Question 1

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR.

Accepted Answer

Problems can occur with the use of IRR i

Question 2

The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12% is:

Accepted Answer

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

Question 3

What is the minimum number of years that an investment costing $500,000 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)  14.00 years 
C)  27.51 years 
D) An infinite number of years 
A)  8.69 years 
B)  14.00 years 
C)  27.51 years 
D) An infinite number of years

Question 4

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero,then returns $20,000 annually for 5 years?

Accepted Answer

A)  The NPV is negative. 
B)  The NPV is zero. 
C)  The profitability index is 1.0. 
D) The IRR is negative 
A)  The NPV is negative. 
B)  The NPV is zero. 
C)  The profitability index is 1.0. 
D) The IRR is negative

Question 5

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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 capi

Question 8

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 
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 9

A project's payback period is the length of time necessary to generate an NPV of zero.

Accepted Answer

A) True 
 B)False

Question 10

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10% and the polisher will last for 5 years,what is the equivalent annual cost of the tool?

Accepted Answer

A)  $17,163 
B)  $22,000 
C)  $22,638 
D) none of these 
A)  $17,163 
B)  $22,000 
C)  $22,638 
D) none of these

Question 11

How many IRRs are possible for the following set of cash flows? CF0= 1,000,C1= +500,C2= -300,C3= +1,000,C4= +200.

Accepted Answer

A)  1 
B)  2 
C)  3 
D) 4 
A)  1 
B)  2 
C)  3 
D) 4

Question 12

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. 
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 13

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)  $3,397.57 
B)  $4,473.44 
C)  $16,085.00 
D) $35,000.00 
A)  $3,397.57 
B)  $4,473.44 
C)  $16,085.00 
D) $35,000.00

Question 14

If the opportunity cost of capital for a 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) borrowing projects 
A)  positive NPV. 
B)  negative NPV. 
C)  acceptable payback period. 
D) borrowing projects

Question 15

A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years,followed by cash outflows of $1,000 annually for 2 years.At most,this project has ______ different IRR(s).

Accepted Answer

A)  one 
B)  two 
C)  three 
D) five 
A)  one 
B)  two 
C)  three 
D) five

Question 16

A new machine will cost $100,000 and generate after-tax cash inflows of $35,000 for 4 years.Find the NPV if the firm uses a 12% 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 17

A project can have as many different internal rates of return as it has:

Accepted Answer

A)  cash inflows. 
B)  cash outflows. 
C)  periods of cash flow. 
D) changes in the sign of the cash flows. 
A)  cash inflows. 
B)  cash outflows. 
C)  periods of cash flow. 
D) changes in the sign of the cash flows.

Question 18

When mutually exclusive projects have different lives,the project that should be selected will have the:

Accepted Answer

A)  highest IRR. 
B)  longest life. 
C)  lowest equivalent annual cost. 
D) highest NPV, discounted at the opportunity cost of capital. 
A)  highest IRR. 
B)  longest life. 
C)  lowest equivalent annual cost. 
D) highest NPV, discounted at the opportunity cost of capital.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 8: Net Present Value and Other Investment Criteria

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR.

The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12% is:

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero,then returns $20,000 annually for 5 years?

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

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

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

Soft capital rationing:

A project's payback period is the length of time necessary to generate an NPV of zero.

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10% and the polisher will last for 5 years,what is the equivalent annual cost of the tool?

How many IRRs are possible for the following set of cash flows? CF0= 1,000,C1= +500,C2= -300,C3= +1,000,C4= +200.

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

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

A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years,followed by cash outflows of $1,000 annually for 2 years.At most,this project has ______ different IRR(s).

A new machine will cost $100,000 and generate after-tax cash inflows of $35,000 for 4 years.Find the NPV if the firm uses a 12% opportunity cost of capital.What is the IRR? What is the payback period?

A project can have as many different internal rates of return as it has:

When mutually exclusive projects have different lives,the project that should be selected will have the:

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

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

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

How many IRRs are possible for the following set of cash flows? CF₀= 1,000,C₁= +500,C₂= -300,C₃= +1,000,C₄= +200.