Question 1

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 2

An investment costs $100,000 and provides a cash inflow of $17,000 per year.If the discount rate is 13%,how long must the cash inflows last for it to be an acceptable investment?
A) 24 years
B) 6 years
C) 10 years
D) 12 years

Accepted Answer

NPV = 0 = −$100,000 + $17,000[(1 / 0.13) − 1 / 0.13(1.13)ⁿ]; n = 12 years

Question 3

When projects are mutually exclusive,you should choose the project with the:
A) longer life.
B) larger initial size.
C) highest IRR.
D) highest NPV.

Accepted Answer

The best choice in mutually exclusive projects is the one with the highest NPV as it represents the higher increase in shareholder wealth or value creation. The NPV takes into consideration the time value of money and measures the difference between the project's present value of inflows and the present value of outflows. The higher the NPV, the more profitable the project is. Therefore, choosing the project with the highest NPV is the best alternative.

Question 4

Given a particular set of project cash flows,which one of the following statements must be correct?
A) There can be only one NPV for the project.
B) There can be only one IRR for the project.
C) There can be more than one IRR for the project.
D) There can be up to two profitability indexes for any project.

Accepted Answer

There can be more than one IRR for the project because there may be multiple discount rates that make the NPV of the project equal to zero. It is possible for a project to have multiple positive and negative cash flow patterns that result in multiple IRRs.

Question 5

If a project costs $72,000 and returns $18,500 per year for 5 years,what is its IRR?
A) 8.98%
B) 7.39%
C) 8.50%
D) 7.67%

Accepted Answer

Using a financial calculator: n = 5; PV = −$72,000; PMT = $18,500; FV = 0; CPT i = 8.98%

Question 6

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

Accepted Answer

NPV_A = −$1,000 + $1,000[(1 / 0.15) − 1 / 0.15(1.15)³] = $1,283.23NPV_B = −$1,000 + {$1,500[(1 / 0.15) − 1 / 0.15(1.15)³]} / 1.15³ = $1,251.89

Question 7

When managers select correctly from among mutually exclusive projects,they:
A) may give up rate of return for NPV.
B) may give up NPV for rate of return.
C) have a tendency to select the largest project.
D) focus on the payback method to avoid conflicting signals.

Accepted Answer

When selecting among mutually exclusive projects, managers should focus on choosing the project with the highest net present value (NPV) rather than the highest rate of return. This is because the NPV takes into account the time value of money and provides a more accurate measure of the project's profitability. Therefore, managers may give up a higher rate of return for a project with a higher NPV.

Question 8

You are analyzing a project that is equivalent to borrowing money.This project's:
A) NPV graph rises as discount rates decrease.
B) initial cash flow is an outflow of funds.
C) value increases when the cost of capital increases.
D) acceptance requires its IRR to exceed the cost of capital.

Accepted Answer

The answer of You are analyzing a project that is...

Question 9

If two machines produce the same product but have different lives,you should choose the machine with 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 machines with different lives, the Equivalent Annual Cost (EAC) method is the most appropriate. The EAC method calculates the annual cost of each machine over its useful life, making it a comparable metric. Therefore, the machine with the lowest EAC should be chosen as it represents the least expensive option per year over the useful life of the machine.

Question 10

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

Accepted Answer

The NPV is negative at a discount rate higher than the IRR, which is 15% in this case. At a 20% discount rate, the NPV would be negative.

Question 11

Two mutually exclusive projects have the same IRR.When will you be indifferent between them?
A) When the IRR is equal to the cost of capital.
B) Always if they have the same IRR.
C) When the IRR is less than the cost of capital.
D) When there is only one change in the sign of the cash flows.

Accepted Answer

When two mutually exclusive projects have the same IRR, the decision for selecting one over the other is based on the comparison of their net present value (NPV) at the cost of capital, which represents the opportunity cost of investing capital in a project. Therefore, when the IRR is equal to the cost of capital, the NPV of both projects will be zero and they will produce the same value. Thus, the decision between them will be indifferent.

Question 12

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 (IRR) when there are changes in the sign of the cash flows. This happens when the project generates negative cash flows during its life and then a large positive cash flow at the end. In such cases, the IRR calculation may give multiple values, and it becomes difficult to interpret the results. Therefore, the IRR is not always the best metric to use for making investment decisions.

Question 13

What is the IRR of a project with the following cash flows: C₀ = −$200,C₁ = $ 110,C₂ = $121? A) Zero B) 10% C) 18% D) 5%

Accepted Answer

The IRR is the rate that makes the NPV of cash flows equal to zero. Solving for IRR: 0 = -200 + 110/(1+IRR) + 121/(1+IRR)^2. The IRR is 10%.

Question 14

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) One B) Two C) Three D) Four

Accepted Answer

There can be a maximum of three IRRs for this set of cash flows. This is because there are three changes in the sign of the cash flows (from negative to positive or vice versa). Each change in the sign of the cash flows can result in one IRR. Therefore, there can be a maximum of three IRRs for this set of cash flows.

Question 15

What is the NPV for the following project cash flows at a discount rate of 15%? C₀ = −$1,000,C₁ = $700,C₂ = $700. A) ($308.70) B) ($138.00) C) $138.00 D) $308.70

Accepted Answer

NPV = −$1,000 + $700[(1 / 0.15) − 1 / 0.15(1.15)²] = $138.00

Question 16

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

Accepted Answer

The declining NPV with increasing discount rates indicates that the project's cash flows are positive but take longer to realize, hence the project's rate of return exceeds the cost of capital. This means that the project generates more cash inflows than the cost of funding it, making it financially feasible. A positive internal rate of return indicates that the project yields a return that is greater than the discount rate, but alone, it does not indicate the project's feasibility. The payback period is a measure of how long it takes to recover the initial investment, but it does not account for the time value of money and profitability. Cash inflows equal to the initial cost do not necessarily make the project financially viable since the cost of financing must be considered.

Question 17

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

Accepted Answer

Using a financial calculator:n = 6; PV = −$100,000; PMT = $30,000; FV = 0; CPT i = 19.91%

Question 18

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?
A) 0.57%
B) 1.21%
C) 5.69%
D) 12.10%

Accepted Answer

Using a financial calculator:n = 6; PV = −$100,000; PMT = $17,000; FV = 0; CPT i = 0.57%

Question 19

When evaluating mutually exclusive projects,remember:
A) the project with the higher IRR may have the higher NPV at one discount rate and a lower NPV at another .
B) cash flows cannot be discounted when considering mutually exclusive projects.
C) mutually exclusive projects produce negative IRR values.
D) mutually exclusive projects always have multiple IRRs.

Accepted Answer

The highest IRR project may not always have the highest NPV as the NPV is influenced by the discount rate used. Therefore, it is important to evaluate projects using both IRR and NPV to make informed decisions. Choices B, C, and D are incorrect as they either provide inaccurate information or are not relevant to the evaluation of mutually exclusive projects.

Question 20

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 level.
B) invest now to maximize the NPV.
C) postpone until the opportunity cost reaches its lowest level.
D) invest at the date that provides the highest NPV today.

Accepted Answer

The best approach when managers cannot determine whether to invest now or wait until costs decrease later is to invest at the date that provides the highest NPV today. This is because the NPV calculation takes into account the time value of money and discounts future cash flows back to their present value. Therefore, if the investment has a positive NPV today, it is better to invest now rather than waiting for costs to decrease in the future as the investment will generate more value for the company today than it would in the future.

Quiz 8: Net Present Value and Other Investment Criteria

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) .

An investment costs $100,000 and provides a cash inflow of $17,000 per year.If the discount rate is 13%,how long must the cash inflows last for it to be an acceptable investment?

When projects are mutually exclusive,you should choose the project with the:

Given a particular set of project cash flows,which one of the following statements must be correct?

If a project costs $72,000 and returns $18,500 per year for 5 years,what is its IRR?

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?

When managers select correctly from among mutually exclusive projects,they:

You are analyzing a project that is equivalent to borrowing money.This project's:

If two machines produce the same product but have different lives,you should choose the machine with the:

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

Two mutually exclusive projects have the same IRR.When will you be indifferent between them?

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

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

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

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

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

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?

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

When evaluating mutually exclusive projects,remember:

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