Question 1

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project),rather than the gross return?

Accepted Answer

A) Internal rate of return (IRR) 
B) Modified internal rate of return (MIRR) 
C) Profitability index (PI) 
D) Net present value (NPV)

Question 2

How many possible IRRs could you find for the following set of cash flows?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) Unable to determine unless we have the cost of capital.

Question 3

Why is a project's cost not an appropriate benchmark for its NPV?

Accepted Answer

The answer of Why is a project's cost not an...

Question 4

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 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 9 percent.

Accepted Answer

A) -$639.96 
B) $360.04 
C) $392.44 
D) $486.29

Question 6

Compare and contrast the IRR and the MIRR statistic.

Accepted Answer

The answer of Compare and contrast the IRR and the...

Question 7

Which of these is 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 8

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 percent.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 9

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:

Accepted Answer

A) IRR. 
B) EAR. 
C) NPV. 
D) MIRR.

Question 10

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
Project J

Accepted Answer

A) The project's MIRR is 14.77 percent and the project should be accepted. 
B) The project's MIRR is 9.29 percent and the project should be rejected. 
C) The project's MIRR is 13.76 percent and the project should be accepted. 
D) The project's MIRR is 15.31 percent and the project should be accepteD.Using a financial calculator: PV = -1437.75; FV = 2739.11; N = 5; PMT = 0; I = MIRR = 13.76 percent; Accept since MIRR> Cost of capital.

Question 11

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

Accepted Answer

A) The project's PI is -8.70 percent and the project should be rejected. 
B) The project's PI is -11.70 percent and the project should be rejected. 
C) The project's PI is 3.70 percent and the project should be accepted. 
D) The project's PI is 5.70 percent and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = -86.95; Step 2: -86.95/1,000 = -8.70 percent and since PI < 0 reject.

Question 12

Compute the 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 payback is five years.

Accepted Answer

A) 3.67 years, accept 
B) 4.67 years, accept 
C) 3.67 years, reject 
D) 4.67 years, reject

Question 13

Which of the following statements is correct?

Accepted Answer

A) A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. 
B) Discounted payback uses a more aggressive reinvestment rate assumption than payback. 
C) Neither payback nor discounted payback uses time value of money concepts. 
D) None of these statements is correct.

Question 14

Define and evaluate the net present value (NPV)method of evaluating capital investment opportunities.

Accepted Answer

The answer of Define and evaluate the net present value...

Question 15

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 16

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 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.
Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) 1.77 years, reject 
B) 1.94 years, accept 
C) 2.06 years, accept 
D) 3.00 years, reject

Question 17

Which of the following statements is correct?

Accepted Answer

A) Discounted payback solves all the shortcomings of payback. 
B) The reinvestment rate of NPV and MIRR is the same. 
C) The MIRR and IRR have the same reinvestment rate. 
D) All of these are correct statements.

Question 18

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Accepted Answer

A) MIRR. 
B) profitability index. 
C) IRR. 
D) NPV.

Question 19

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 20

Suppose you have a project whose discounted payback is equal to its termination date.What can you say for sure about its PI?

Accepted Answer

A) The discounted payback will be greater than zero. 
B) It will have a PI and NPV of zero. 
C) The NPV and IRR will yield the same decision. 
D) The IRR will just equal the cost of capital.

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

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project) ,rather than the gross return?

How many possible IRRs could you find for the following set of cash flows?

Why is a project's cost not an appropriate benchmark for its NPV?

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

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 9 percent.

Compare and contrast the IRR and the MIRR statistic.

Which of these is 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?

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 percent.Should this project be accepted,and why?

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J

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

Compute the 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 payback is five years.

Which of the following statements is correct?

Define and evaluate the net present value (NPV)method of evaluating capital investment opportunities.

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

Which of the following statements is correct?

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

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?

Suppose you have a project whose discounted payback is equal to its termination date.What can you say for sure about its PI?