Question 1

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  PI = 6.94%; reject the project 
B)  PI = -7.52%; reject the project 
C)  PI = -4.21%; reject the project 
D)  PI = 5.33%; accept the project

Question 2

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 3

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  $35,995.86, reject 
B)  $38,875.53, accept 
C)  $138,875.53, accept 
D)  $238,875.53, accept

Question 4

This technique for evaluating capital projects 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 5

Use the discounted 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 6

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

Accepted Answer

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

Question 7

Use the NPV 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

Compute the NPV statistic for Project U given the following cash flows and if the appropriate cost of capital is 9 percent. Project U

Accepted Answer

A)  $201.69 
B)  $273.82 
C)  $383.63 
D)  $397.21

Question 9

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

Accepted Answer

A)  either project if they both are more than managers' maximum payback period. 
B)  neither project if they both are less than managers' maximum payback period. 
C)  the project that pays back the soonest. 
D)  the project that pays back the soonest if it is equal to or less than managers' maximum payback period.

Question 10

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent. Project Q

Accepted Answer

A)  The project's PI is -8.70% and the project should be rejected. 
B)  The project's PI is -11.70% and the project should be rejected. 
C)  The project's PI is 3.70% and the project should be accepted. 
D)  The project's PI is 5.70% and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = -86.95; Step 2: -86.95/1000 = -8.70% and since PI<0 reject.

Question 11

A disadvantage of the payback statistic is that ___________.

Accepted Answer

A)  It does not reflect the time value of money 
B)  It does not give an indication of the project's riskiness 
C)  It does not consider cash flows beyond the payback period 
D)  All of these are disadvantages of payback

Question 12

All of the following are strengths of payback except ____________________.

Accepted Answer

A)  Its benchmark is not determined by a relevant external constraint 
B)  It incorporates the time value of money 
C)  It uses a conservative reinvestment rate 
D)  None of these

Question 13

The MIRR statistic is different from the IRR statistic in that _____________.

Accepted Answer

A)  The MIRR assumes that the cash inflows can be reinvested at the cost of capital 
B)  The MIRR assumes that the cash inflows can be reinvested at the IRR 
C)  The MIRR uses weighted-average dollars 
D)  The MIRR uses input from the NPV whereas the IRR does not

Question 14

Use the NPV 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 15

Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years.

Accepted Answer

A)  1.25 years, reject 
B)  1.25 years, accept 
C)  1.33 years, accept 
D)  2.25 years, accept

Question 16

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

Accepted Answer

A)  10%, accept 
B)  10%, reject 
C)  13.26%, accept 
D)  13.26%, reject

Question 17

This technique for evaluating capital projects 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

Question 18

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

Accepted Answer

A)  7.62%, accept 
B)  7.62%, reject 
C)  47.09%, accept 
D)  47.09%, reject

Question 19

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8%. Should this project be accepted, and why?

Accepted Answer

A)  Yes, the project should be accepted since it has a NPV = $15,391.23. 
B)  Yes, the project should be accepted since it has a NPV = $13,610.89. 
C)  Yes, the project should be accepted since it has a NPV = $16,999.62. 
D)  None of these answers is correct.

Question 20

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

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

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates.

Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the NPV statistic for Project U given the following cash flows and if the appropriate cost of capital is 9 percent. Project U

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent. Project Q

A disadvantage of the payback statistic is that ___________.

All of the following are strengths of payback except ____________________.

The MIRR statistic is different from the IRR statistic in that _____________.

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years.

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors.

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8%. Should this project be accepted, and why?

Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?