10 percent

Question 70

If the NPV of a project is greater than 0,then its profitability index is:

A) greater than 1.
B) greater than 0.
C) less than 1.
D) None of the choices.

Question 71

The NPV of an investment made today is $10,000.If postponed for one year,the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

A) postpone; the NPV increases by a positive amount.
B) postpone; the NPV will be larger.
C) invest now; NPV does not grow at a sufficient rate.
D) invest now; always accept positive NPV projects.

Question 72

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 percent?

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

Question 73

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

A) the NPVs of these projects cross over at some discount rate.
B) discounted cash flow is not considered with mutually exclusive projects.
C) IRR performs better with accounting returns than with cash flows.
D) mutually exclusive projects have multiple IRRs.

Question 74

When the NPV of an investment is positive,then the IRR will be:

A) equal to the opportunity cost of capital.
B) greater than the opportunity cost of capital.
C) less than the opportunity cost of capital.
D) less than or equal to the opportunity cost of capital.

Question 75

The use of a profitability index will always provide results consistent with selecting the project with the:

A) highest NPV.
B) highest IRR.
C) largest dollar invested per rate of return.
D) largest return per dollar invested.

Question 76

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

A) it increases.
B) it decreases.
C) it is not affected.
D) it depends on whether or not the projects are mutually exclusive.

Question 77

A Project's opportunity cost of capital is:

A) the forgone return from investing in the project.
B) the return earned by investing in the project.
C) equal to the average return on all company projects.
D) designed to be less than the project's IRR.

Question 78

Which of the following is incorrect for a borrowing project?

A) its NPV graph rises as discount rates increase.
B) its cash flow at time zero is typically an inflow.
C) its NPV is positive.
D) it's acceptable if IRR exceeds cost of capital.

Question 79

Which of the following statements is true for a project with $20,000 initial cost,cash inflows of $5,800 per year for six years,and a discount rate of 15 percent?

A) its payback period is roughly 3 1/2 years.
B) its NPV is $2,194.
C) its IRR is 1.85 percent.
D) its profitability index is 0.109.

Question 80

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent,you should:

A) buy the new machine and save $600 in equivalent annual costs
B) buy the new machine and save $388 in equivalent annual costs
C) keep the old machine and save $388 in equivalent annual costs
D) keep the old machine and save $580 in equivalent annual costs