Question 1

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. 
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 2

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years, how much did the project cost?

Accepted Answer

A)  $44,617.07 
B)  $52,208.18 
C)  $41,909.29 
D) $49,082.11 
A)  $44,617.07 
B)  $52,208.18 
C)  $41,909.29 
D) $49,082.11

Question 3

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

Accepted Answer

A)  "A" has a small, but negative, NPV. 
B)  "B" has a positive NPV when discounted at 10%. 
C)  "C's" cost of capital exceeds its rate of return. 
D) "D" has a zero NPV when discounted at 14%. 
A)  "A" has a small, but negative, NPV. 
B)  "B" has a positive NPV when discounted at 10%. 
C)  "C's" cost of capital exceeds its rate of return. 
D) "D" has a zero NPV when discounted at 14%.

Question 4

How is the profitability index calculated and how can it be used to choose between projects when funds are limited?

Accepted Answer

If there is a shortage of capital, compa

Question 5

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

Question 6

A currently used machine costs $10,000 annually to run. What is the maximum that should be paid to replace the machine with one that will last 3 years and cost only $4,000 annually to run? The opportunity cost of capital is 12%.

Accepted Answer

A)  $15,209.84 
B)  $9,607.33 
C)  $14,410.99 
D) $10,338.56 
A)  $15,209.84 
B)  $9,607.33 
C)  $14,410.99 
D) $10,338.56

Question 7

What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today?

Accepted Answer

A)  19.91% 
B)  16.67% 
C)  15.84% 
D) 22.09% 
A)  19.91% 
B)  16.67% 
C)  15.84% 
D) 22.09%

Question 8

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. 
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 9

The investment timing decision is aimed at analyzing whether the:

Accepted Answer

A)  cash flows occur at the beginning or end of each time period. 
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. 
A)  cash flows occur at the beginning or end of each time period. 
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 10

When using a profitability index to select projects, a value of .63 is preferred over a value of 0.21.

Accepted Answer

A) True 
 B)False

Question 11

If the IRR for a project is 15%, then the project's NPV would be:

Accepted Answer

A)  negative at a discount rate of 10%. 
B)  positive at a discount rate of 20%. 
C)  negative at a discount rate of 20%. 
D) positive at a discount rate of 15%. 
A)  negative at a discount rate of 10%. 
B)  positive at a discount rate of 20%. 
C)  negative at a discount rate of 20%. 
D) positive at a discount rate of 15%.

Question 12

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 unequal lives; and when to replace equipment?

Accepted Answer

Sometimes a project may have a positive

Question 13

What should occur when a project's net present value is determined to be negative?

Accepted Answer

A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D) The project should be rejected. 
A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D) The project should be rejected.

Question 14

Which one of the following best illustrates the problem imposed by capital rationing?

Accepted Answer

A)  Accepting projects with the highest NPVs first 
B)  Accepting projects with the highest IRRs first 
C)  Bypassing projects that have positive NPVs 
D) Bypassing projects that have zero IRRs 
A)  Accepting projects with the highest NPVs first 
B)  Accepting projects with the highest IRRs first 
C)  Bypassing projects that have positive NPVs 
D) Bypassing projects that have zero IRRs

Question 15

A new machine will cost $100,000 and generate after-tax cash inflows of $35,000 for 4 years. What is the minimum rate of return the project must earn to be acceptable? Prove that your rate is correct.

Accepted Answer

Using a financial calculator:
n = 4; PV

Question 16

What is the minimum number of years in which an investment costing $210,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

Accepted Answer

A)  8.69 years 
B)  5.37 years 
C)  7.51 years 
D) 4.46 years 
A)  8.69 years 
B)  5.37 years 
C)  7.51 years 
D) 4.46 years

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

A firm plans to use the profitability index to select between two mutually exclusive investments. If no capital rationing has been imposed, which project should be selected?

Accepted Answer

A)  Select the project with the higher profitability index 
B)  Select the project with the lower profitability index 
C)  Without capital rationing, both projects can be selected 
D) Without capital rationing, the NPV method must be used instead 
A)  Select the project with the higher profitability index 
B)  Select the project with the lower profitability index 
C)  Without capital rationing, both projects can be selected 
D) Without capital rationing, the NPV method must be used instead

Question 19

As the discount rate is increased, the NPV of a specific project will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain constant. 
D) decrease to zero, then remain constant. 
A)  increase. 
B)  decrease. 
C)  remain constant. 
D) decrease to zero, then remain constant.

Question 20

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 indicate which projects will be accepted. All four projects will last 3 years and the firm uses a 10% discount rate.

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Select projects B, A, and D

Exam 8: Net Present Value and Other Investment Criteria

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

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years, how much did the project cost?

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

How is the profitability index calculated and how can it be used to choose between projects when funds are limited?

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.

A currently used machine costs $10,000 annually to run. What is the maximum that should be paid to replace the machine with one that will last 3 years and cost only $4,000 annually to run? The opportunity cost of capital is 12%.

What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today?

Borrowing and lending projects usually can be distinguished by whether:

The investment timing decision is aimed at analyzing whether the:

When using a profitability index to select projects, a value of .63 is preferred over a value of 0.21.

If the IRR for a project is 15%, then the project's NPV would be:

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 unequal lives; and when to replace equipment?

What should occur when a project's net present value is determined to be negative?

Which one of the following best illustrates the problem imposed by capital rationing?

A new machine will cost $100,000 and generate after-tax cash inflows of $35,000 for 4 years. What is the minimum rate of return the project must earn to be acceptable? Prove that your rate is correct.

What is the minimum number of years in which an investment costing $210,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

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

A firm plans to use the profitability index to select between two mutually exclusive investments. If no capital rationing has been imposed, which project should be selected?

As the discount rate is increased, the NPV of a specific project will:

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

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