Question 1

A new machine will cost $100,000 and generate after-tax cash inflows of $356,000 for four years.Find the NPV if the firm uses a 12 percent opportunity cost of capital.What is the IRR? What is the payback period?

Accepted Answer

The answer of A new machine will cost $100,000 and...

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

soft capital rationing:

Accepted Answer

A) is costly to shareholders. 
B) is used to determine mutually exclusive projects. 
C) should be costless to the shareholders of the firm. 
D) solves the problem of investment timing.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

Accepted Answer

A) the rate corresponding to the crossover NPV exceeds the opportunity cost of capital. 
B) the rate corresponding to the crossover NPV is less than the opportunity cost of capital. 
C) that IRR exceeds the opportunity cost of capital. 
D) the NPV is negative when discounted at the IRR.

Question 6

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:

Accepted Answer

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

Question 7

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.

Accepted Answer

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

Question 8

If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:

Accepted Answer

A) the profitability index to exceed 1.0. 
B) the opportunity cost of capital to be too low. 
C) the IRR to exceed the opportunity cost of capital. 
D) the NPV to be zero.

Question 9

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

Accepted Answer

The answer of How can the net present value rule...

Question 10

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

Accepted Answer

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

Question 11

Evaluate the following mutually exclusive projects using IRR as a selection criterion.Assuming the discount rate to be 14 percent, which project-if either-would be selected? Project A costs $50,000 and returns $15,000 after-tax annually.Project B costs $35,000 and returns $11,000 after-tax annually.Both projects last five years.

Accepted Answer

The answer of Evaluate the following mutually exclusive projects using...

Question 12

The decision rule for net present value is to:

Accepted Answer

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 13

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

Accepted Answer

A) postpone until costs reach their lowest. 
B) invest now to maximize the NPV. 
C) postpone until the opportunity cost reaches its lowest. 
D) invest at the date that gives the highest NPV today.

Question 14

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years.At most, this project has ______ different IRR(s).

Accepted Answer

A) One 
B) Two 
C) three 
D) five

Question 15

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

Accepted Answer

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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 18

When calculating a Project's payback period, cash flows are discounted at:

Accepted Answer

A) the opportunity cost of capital. 
B) the internal rate of return. 
C) the risk-free rate of return. 
D) a discount rate of zero.

Question 19

The investment timing decision is aimed at analyzing whether the:

Accepted Answer

A) cash flows occur at the beginning or end of a year. 
B) payback period or NPV analysis should be used. 
C) project is a borrowing or lending project. 
D) investment should occur now or at some future point.

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 8: Net Present Value and Other Investment Criteria

A new machine will cost $100,000 and generate after-tax cash inflows of $356,000 for four years.Find the NPV if the firm uses a 12 percent opportunity cost of capital.What is the IRR? What is the payback period?

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

soft capital rationing:

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

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

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:

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.

If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

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

The decision rule for net present value is to:

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years.At most, this project has ______ different IRR(s) .

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

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

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

When calculating a Project's payback period, cash flows are discounted at:

The investment timing decision is aimed at analyzing whether the:

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.