Question 1

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

Accepted Answer

The payback rule measures the amount of time it takes to recover the initial investment. Firms using this rule may prefer projects with shorter payback periods, even if they have a lower overall return on investment. This bias may cause them to reject projects with longer payback periods, which could have higher overall returns. Therefore, the answer is B- projects with long lives.

Question 2

How is the internal rate of return of a project calculated and what must one look out for when using the internal rate of return rule?

Accepted Answer

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Question 3

One method that can be used to increase the NPV of a project is to decrease the:
A) project's payback.
B) project's cost of capital.
C) time until receipt of cash inflows.
D) number of project IRRs.

Accepted Answer

The answer of One method that can be used to...

Question 4

Given a particular set of project cash flows,which of the following statements is 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 NPV for the project.
D) there can be only one profitability index for the project.

Accepted Answer

There can be more than one NPV for the project if the discount rate changes or if there are non-conventional cash flows such as cash inflows and outflows occurring more than once. The IRR can also have multiple solutions in certain cases such as non-conventional cash flows. There can only be one profitability index for the project as it is calculated as the ratio of the present value of cash inflows to the initial investment.

Question 5

Why doesn't the payback rule always make shareholders better off?

Accepted Answer

The answer of Why doesn't the payback rule always make...

Question 6

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

The payback period calculation does not involve discounting cash flows, so it effectively uses a discount rate of zero. This method simply measures how long it takes for the initial investment to be recovered through the project's cash inflows, without considering the time value of money.

Question 7

Discuss three reasons why a firm may want to impose soft capital rationing.

Accepted Answer

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Question 8

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR,and how to reconcile the two methods' results.

Accepted Answer

The answer of The use of NPV as an investment...

Question 9

If two projects offer the same,positive NPV,then:
A) they also have the same IRR.
B) they have the same payback period.
C) they are mutually exclusive projects.
D) they add the same amount to the value of the firm.

Accepted Answer

The answer of If two projects offer the same,positive NPV,then:
A)...

Question 10

What is the net present value of an investment,and how do you calculate it?

Accepted Answer

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Question 11

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?
A) select the project with the higher profitability index.
B) select the project with the lower profitability index.
C) without capital rationing, both projects can be selected.
D) without capital rationing, select by NPV method.

Accepted Answer

Without capital rationing, the focus should be on selecting the project that adds the most value to the firm, which is determined by the Net Present Value (NPV) method. The profitability index is more useful when capital is limited.

Question 12

"While IRR may be easier to understand than NPV,NPV should be used as a final decision criterion for an investment." Do you agree with the above statement? Why or why not?

Accepted Answer

The answer of "While IRR may be easier to understand...

Question 13

Which mutually exclusive project would you select,if both are priced at $1,000 and your discount rate is 15 percent; Project A with three annual cash flows of $1,000,or Project B,with three years of zero cash flow followed by three 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

Project A has a higher NPV because it provides cash flows earlier, which are more valuable due to the time value of money at a 15% discount rate.

Question 14

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:
A) equal to $50.
B) less than 0 if the discount rate is less than 5 percent.
C) zero if the discount rate is equal to 5 percent.
D) positive if the discount rate is greater than 5 percent.

Accepted Answer

The NPV of the project can be calculated as follows:
NPV = -$1,000 + $1,050 / (1 + r)
where r is the discount rate. If we plug in r = 5%, we get:
NPV = -$1,000 + $1,050 / (1 + 0.05) = $50 / 1.05 - $1,000 = $0
Therefore, the NPV of the project is zero if the discount rate is 5%. If the discount rate is less than 5%, the NPV will be negative, and if the discount rate is greater than 5%, the NPV will be positive.

Question 15

Borrowing and lending projects usually can be distinguished by whether:
A) they have positive or negative IRRs.
B) the time-zero cash flow is positive or negative.
C) their IRR increases as the discount rate increases.
D) their rate of return is high or low.

Accepted Answer

Borrowing and lending projects can be distinguished by whether the time-zero cash flow is positive (lending) or negative (borrowing). The other options given do not necessarily indicate whether a project involves borrowing or lending.

Question 16

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000,is expected to last for 10 years,and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent,should the project be accepted?

Accepted Answer

The answer of You have been assigned to evaluate a...

Question 17

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years,followed by cash outflows of $1,000 annually for two 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 it has changing cash flows from positive to negative (inflows to outflows) and back to positive. This gives rise to two possible solutions for the IRR.

Question 18

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

Accepted Answer

The answer of How can the net present value rule...

Question 19

A Project's payback period is determined to be four years.If it is later discovered that additional cash flows will be generated in years five and six,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 is the time it takes for a project to recover its initial investment from its cash inflows. Additional cash flows beyond the payback period do not affect the calculation of the payback period itself, which is solely concerned with reaching the break-even point.

Question 20

If projects A and B are independent,which of the following is true?
A) Value (A + B) > value (A) + value (B)
B) Value (A + B) < value (A) + value (B)
C) Value (A + B) = value (A) + value (B)
D) Value (A + B) - value (B) > value (A)

Accepted Answer

If projects A and B are independent, then the value of A does not affect the value of B and vice versa. Therefore, the total value of A+B would simply be the sum of the value of A and the value of B, which is represented by the equation Value(A+B) = Value(A) + Value(B).

Quiz 8: Net Present Value and Other Investment Criteria

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

How is the internal rate of return of a project calculated and what must one look out for when using the internal rate of return rule?

One method that can be used to increase the NPV of a project is to decrease the:

Given a particular set of project cash flows,which of the following statements is correct?

Why doesn't the payback rule always make shareholders better off?

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

Discuss three reasons why a firm may want to impose soft capital rationing.

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR,and how to reconcile the two methods' results.

If two projects offer the same,positive NPV,then:

What is the net present value of an investment,and how do you calculate it?

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

"While IRR may be easier to understand than NPV,NPV should be used as a final decision criterion for an investment." Do you agree with the above statement? Why or why not?

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

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:

Borrowing and lending projects usually can be distinguished by whether:

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000,is expected to last for 10 years,and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent,should the project be accepted?

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years,followed by cash outflows of $1,000 annually for two years.At most,this project has ______ different IRR(s) .

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

A Project's payback period is determined to be four years.If it is later discovered that additional cash flows will be generated in years five and six,then:

If projects A and B are independent,which of the following is true?