Question 1

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Accepted Answer

A)  Select the lowest IRR to be conservative 
B)  Select the highest IRR to maximize the benefits 
C)  Any or all of the IRRs are justified to use 
D)  Calculate the modified internal rate of return. 
A)  Select the lowest IRR to be conservative 
B)  Select the highest IRR to maximize the benefits 
C)  Any or all of the IRRs are justified to use 
D)  Calculate the modified internal rate of return.

Question 2

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 3

When calculating IRR with a trial and error process,discount rates should usually be raised when NPV is positive.

Accepted Answer

A) True 
 B)False

Question 4

Selecting the project(s)with the highest NPV(s)is not the correct decision rule when:

Accepted Answer

A)  there is capital rationing. 
B)  there are mutually exclusive projects. 
C)  projects are long-lived. 
D)  projects are independent. 
A)  there is capital rationing. 
B)  there are mutually exclusive projects. 
C)  projects are long-lived. 
D)  projects are independent.

Question 5

For most managers,discounted cash-flow analysis is in fact the dominant tool for project evaluation.

Accepted Answer

A) True 
 B)False

Question 6

As long as the NPV of a project declines smoothly with increases in the discount rate,the project is acceptable if its:

Accepted Answer

A)  internal rate of return is positive. 
B)  payback period is greater than one. 
C)  rate of return exceeds the cost of capital. 
D)  cash inflows equal the initial cost. 
A)  internal rate of return is positive. 
B)  payback period is greater than one. 
C)  rate of return exceeds the cost of capital. 
D)  cash inflows equal the initial cost.

Question 7

The profitability index selects projects based on the:

Accepted Answer

A)  highest net discounted value at time zero. 
B)  highest internal rate of return. 
C)  largest dollar investment per rate of return. 
D)  largest return per dollar invested. 
A)  highest net discounted value at time zero. 
B)  highest internal rate of return. 
C)  largest dollar investment per rate of return. 
D)  largest return per dollar invested.

Question 8

Occasionally projects may have positive initial cash flows.Such projects:

Accepted Answer

A)  are like lending money. 
B)  are like borrowing money. 
C)  have no IRR. 
D)  their IRR increases as the cost of capital increases. 
A)  are like lending money. 
B)  are like borrowing money. 
C)  have no IRR. 
D)  their IRR increases as the cost of capital increases.

Question 9

The modified internal rate of return can be used to correct for:

Accepted Answer

A)  negative NPV calculations. 
B)  multiple internal rates of return. 
C)  undefined payback periods. 
D)  borrowing projects. 
A)  negative NPV calculations. 
B)  multiple internal rates of return. 
C)  undefined payback periods. 
D)  borrowing projects.

Question 10

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

Question 11

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 12

What is the NPV for the following project cash flows at a discount rate of 15%? C0 = −$1,000,C1 = $700,C2 = $700.

Accepted Answer

A)  ($308.70) 
B)  ($138.00) 
C)  $138.00 
D)  $308.70 
A)  ($308.70) 
B)  ($138.00) 
C)  $138.00 
D)  $308.70

Question 13

What is the IRR of a project with the following cash flows: C0 = −$200,C1 = $ 110,C2 = $121?

Accepted Answer

A)  Zero 
B)  10% 
C)  18% 
D)  5% 
A)  Zero 
B)  10% 
C)  18% 
D)  5%

Question 14

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

Accepted Answer

A)  accepted for all projects. 
B)  accepted only for projects with a positive initial cash flow. 
C)  accepted only for projects with a negative initial cash flow. 
D)  rejected for all projects. 
A)  accepted for all projects. 
B)  accepted only for projects with a positive initial cash flow. 
C)  accepted only for projects with a negative initial cash flow. 
D)  rejected for all projects.

Question 15

If a project has a cost of $50,000 and a profitability index of 2,then:

Accepted Answer

A)  it has a negative NPV. 
B)  its NPV could be positive or negative depending on the cost of capital. 
C)  its cash flow is $100,000. 
D)  it has a positive NPV. 
A)  it has a negative NPV. 
B)  its NPV could be positive or negative depending on the cost of capital. 
C)  its cash flow is $100,000. 
D)  it has a positive NPV.

Question 16

Which mutually exclusive project would you select,if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B,with 3 years of zero cash flow followed by 3 years of $1,500 annually?

Accepted Answer

A)  Project A 
B)  Project B 
C)  You are indifferent since the NPVs are equal. 
D)  Neither project should be selected. 
A)  Project A 
B)  Project B 
C)  You are indifferent since the NPVs are equal. 
D)  Neither project should be selected.

Question 17

The opportunity cost of capital is equal to:

Accepted Answer

A)  the discount rate that makes the project NPV equal zero. 
B)  the return that shareholders could expect by investing their money in the financial markets. 
C)  a project's internal rate of return. 
D)  the average rate of return for a firm's projects. 
A)  the discount rate that makes the project NPV equal zero. 
B)  the return that shareholders could expect by investing their money in the financial markets. 
C)  a project's internal rate of return. 
D)  the average rate of return for a firm's projects.

Question 18

One way to increase the NPV of a project is to decrease the:

Accepted Answer

A)  project's payback period. 
B)  profitability index. 
C)  time until the receipt of cash inflows. 
D)  number of project IRRs. 
A)  project's payback period. 
B)  profitability index. 
C)  time until the receipt of cash inflows. 
D)  number of project IRRs.

Question 19

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)  $17,163.04 
B)  $22,187.84 
C)  $22,637.98 
D)  $19,411.15 
A)  $17,163.04 
B)  $22,187.84 
C)  $22,637.98 
D)  $19,411.15

Question 20

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

Accepted Answer

A)  It increases. 
B)  It decreases. 
C)  It is not affected. 
D)  It depends on whether or not the projects are mutually exclusive. 
A)  It increases. 
B)  It decreases. 
C)  It is not affected. 
D)  It depends on whether or not the projects are mutually exclusive.

Exam 8: Net Present Value and Other Investment Criteria

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

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

When calculating IRR with a trial and error process,discount rates should usually be raised when NPV is positive.

Selecting the project(s)with the highest NPV(s)is not the correct decision rule when:

For most managers,discounted cash-flow analysis is in fact the dominant tool for project evaluation.

As long as the NPV of a project declines smoothly with increases in the discount rate,the project is acceptable if its:

The profitability index selects projects based on the:

Occasionally projects may have positive initial cash flows.Such projects:

The modified internal rate of return can be used to correct for:

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

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 NPV for the following project cash flows at a discount rate of 15%? C0 = −$1,000,C1 = $700,C2 = $700.

What is the IRR of a project with the following cash flows: C0 = −$200,C1 = $ 110,C2 = $121?

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

If a project has a cost of $50,000 and a profitability index of 2,then:

Which mutually exclusive project would you select,if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B,with 3 years of zero cash flow followed by 3 years of $1,500 annually?

The opportunity cost of capital is equal to:

One way to increase the NPV of a project is to decrease the:

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?

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters

What is the NPV for the following project cash flows at a discount rate of 15%? C₀ = −$1,000,C₁ = $700,C₂ = $700.

What is the IRR of a project with the following cash flows: C₀ = −$200,C₁ = $ 110,C₂ = $121?