Question 1

Compute the IRR for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-1,000&-75&100&100&0&2,000\\hline
\end{array}
\end{array}$$

Accepted Answer

A)  9 percent, accept 
B)  9 percent, reject 
C)  16.61 percent, accept 
D)  16.61 percent, reject

Question 2

Which of the following statements is correct regarding the NPV profile?

Accepted Answer

A)  The IRR appears as the intersection of the NPV profile with the x-axis. 
B)  The IRR appears at the crossover point or where the two profiles intersect. 
C)  NPV profiles for independent projects with normal cash flows will intersect. 
D)  All of these choices are correct.

Question 3

How many possible IRRs could you find for the following set of cash flows?
$$\begin{array} { c c c c c c c } 
\text { Timne } & 0 & 1 & 2 & 3 & 4 \
\text { Cash Flow } & - \$ 201,000 & - \$ 37,350 & \$ 460,180 & \$ 217,020 & - \$ 5,000
\end{array}$$

Accepted Answer

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

Question 4

Rate-based statistics represent summary cash flows, and these summaries tend to lose which two important details?

Accepted Answer

A)  The investment size and cash inflows that occur after the rather arbitrary testing period 
B)  The investment size and the cash inflows that occur before the testing period 
C)  The investment size and the cash outflows that occur before the testing period 
D)  The investment size and the cash inflows that occur during the testing period

Question 5

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-75&-75&0&100&75&50\\hline
\end{array}
\end{array}$$

Accepted Answer

A)  $12.93 
B)  $14.22 
C)  $62.07 
D)  $136.90

Question 6

The net present value decision technique uses a statistic denominated in

Accepted Answer

A)  years. 
B)  currency. 
C)  a percentage. 
D)  time lines.

Question 7

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | }
\hline\text {Time: }&0&1&2&3\
\hline\text {Project A Cash flow:}&-1,000&300&400&700\
\hline\text {Project b Cash flow:}&-500&200&400&300\\hline
\end{array}
\end{array}$$
Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 8

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | }
\hline\text {Time: }&0&1&2&3\
\hline\text {Project A Cash flow:}&-5,000&1,000&3,000&5,000\
\hline\text {Project b Cash flow:}&-10,000&5,000&5,000&5,000\\hline
\end{array}
\end{array}$$
Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 9

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | }
\hline\text {Time: }&0&1&2&3\
\hline\text {Project A Cash flow:}&-20,000&10,000&30,000&1,000\
\hline\text {Project b Cash flow:}&-30,000&10,000&20,000&50,000\\hline
\end{array}
\end{array}$$
Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 10

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$  1,100 & \$ 2,000
\end{array}$$

Accepted Answer

A)  IRR = 16.92 percent, accept the project 
B)  IRR = 7.123 percent, reject the project 
C)  IRR = 18.32 percent, accept the project 
D)  IRR = 7.59 percent, reject the project

Question 11

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Accepted Answer

A)  Payback 
B)  Discounted payback 
C)  Net present value 
D)  Profitability index

Question 12

Which capital budgeting technique step in the decision process is not used to evaluate a group of independent projects?

Accepted Answer

A)  compute the statistic 
B)  have a run off between the mutually exclusive projects choosing the one with the best statistic 
C)  compare the computed statistic with the benchmark to decide to accept or reject the project. 
D)  all of the above are used

Question 13

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | }
\hline\text {Time: }&0&1&2&3\
\hline\text {Project A Cash flow:}&-20,000&10,000&30,000&1,000\
\hline\text {Project b Cash flow:}&-30,000&10,000&20,000&50,000\\hline
\end{array}
\end{array}$$
Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A)  Accept both A and B 
B)  Accept neither A nor B 
C)  Accept A, reject B 
D)  Reject A, accept B

Question 14

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent.
Project Y
$$\begin{array} { c c c c c c c c } 
\text { Trme } &0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 50,000 & \$ 7,000 & \$ 20,000 & \$ 20,000 & \$ 20,000 & \$ 10,000
\end{array}$$

Accepted Answer

A)  ?$19,594.29 
B)  $7,788.34 
C)  $9,367.11 
D)  $107,788.34

Question 15

Which of the following tools is suitable for choosing between mutually exclusive projects?

Accepted Answer

A)  NPV 
B)  IRR 
C)  MIRR 
D)  None are suitable

Question 16

Compute the MIRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-175&75&0&100&75&50\\hline
\end{array}
\end{array}$$

Accepted Answer

A)  13.26 percent, accept 
B)  13.89 percent, accept 
C)  13.26 percent, reject 
D)  15.73 percent, accept

Question 17

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 &  3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

A)  MIRR = 11.59 percent, accept the project 
B)  MIRR = 9.21 percent, reject the project 
C)  MIRR = 7.19 percent, reject the project 
D)  MIRR = 10.58 percent, accept the project

Question 18

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-1,000&500&480&400&300&150\\hline
\end{array}
\end{array}$$

Accepted Answer

A)  2.49 years, accept 
B)  2.98 years, accept 
C)  3.49 years, reject 
D)  4.98 years, reject

Question 19

Which of the following best describes the NPV profile?

Accepted Answer

A)  A graph of a project's NPV as a function of possible IRRs. 
B)  A graph of a project's NPV over time. 
C)  A graph of a project's NPV as a function of possible capital costs. 
D)  None of the statements are correct.

Question 20

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Accepted Answer

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

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Which of the following statements is correct regarding the NPV profile?

How many possible IRRs could you find for the following set of cash flows? $\begin{array} { c c c c c c c } \text { Timne } & 0 & 1 & 2 & 3 & 4 \\\text { Cash Flow } & - \$ 201,000 & - \$ 37,350 & \$ 460,180 & \$ 217,020 & - \$ 5,000\end{array}$

Rate-based statistics represent summary cash flows, and these summaries tend to lose which two important details?

The net present value decision technique uses a statistic denominated in

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Which capital budgeting technique step in the decision process is not used to evaluate a group of independent projects?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Which of the following best describes the NPV profile?

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?