Question 1

When mutually exclusive projects have different lives, the project which 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

The answer of When mutually exclusive projects have different lives,...

Question 2

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?
A)NPV = $3,071.01
B)NPV = $20,000
C)IRR = 2.8 percent
D)IRR is greater than 10 percent $50,000 = $14,000

Accepted Answer

The IRR is the discount rate that makes the NPV of cash flows equal to zero. Given the cash inflows of $14,000 per year for five years, the IRR is likely greater than 10 percent, as the total inflow ($70,000) significantly exceeds the initial cost ($50,000).

Question 3

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 present value of cash flows when discounted at 15 percent compared to Project B. The cash flows from Project A come earlier, which means they are less affected by the discount rate compared to the delayed cash flows of Project B.

Question 4

Which of the following best illustrates the problem imposed by capital rationing?
A)Accepting projects with the highest NPVs first
B)Accepting projects with the highest IRRs first
C)Bypassing projects that have positive NPVs
D)Bypassing projects that have positive IRRs

Accepted Answer

Capital rationing refers to situations where a company has limited funds to invest in projects. In such situations, the company may have to choose between potential projects and prioritize them based on their expected returns. If a company decides to bypass projects that have positive NPVs (Net Present Values), it may miss out on profitable investment opportunities. Therefore, bypassing projects with positive NPVs illustrates the problem imposed by capital rationing.

Question 5

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF₀ = ($1,000), CF₁ = $700, CF₂ = $700. A)($308.70) B)($138.00) C)$138.00 D)$308.70 NPV = $700

Accepted Answer

The NPV calculation would be: 
NPV = (-$1,000/(1+0.15)^1) + ($700/(1+0.15)^2) + ($700/(1+0.15)^3) 
NPV = -$869.57 + $540.27 + $449.05 
NPV = -$308.70 
So the best choice is Option C, as it has a positive NPV.

Question 6

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:
A)The rate corresponding to the crossover NPV exceeds the opportunity cost of capital
B)The rate corresponding to the crossover NPV is less than the opportunity cost of capital
C)That IRR exceeds the opportunity cost of capital
D)The NPV is negative when discounted at the IRR

Accepted Answer

The project with the lower IRR should be selected whenever the rate corresponding to the crossover NPV exceeds the opportunity cost of capital. This is because the crossover NPV is the point at which the NPVs of the two projects are equal, and if the rate corresponding to the crossover NPV exceeds the opportunity cost of capital, then the project with the lower IRR will have a higher NPV at the opportunity cost of capital.

Question 7

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 percent 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 NPV = (65,000/.13) - $500,000
NPV = 500,000 - 500,000

Accepted Answer

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

Question 8

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 decision should be based on maximizing the Net Present Value (NPV) today, which considers the time value of money and potential future cash flows.

Question 9

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 payback method to avoid conflicting signals

Accepted Answer

When managers select from among mutually exclusive projects, they should prioritize those with the highest NPV, even if they have a lower rate of return. This is because the NPV takes into account the time value of money and provides a more accurate picture of the project's profitability over its entire lifespan. Choosing a project with a higher rate of return but a lower NPV may result in missed opportunities to create long-term value for the company.

Question 10

Soft capital rationing:
A)is costly to shareholders
B)Is used to determine mutually exclusive projects
C)Should be costless to the shareholders of the firm
D)Solves the problem of investment timing

Accepted Answer

Soft capital rationing refers to a situation where external financing is limited due to internal constraints such as management's reluctance to raise debt or issue new equity. It is a flexible form of capital rationing and is imposed voluntarily by the management to safeguard the financial stability of the firm. As it is an internal constraint, it should not be costly to the shareholders. Hence, option C is the correct choice. Option A is incorrect because soft capital rationing does not involve any direct cost to the shareholders. Option B is not right because the selection of mutually exclusive projects is guided by the means of capital budgeting analysis and not by soft capital rationing. Option D is not true because investment timing requires careful analysis of external factors like market conditions, regulatory environment, and economic outlook, which are beyond the scope of capital rationing decision.

