Question 1

When you have to choose between projects with different lives, you should put them on an equal footing by computing the equivalent annual annuity or benefit of the two projects.

Accepted Answer

A) True 
 B)False

Question 2

If two projects offer the same positive NPV, then they:

Accepted Answer

A)  also have the same IRR. 
B)  have the same payback period. 
C)  are mutually exclusive projects. 
D) add the same amount of value to the firm.

Question 3

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

Accepted Answer

A)  internal rate of return. 
B)  opportunity cost of capital. 
C)  risk-free interest rate. 
D) accounting rate of return.

Question 4

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

Accepted Answer

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

Question 5

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?

Accepted Answer

A)  $13,397.57 
B)  $14,473.44 
C)  $16,081.60 
D) $33,748.58

Question 6

If a project costs $72,000 and returns $18,500 per year for 5 years, what is its IRR?

Accepted Answer

A)  8.98% 
B)  7.39% 
C)  8.50% 
D) 7.67%

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

A)  Net present value only 
B)  Profitability index and net present value only 
C)  Internal rate of return and net present value only 
D) Profitability index, internal rate of return, and net present value

Question 9

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

Accepted Answer

A)  project's initial cost. 
B)  project's NPV. 
C)  project's discounted cash inflows. 
D) soft capital rationing budget.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The opportunity cost of capital is equal to:

Accepted Answer

A)  the discount rate that makes the 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 12

When will you be indifferent between two mutually exclusive projects of similar size?

Accepted Answer

A)  When the required return on the projects is equal to the crossover discount rate 
B)  When the time period of the projects are equal 
C)  When both projects have only cash inflows following the initial cash outflow 
D) When both projects have IRR's that exceed the crossover discount rate

Question 13

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

Accepted Answer

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

Question 14

When a project's internal rate of return equals its opportunity cost of capital, then the:

Accepted Answer

A)  project should be rejected. 
B)  project has no cash inflows. 
C)  net present value will be positive. 
D) net present value will be zero.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A risky dollar is worth more than a safe one.

Accepted Answer

A) True 
 B)False

Question 17

What is the net present value of an investment, and how do you calculate it?

Accepted Answer

The answer of What is the net present value of...

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

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years, and the cost of capital is 9%?

Accepted Answer

A)  $101,251.79 
B)  $109,200.00 
C)  $126,564.73 
D) $130,800.00

Question 20

The decision rule for net present value is to:

Accepted Answer

A)  accept all projects with cash inflows exceeding the 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.

Exam 8: Net Present Value and Other Investment Criteria

When you have to choose between projects with different lives, you should put them on an equal footing by computing the equivalent annual annuity or benefit of the two projects.

If two projects offer the same positive NPV, then they:

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

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

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?

If a project costs $72,000 and returns $18,500 per year for 5 years, what is its IRR?

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

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

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

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

The opportunity cost of capital is equal to:

When will you be indifferent between two mutually exclusive projects of similar size?

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

When a project's internal rate of return equals its opportunity cost of capital, then the:

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

A risky dollar is worth more than a safe one.

What is the net present value of an investment, and how do you calculate it?

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

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for 3 years, and the cost of capital is 9%?

The decision rule for net present value is to: