Question 1

When managers cannot determine whether to invest now or wait until costs decrease later,the rule should be to:
A) postpone until costs reach their lowest.
B) invest now to maximize the NPV.
C) postpone until the opportunity cost reaches its lowest.
D)invest at the date that gives the highest NPV today.

Accepted Answer

The best choice is to invest at the date that gives the highest NPV today. Waiting indefinitely for costs to decrease can lead to missed opportunities to generate income and profits, and the opportunity cost of waiting can outweigh any potential savings from lower costs. Therefore, if the decision is between investing now and waiting for costs to decrease, the best approach is to assess the NPV of the investment at the current time and invest if it generates a positive NPV.

Question 2

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

Accepted Answer

When calculating a project's payback period, cash flows are not discounted, implying a discount rate of zero. This method simply measures how long it takes for the initial investment to be recovered from the cash inflows, without considering the time value of money.

Question 3

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?
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)Evaluate the project according to NPV.

Accepted Answer

When sign changes in cash flows produce multiple IRRs, the IRR concept becomes ambiguous and inconsistent. Therefore, the best choice is to evaluate the project according to the Net Present Value (NPV) method, which avoids the inconsistencies of the IRR method and provides a clear indication of the project's economic viability.

Question 4

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?
A) $44,617
B) $52,200
C) $60,000
D)$72,747

Accepted Answer

The IRR is the discount rate that makes the NPV of cash flows equal to zero. Using the IRR of 13% and the cash flows of $15,000 for 4 years, the present value of these cash flows is $44,617, which is the initial cost of the project.

Question 5

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?
A) 8.69 years
B) 14.00 years
C) 27.51 years
D)An infinite number of years

Accepted Answer

The answer of What is the minimum number of years...

Question 6

When mutually exclusive projects have different lives,the project that should be selected will have the:
A) highest IRR.
B) longest life.
C) lowest equivalent annual cost.
D)highest NPV, discounted at the opportunity cost of capital.

Accepted Answer

When comparing mutually exclusive projects with different lives, the project with the lowest equivalent annual cost (EAC) should be selected. EAC allows for a uniform comparison of the annual cost of each project over its lifespan, making it a useful tool for evaluating projects with differing lifespans.

Question 7

A project has a payback period of 5 years and the firm employs a 10% cost of capital.Which of the following statements is correct concerning this project's discounted payback?
A) Discounted payback will exceed 5 years.
B) Discounted payback will be less than 5 years.
C) Discounted payback will decrease if the project's IRR exceeds 10%.
D) Discounted payback will increase if the project's IRR is less than 10%.

Accepted Answer

Discounted payback will always be longer than regular payback, since it takes into account the time value of money. Therefore, the discounted payback period for this project is likely to be longer than 5 years. The IRR of the project does not affect the discounted payback period, since it only measures the project's rate of return, not the time it takes to recoup the initial investment.

Question 8

Project A has an IRR of 20% while Project B has an IRR of 30%.Under which of the following situations might you be inclined to select Project A,assuming the projects to be mutually exclusive,lending projects?
A) Project A is riskier.
B) Project A requires a smaller initial investment.
C) Project A requires a larger initial investment.
D)Project A requires cash outflows in the final period.

Accepted Answer

If Project A requires a larger initial investment, it might generate a higher net present value (NPV) despite having a lower IRR, making it more attractive if maximizing NPV is the goal.

Question 9

Which of the following statements is true for a project with $20,000 initial cost,cash inflows of $5,800 per year for 6 years,and a discount rate of 15%?
A) Its payback period is roughly 3 1/2 years.
B) Its NPV is $2,194.
C) Its IRR is 1.85%.
D)Its profitability index is 0.109

Accepted Answer

The answer of Which of the following statements is true...

Question 10

A project's payback period is determined to be 4 years.If it is later discovered that additional cash flows will be generated in years 5 and 6,then:
A) the project's payback period will be reduced.
B) the project's payback period will be increased.
C) the project's payback period will be unchanged.
D)the discount rate must be known to determine whether the payback period changes.

Accepted Answer

The payback period only considers the time it takes to recover the initial investment, so additional cash flows after the payback period do not affect it.

Question 11

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:
A) with short lives.
B) with long lives.
C) with late cash inflows.
D)that have negative NPVs.

Accepted Answer

The answer of Firms that make investment decisions based on...

Question 12

A project with an IRR that is less than the opportunity cost of capital should be:
A) accepted for all project types.
B) accepted for all lending projects.
C) accepted for all borrowing projects.
D)rejected for all projects.

Accepted Answer

The answer of A project with an IRR that is...

Question 13

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) one
B) two
C) three
D)five

Accepted Answer

The project has two different IRRs because of the sign changes in the cash flows. For the first 3 years, the cash inflows are positive, and for the next 2 years, the cash outflows are negative. This means that the project has a positive IRR for the first 3 years and a negative IRR for the next 2 years. Therefore, the project has two different IRRs.

Question 14

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

Accepted Answer

If a project's expected rate of return exceeds its opportunity cost of capital, we can infer that the project is a good investment. IRR is the rate at which the NPV of a project is zero, so if the IRR of the project exceeds the opportunity cost of capital, it means that the project is expected to generate a positive net present value. Therefore, choice C is correct. The profitability index (PI) measures the ratio of the present value of future cash flows to the initial investment. If the PI is greater than 1.0, it means that the project is expected to generate positive net present value, so choice A is also correct. The opportunity cost of capital is the minimum rate of return required by investors to invest in a project. If the project's expected rate of return exceeds the opportunity cost of capital, it means that investors are getting a higher return than what they would get from other investments with similar risk, so choice B is incorrect. NPV is the difference between the present value of future cash flows and the initial investment. If the NPV is positive, it means that the project is expected to generate a return greater than the opportunity cost of capital. If the NPV is zero, it means that the project will generate exactly the required rate of return. Therefore, choice D is incorrect.

Question 15

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:
A) the NPVs of these projects cross over at some discount rate.
B) discounted cash flow is not considered with mutually exclusive projects.
C) IRR performs better with accounting returns than with cash flows.
D)mutually exclusive projects have multiple IRRs

Accepted Answer

The IRR criterion can give conflicting signals with mutually exclusive projects because the NPVs of these projects may cross over at some discount rate, making it difficult to determine which project is more financially advantageous. In other words, the IRR may suggest one project is better at one discount rate, while the other project is better at a different discount rate. This is why the NPV criterion is typically preferred for evaluating mutually exclusive projects.

Question 16

How many IRRs are possible for the following set of cash flows? CF₀= 1,000,C₁= +500,C₂= -300,C₃= +1,000,C₄= +200. A) 1 B) 2 C) 3 D)4

Accepted Answer

The answer of How many IRRs are possible for the...

Question 17

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10%: C₀= -6,000,C₁= +3,300,C₂= +3,300. A) Accept, since IRR exceeds opportunity cost. B) Reject, since opportunity cost exceeds IRR. C) Accept, since opportunity cost exceeds IRR. D)Reject, since IRR exceeds opportunity cost.

Accepted Answer

The answer of Evaluate the following project using an IRR...

Question 18

Which of the following investment decision rules tends to improperly reject long-lived projects?
A) Net present value
B) Internal rate of return
C) Payback period
D)Profitability index

Accepted Answer

Payback period tends to improperly reject long-lived projects because it only considers the time it takes to recover the initial investment and ignores the cash flows that occur after the payback period. It doesn't take into account the total profitability or returns of a project. The other investment decision rules (net present value, internal rate of return, and profitability index) all consider the time value of money and the total cash flows over the life of the project.

Question 19

A project can have as many different internal rates of return as it has:
A) cash inflows.
B) cash outflows.
C) periods of cash flow.
D)changes in the sign of the cash flows.

Accepted Answer

A project can have multiple internal rates of return when there are changes in the sign of cash flows. This occurs when the project generates negative cash flows before turning positive, or vice versa. In these cases, the project will have multiple internal rates of return because the equation that calculates the internal rate of return assumes that cash flows only change sign once. Therefore, choice D is the correct answer.

Question 20

A firm considers a project with the following cash flows: time-zero = +20,000,years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10%?
A) Yes, the IRR of the project is 4.06%.
B) Yes, the IRR of the project is 12.5%.
C) No, the IRR of the project is 4.06%.
D)No, the IRR of the project is 12.5%.

Accepted Answer

The IRR of the project is 4.06%, which is less than the cost of capital of 10%. Therefore, the project should not be accepted.

Quiz 8: Net Present Value and Other Investment Criteria

When managers cannot determine whether to invest now or wait until costs decrease later,the rule should be to:

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

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

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?

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?

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

A project has a payback period of 5 years and the firm employs a 10% cost of capital.Which of the following statements is correct concerning this project's discounted payback?

Project A has an IRR of 20% while Project B has an IRR of 30%.Under which of the following situations might you be inclined to select Project A,assuming the projects to be mutually exclusive,lending projects?

Which of the following statements is true for a project with $20,000 initial cost,cash inflows of $5,800 per year for 6 years,and a discount rate of 15%?

A project's payback period is determined to be 4 years.If it is later discovered that additional cash flows will be generated in years 5 and 6,then:

Firms that make investment decisions based on the payback rule may be biased toward rejecting projects:

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

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) .

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

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

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

Evaluate the following project using an IRR criterion,based on an opportunity cost of 10%: C₀= -6,000,C₁= +3,300,C₂= +3,300.

Which of the following investment decision rules tends to improperly reject long-lived projects?

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

A firm considers a project with the following cash flows: time-zero = +20,000,years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10%?