Question 1

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.

Accepted Answer

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

Question 2

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

Accepted Answer

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

Question 3

Which of the following investment decision rules tends to improperly reject long-lived projects?

Accepted Answer

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

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

When using a profitability index to select projects, a value of 1.63 is preferred over a value of 1.21.

Accepted Answer

A) True 
 B)False

Question 6

ABC Corporation is experiencing hard capital rationing and will not be able to invest more than $1,000,000 this year.Develop a profitability index for the following four projects and state what would be selected: All four projects will last three years and the firm uses a 10 percent discount rate.
 $$\begin{array} { | c | c | c | } 
\hline \text { Project } & \text { Cost } & \text { Annual Inflows } \
\hline \text { A } & \$ 300,000 & \$ 130,000 \
\hline \text { B } & \$ 500,000 & \$ 220,000 \
\hline \text { C } & \$ 125,000 & \$ 60,000 \
\hline \text { D } & \$ 250,000 & \$ 100,000 \
\hline
\end{array}$$

Accepted Answer

The answer of ABC Corporation is experiencing hard capital rationing...

Question 7

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.

Accepted Answer

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

Question 8

The "gold standard" of investment criteria refers to:

Accepted Answer

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

Question 9

Soft rationing should never cost the firm anything.

Accepted Answer

A) True 
 B)False

Question 10

The opportunity cost of capital is equal to:

Accepted Answer

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 11

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

Accepted Answer

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

Question 12

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for five years?

Accepted Answer

A) the NPV is negative 
B) the NPV is zero 
C) the profitability index is 1.0 
D) the IRR is negative

Question 13

Borrowing and lending projects usually can be distinguished by whether:

Accepted Answer

A) they have positive or negative IRRs. 
B) the time-zero cash flow is positive or negative. 
C) their IRR increases as the discount rate increases. 
D) their rate of return is high or low.

Question 14

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?

Accepted Answer

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

Question 15

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:

Accepted Answer

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

Question 16

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.

Accepted Answer

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

Question 17

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.

Accepted Answer

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

Question 18

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

Accepted Answer

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

Question 19

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?

Accepted Answer

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 20

Given a particular set of project cash flows, which of the following statements is correct?

Accepted Answer

A) there can be only one NPV for the project. 
B) there can be only one IRR for the project. 
C) there can be more than one NPV for the project. 
D) there can be only one profitability index for the project.

Exam 8: Net Present Value and Other Investment Criteria

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.

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

Which of the following investment decision rules tends to improperly reject long-lived projects?

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

When using a profitability index to select projects, a value of 1.63 is preferred over a value of 1.21.

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.

The "gold standard" of investment criteria refers to:

Soft rationing should never cost the firm anything.

The opportunity cost of capital is equal to:

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

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for five years?

Borrowing and lending projects usually can be distinguished by whether:

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:

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.

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.

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

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?

Given a particular set of project cash flows, which of the following statements is correct?