Question 1

Internal rate of return is preferable to net present value because IRR employs a weighted average cost of capital discount rate that reflects potential reinvestment.

Accepted Answer

The Internal Rate of Return (IRR) does not use a weighted average cost of capital (WACC) as its discount rate; instead, it calculates the rate at which the net present value of cash flows equals zero, without explicitly considering the cost of capital or reinvestment rates.

Question 2

Between projects A and B, project A will be considered a superior financial undertaking if it has:
A) A shorter payback period than project B.
B) A lower average rate of return than project B.
C) A lower net present value than project B.
D) A longer payback period than project B.

Accepted Answer

A shorter payback period indicates that the project will generate cash flows faster and will be able to recoup the initial investment sooner, making it a superior financial undertaking. The other options suggest inferior financial outcomes.

Question 3

The Analytical Hierarchy Process is used to decide among three projects that we'll call A, B, and C. The total score for project A is .650, for project B is .514, and for project C is .321. Which of the following statements is BEST?
A) Project A is twice as good as project C.
B) The analysis must be incorrect because the total scores should sum to 1.00.
C) The analysis must be incorrect because there are two total scores that exceed 0.50.
D) The analysis must be incorrect because project C's total score is odd.

Accepted Answer

The AHP does not require the total scores to add up to 1. The scores are relative to each other, and the score of .650 for project A indicates that it is the best option, followed by project B with a score of .514 and project C with a score of .321. The score for project A is approximately twice that of project C.

Question 4

A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects has the highest internal rate of return?
A) $25,000 initial outlay with $10,000 cash inflows during the following five years
B) $12,500 initial outlay with $10,000 cash inflows during the following five years
C) $25,000 initial outlay with $5,000 cash inflows during the following five years
D) $12,500 initial outlay with $5,000 cash inflows during the following five years

Accepted Answer

Project B has the highest internal rate of return (IRR) because it requires the lowest initial investment ($12,500) while generating the same annual cash inflows ($10,000) as project A for five years, leading to a quicker and higher return on investment compared to the other options.

Question 5

Which statement about the use of the profile model is BEST?
A) The profile model requires careful calculation of the percentage risk for each possible project.
B) The scale used for the profile model can be any two numerical variables that a company deems important.
C) The efficient frontier in the profile model is where return is 100% (or greater) and risk is 0%.
D) For a given level of risk, a positive move on the return axes would indicate a superior project.

Accepted Answer

Option D is the best statement. It accurately describes the use of the profile model, where a positive move on the return axes represents a superior project for a given level of risk. Options A and B are incorrect as they do not accurately describe the calculations or variables used in the profile model. Option C is also incorrect as a return of 100% or greater with zero risk is not realistic or achievable in any investment scenario.

Question 6

A project manager is using the payback method to make the final decision on which project to undertake. The company has a 10% required rate of return and expects a 4% rate of inflation for the following four years. What is the non-discounted payback of a project that has cash flows as shown in the table? 
A) 3.875 years
B) 3.625 years
C) 3.750 years
D) 3.500 years

Accepted Answer

The answer of A project manager is using the payback...

Question 7

A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects has the highest internal rate of return?
A) $100,000 initial outlay with $10,000 cash inflows during the first two years, $20,000 during the third and fourth years, and $30,000 during the fifth year
B) $100,000 initial outlay with a $5,000 cash inflow during the first year, $15,000 cash inflow during the second year, and $25,000 cash inflows during years three through five
C) $75,000 initial outlay with a $5,000 cash inflow during the first year, increasing by $5,000 per year through the fifth year
D) $50,000 initial outlay with $5,000 cash inflows during the first two years, $15,000 during the third and fourth years, and $20,000 during the fifth year

Accepted Answer

Project D has the highest Internal Rate of Return (IRR) because it requires the lowest initial investment while still generating significant cash inflows, especially in the later years. This combination typically results in a higher IRR compared to projects with higher initial outlays or lower cash inflows.

Question 8

Which of these statements about valuation models is NOT correct?
A) NPV employs a weighted average cost of capital discount rate that reflects potential reinvestment.
B) IRR and NPV calculations typically make the same investment recommendations only when the projects are independent of each other.
C) If cash flows are not normal, IRR may arrive at multiple solutions.
D) IRR is a more robust determinant of project viability than NPV.

Accepted Answer

The statement that IRR is a more robust determinant of project viability than NPV is incorrect. NPV is generally considered to be the more reliable valuation model, as it takes into account the time value of money and the cost of capital, while IRR only considers the percentage return of the project. Additionally, IRR can suffer from certain limitations such as the potential for multiple solutions or the inability to handle certain types of cash flows.

Question 9

A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows. If the company is employing the net present value criterion, which project should they choose?
A) $25,000 in year 1; $15,000 in year 2; $10,000 in year 3; and $5,000 in year 4
B) $5,000 in year 1; $5,000 in year 2; $20,000 in year 3; and $30,000 in year 4
C) $15,000 in year 1; $15,000 in year 2; $15,000 in year 3; and $15,000 in year 4
D) $5,000 in year 1; $5,000 in year 2; $25,000 in year 3; and $25,000 in year 4

Accepted Answer

The answer of A company facing an interest rate of...

Question 10

The Analytical Hierarchy Process elegantly addresses scaling issues in criteria and negative utility in alternative scores.

Accepted Answer

The Analytical Hierarchy Process (AHP) primarily deals with scaling issues through pairwise comparisons and ratio scales but does not inherently address negative utility in alternative scores; it focuses on positive pairwise comparisons and priorities.

Question 11

The profile model plots a graph on a(n):
A) Perception-reality pair of axes.
B) Risk-return pair of axes.
C) Efficiency-effectiveness pair of axes.
D) Saxon-Norman pair of axes.

Accepted Answer

The answer of The profile model plots a graph on...

Question 12

Describe the use of a profile model and sketch an example, clearly labeling every component and the best alternative in your example.

Accepted Answer

The answer of Describe the use of a profile model...

Question 13

A project manager is using the net present value method to make the final decision on which project to undertake. The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years. What is the NPV of a project that has cash flows as shown in the table? 
A) -$9,762
B) -$56,859
C) -$69,387
D) -$98,780

Accepted Answer

The answer of A project manager is using the net...

Question 14

The efficient frontier in project management is the set of portfolio options that offer:
A) A minimum return for a minimum risk.
B) A minimum return for a maximum risk.
C) A maximum return for a minimum risk.
D) A maximum return for a maximum risk.

Accepted Answer

The efficient frontier in project management represents the combinations of projects that provide the highest expected return for a given level of risk or the lowest risk for a given level of return. Therefore, the portfolio options that offer a maximum return for a minimum risk represent the most efficient and desirable options for project management decisions. Option C is the only one that describes this combination. Option A offers a minimum return but doesn't specify the risk level, while option B offers a maximum risk, which is not desirable for project management decision-making. Option D offers a maximum risk but doesn't specify the return level, which is not useful for decision-making either.

Question 15

The reciprocal of the payback period is used to calculate the average rate of return for a project.

Accepted Answer

The reciprocal of the payback period is the number of years it takes to recover 1 dollar of investment. Taking the inverse of this value gives the annual rate of return.

Question 16

Net present value is being used to break the tie among four otherwise equal projects. If the interest rate is 4%, which of these anticipated four-year flows would yield the greatest net present value?
A) $10,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $13,000 in year 4
B) $13,000 in year 1; $12,000 in year 2; $11,000 in year 3; and $10,000 in year 4
C) $10,000 in year 1; $10,000 in year 2; $13,000 in year 3; and $13,000 in year 4
D) $11,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $12,000 in year 4

Accepted Answer

The net present value (NPV) is higher when cash flows are received earlier, as they can be reinvested sooner. Option B, with the highest cash flows in the earliest years, would yield the greatest NPV at a 4% interest rate.

Question 17

The efficient frontier in a profile model is the set of options that offers a maximum return for a given level of risk or a minimum risk for every level of return.

Accepted Answer

This is a correct definition of the efficient frontier.

Question 18

The present value of money is lower the further out in the future I expect to spend it.

Accepted Answer

The answer of The present value of money is lower...

Question 19

How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth the extra effort?

Accepted Answer

The answer of How does the Analytical Hierarchy Process differ...

Question 20

Which of these statements about internal rate of return analysis is BEST?
A) If the IRR is less than the company's required rate of return, the project is worth funding.
B) Projects having lower IRR are generally superior to those having higher IRR.
C) IRR and NPV calculations always make the same investment recommendations.
D) If net outflows follow a period of net inflows, IRR may give conflicting results.

Accepted Answer

IRR may give conflicting results in situations where there are alternating periods of net inflows and outflows. In such cases, the IRR may have multiple values, and the traditional method of using IRR to determine project feasibility may not work. Therefore, it is recommended to use a combination of both IRR and NPV calculations to make investment decisions. Option A is incorrect because a project is worth funding only if the IRR is greater than the required rate of return. Option B is incorrect because projects with higher IRR are generally considered superior as they generate more cash flows per dollar invested. Option C is also incorrect because IRR and NPV may not always give the same investment recommendations, especially in certain scenarios where there are multiple rates of return or non-conventional cash flows.

Quiz 3: Project Selection and Portfolio Management

Internal rate of return is preferable to net present value because IRR employs a weighted average cost of capital discount rate that reflects potential reinvestment.

Between projects A and B, project A will be considered a superior financial undertaking if it has:

The Analytical Hierarchy Process is used to decide among three projects that we'll call A, B, and C. The total score for project A is .650, for project B is .514, and for project C is .321. Which of the following statements is BEST?

A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects has the highest internal rate of return?

Which statement about the use of the profile model is BEST?

A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects has the highest internal rate of return?

Which of these statements about valuation models is NOT correct?

A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows. If the company is employing the net present value criterion, which project should they choose?

The Analytical Hierarchy Process elegantly addresses scaling issues in criteria and negative utility in alternative scores.

The profile model plots a graph on a(n) :

Describe the use of a profile model and sketch an example, clearly labeling every component and the best alternative in your example.

A project manager is using the net present value method to make the final decision on which project to undertake. The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years. What is the NPV of a project that has cash flows as shown in the table?

The efficient frontier in project management is the set of portfolio options that offer:

The reciprocal of the payback period is used to calculate the average rate of return for a project.

Net present value is being used to break the tie among four otherwise equal projects. If the interest rate is 4%, which of these anticipated four-year flows would yield the greatest net present value?

The efficient frontier in a profile model is the set of options that offers a maximum return for a given level of risk or a minimum risk for every level of return.

The present value of money is lower the further out in the future I expect to spend it.

How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth the extra effort?

Which of these statements about internal rate of return analysis is BEST?