Question 1

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,300,and C₂ = -1,500.If the IRR of the project is 25% and if the cost of capital is 18%,you would: A)accept the project. B)reject the project.

Accepted Answer

The IRR of the project is 25%, which is higher than the cost of capital of 18%. However, the cash flows for years 1 and 2 are both negative, indicating that the project will require additional funding in those years. Since the project has negative cash flows in the first two years and there is no information about the expected cash flows beyond year 3, it is prudent to reject the project.

Question 2

One can use the profitability index most usefully for which situation?
A)when capital rationing exists
B)evaluation of exceptionally long-term projects
C)evaluation of non-normal projects
D)when a project has unusually high cash-flow uncertainty

Accepted Answer

The profitability index is a measure of investment profitability that takes into account the time value of money. It is calculated by dividing the present value of the project's expected cash flows by the initial investment. It is most usefully employed in situations where there is capital rationing, which means that there are limited funds available for investment and a need to select the best projects to pursue. By using the profitability index, decision-makers can identify those projects that will provide the highest return on investment relative to their costs.

Question 3

If the sign of the cash flows for a project changes two times,then the project likely has:
A)one IRR.
B)two IRRs.
C)three IRRs.
D)four IRRs.

Accepted Answer

If the sign of the cash flows for a project changes two times, then there are two possible points where the net present value (NPV) of the project can equal zero, indicating two possible internal rates of return (IRR). Therefore, the project likely has two IRRs.

Question 4

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years.Calculate the NPV for the project if the cost of capital is 15%.
A)$169,935
B)$1,200,000
C)$339,870
D)$125,846

Accepted Answer

To calculate NPV, we need to discount the cash flows by the cost of capital. 
Year 1: $1,200,000 / (1 + 0.15)^1 = $1,043,481.48
Year 2: $1,200,000 / (1 + 0.15)^2 = $905,168.54
Year 3: $1,200,000 / (1 + 0.15)^3 = $785,464.48
NPV = -$2,400,000 + $1,043,481.48 + $905,168.54 + $785,464.48
NPV = $333,114.50
Therefore, the correct choice is C), as it has the closest NPV calculation value.

Question 5

The IRR is defined as:
A)the discount rate that makes a project's NPV equal to zero.
B)the difference between the cost of capital and the present value of the cash flows.
C)the discount rate used in the NPV method.
D)the discount rate

Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that results in a project’s NPV (Net Present Value) being equal to zero. In other words, the IRR is that rate of return at which the present value of the future cash flows of a project equals its initial investment outlay.

Question 6

The quickest way to calculate the internal rate of return (IRR)of a project is by:
A)trial and error method.
B)using the graphical method.
C)using a financial calculator.
D)doubling the opportunity cost of capital.

Accepted Answer

Using a financial calculator is the quickest and most accurate way to calculate the internal rate of return (IRR) of a project. It saves time compared to the trial and error method and is more precise than the graphical method. Doubling the opportunity cost of capital is not a valid method for calculating IRR.

Question 7

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment,and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.
A)14.6 %
B)16.4 %
C)18.2 %

Accepted Answer

The answer of Muscle Company is investing in a giant...

Question 8

Driscoll Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years.Calculate the IRR for the project.
A)14.5%
B)18.6%
C)20.2%
D)23.4%

Accepted Answer

The answer of Driscoll Company is considering investing in a...

Question 9

Mass Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.At the end of the fourth year,there will be a $1.0 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12%.
A)17.8%
B)15.3%
C)23.8%

Accepted Answer

The MIRR is calculated by finding the future value of cash inflows at the cost of capital, subtracting the future value of the disposal cost, and then finding the rate that equates this net future value to the initial investment. The MIRR for this project is approximately 17.8%.

Question 10

Story Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years.Calculate the NPV at 12%.
A)$2.4 million
B)$1.2 million
C)$0.80 million
D)$0.20 million

Accepted Answer

The NPV is calculated by discounting the cash flows at the given rate and subtracting the initial investment. NPV = -6 + (3/1.12) + (3/1.12^2) + (3/1.12^3) = $1.2 million.

Question 11

The following are some of the shortcomings of the IRR method except:
A)IRR is conceptually easy to communicate.
B)Projects can have multiple IRRs.
C)IRR cannot distinguish between a borrowing project and a lending project.
D)It is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Accepted Answer

The statement "IRR is conceptually easy to communicate" is not a shortcoming, but rather a strength of the method. The other options (B, C, and D) are all acknowledged shortcomings of the IRR method.

Question 12

Project Y has following cash flows: C₀ = -800,C₁ = +5,000,and C₂ = -5,000. Calculate the IRRs for the project: A)25% and 400%. B)125% and 500%. C)-44% and 11.6%.

Accepted Answer

The answer of Project Y has following cash flows: C₀...

Question 13

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,150,and C₂ = -1,150.If the IRR of the project is 9.85% and if the cost of capital is 12%,you would: A)accept the project. B)reject the project.