Question 11

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 there are two sign changes in cash flows - from inflows to outflows after three years and from outflows to zero after five years. This creates two possible discount rates at which the project's net present value would equal zero, i.e. two different values for IRR.

Question 12

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 due to the possibility of multiple discount rates leading to different net present values. This is especially true if there are non-conventional cash flows (i.e. multiple sign changes). IRR and profitability index are unique to a project, and there cannot be more than one value for each.

Question 13

If the IRR for a project is 15 percent, then the Project's NPV would be:
A)Negative at a discount rate of 10 percent
B)Positive at a discount rate of 20 percent
C)Negative at a discount rate of 20 percent
D)Positive at a discount rate of 15 percent

Accepted Answer

The NPV is negative at any discount rate higher than the IRR, which is 15% in this case.

Question 14

When projects are mutually exclusive, selection should be made according to the project with the:
A)Longer life
B)Larger initial size
C)Highest IRR
D)Highest NPV

Accepted Answer

The highest NPV should be the deciding factor when choosing between mutually exclusive projects. NPV takes into account the time value of money and provides the total expected value of a project over its entire life, making it a better measure than IRR or initial size. Longer life may not be advantageous if the cash flows are not significant enough, so it is not a definitive criterion.

Question 15

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)Net present value does not equal zero
C)Rate of return exceeds the cost of capital
D)Cash inflows exceed the initial cost

Accepted Answer

The smooth decline in NPV with an increase in the discount rate indicates that the project is profitable, and the rate of return exceeds the cost of capital. This means that the project is creating value for the company and is acceptable. A positive IRR and cash inflows exceeding initial cost are good indicators, but not sufficient on their own as acceptance criteria. Net present value not equaling zero can be either positive or negative, so it is not a sure indicator of project acceptance. Therefore, option C is the best choice.

Question 16

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 only when there are changes in the sign of the cash flows, such as when there is a negative cash flow followed by positive cash flows. Therefore, option D is the correct choice. Options A, B, and C are incorrect as they do not have any impact on the number of internal rates of return.

Question 17

Which of the following is incorrect for a borrowing project?
A)Its NPV graph rises as discount rates increase
B)Its cash flow at time zero is typically an inflow
C)Its NPV is positive
D)it's acceptable if IRR exceeds cost of capital

Accepted Answer

The answer of Which of the following is incorrect for...

Question 18

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10 percent: CF₀ = -6,000, CF₁ = +3,300, CF₂ = +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 19

How many IRRs are possible for the following set of cash flows? CF₀ = -1,000, CF₁ = + 500, CF₂ = -300, CF₃ = + 1,000, CF₄ = + 200. A)1 B)2 C)3 D)4

Accepted Answer

To calculate the number of possible IRRs, we need to count the number of times the cash flow stream changes signs. In this case, we have three sign changes:
- From -1000 to +500 (at year 1)
- From +500 to -300 (at year 2)
- From -300 to +1000 to +200 (at year 3)

Therefore, there are three possible IRRs.

Question 20

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, leading to different project rankings depending on the discount rate used.

Quiz 8: Net Present Value and Other Investment Criteria

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

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

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?

Which of the following best illustrates the problem imposed by capital rationing?

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF₀ = ($1,000) , CF₁ = $700, CF₂ = $700.

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

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 percent in order to be an acceptable investment?

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

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

Soft capital rationing:

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) .

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

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

When projects are mutually exclusive, selection should be made according to the project with the:

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

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

Which of the following is incorrect for a borrowing project?

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10 percent: CF₀ = -6,000, CF₁ = +3,300, CF₂ = +3,300.

How many IRRs are possible for the following set of cash flows? CF₀ = -1,000, CF₁ = + 500, CF₂ = -300, CF₃ = + 1,000, CF₄ = + 200.

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