Accepted Answer

IRR > Cost of capital

Question 14

Given the following cash flows for Project M: C₀ = -1,000,C₁ = +200,C₂ = +700,C₃ = +698,calculate the IRR for the project. A)23% B)21% C)19% D)17%

Accepted Answer

IRR is the discount rate that makes the NPV of a project equal to zero. In this case, the NPV is:-1,000 + 200/(1+r) + 700/(1+r)^2 + 698/(1+r)^3 = 0Solving for r using a financial calculator or spreadsheet, we get IRR = 23%.

Question 15

Given the following cash flows for project A: C₀ = -3,000,C₁ = +500,C₂ = +1,500,and C₃ = +5,000,calculate the NPV of the project using a 15% discount rate. A)$5,000 B)$2,352 C)$3,201 D)$1,857

Accepted Answer

The NPV is calculated as: NPV = -3000 + 500/(1+0.15)^1 + 1500/(1+0.15)^2 + 5000/(1+0.15)^3 = $1,857.

Question 16

Dry-Sand Company is considering investing in a new project.The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax)cash flows for three years.However,at the end of the fourth year,the project will generate -$500,000 of after-tax cash flow due to dismantling costs.Calculate the MIRR (modified internal rate of return)for the project if the cost of capital is 15%.
A)8.1%
B)12.6%
C)28.2%

Accepted Answer

MIRR considers the reinvestment rate and the terminal value of the project. In this case, the reinvestment rate is 15% and the terminal value is -$500,000. The MIRR is calculated as 8.1%.

Question 17

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?
i.payback period; II)discounted payback period; III)net present value (NPV); IV)internal rate of return
A)I,II,and III only
B)II,III,and IV only
C)III and IV only
D)I,II,III,and IV

Accepted Answer

The discounted payback period, net present value, and internal rate of return all incorporate the time value of money concept by discounting future cash flows to their present value. The payback period, on the other hand, does not consider the time value of money and only calculates the number of years it takes for the initial investment to be recovered.

Question 18

A project will have only one internal rate of return if:
A)the net present value is positive
B)the net present value is negative
C)the cash flows decline over the life of the project
D)there is a one-sign change in the cash flows

Accepted Answer

A project will have only one internal rate of return if there is a one-sign change in the cash flows. If cash flows change signs (i.e., negative to positive or vice versa) more than once, it will result in multiple internal rates of return, making it difficult to determine which rate to use. The net present value being positive or negative does not determine the uniqueness of the internal rate of return. Similarly, the cash flows declining over the life of the project does not have any impact on the uniqueness of the internal rate of return.

Question 19

If an investment project (normal project)has an IRR equal to the cost of capital,the NPV for that project is:
A)positive.
B)negative.
C)zero.
D)unable to determine.

Accepted Answer

If the IRR is equal to the cost of capital, then the NPV will be zero. This means that the project's cash inflows and outflows are exactly equal to the required rate of return, resulting in no net gain or loss.

Question 20

The profitability index is the ratio of the:
A)future value of cash flows to investment
B)net present value of cash flows to investment
C)net present value of cash flows to IRR
D)present value of cash flows to IRR

Accepted Answer

The profitability index is calculated as the ratio of the net present value of cash flows to the investment. It is used to determine the value created per unit of investment. Therefore, the correct choice is B.

Quiz 5: Net Present Value and Other Investment Criteria

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,300,and C₂ = -1,500.If the IRR of the project is 25% and if the cost of capital is 18%,you would:

One can use the profitability index most usefully for which situation?

If the sign of the cash flows for a project changes two times,then the project likely has:

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the NPV for the project if the cost of capital is 15%.

The IRR is defined as:

The quickest way to calculate the internal rate of return (IRR) of a project is by:

Muscle Company is investing in a giant crane.It is expected to cost $6.5 million in initial investment,and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years.Calculate the IRR.

Driscoll Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the IRR for the project.

Story Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years.Calculate the NPV at 12%.

The following are some of the shortcomings of the IRR method except:

Project Y has following cash flows: C₀ = -800,C₁ = +5,000,and C₂ = -5,000. Calculate the IRRs for the project:

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,150,and C₂ = -1,150.If the IRR of the project is 9.85% and if the cost of capital is 12%,you would:

Given the following cash flows for Project M: C₀ = -1,000,C₁ = +200,C₂ = +700,C₃ = +698,calculate the IRR for the project.

Given the following cash flows for project A: C₀ = -3,000,C₁ = +500,C₂ = +1,500,and C₃ = +5,000,calculate the NPV of the project using a 15% discount rate.

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept? i.payback period; II) discounted payback period; III) net present value (NPV) ; IV) internal rate of return

A project will have only one internal rate of return if:

If an investment project (normal project) has an IRR equal to the cost of capital,the NPV for that project is:

The profitability index is the ratio of the: