Question 1

The payback rule ignores all cash flows after the cut-off date.

Accepted Answer

A) True 
 B)False

Question 2

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 percent and if the cost of capital is 18 percent, you would

Accepted Answer

A)  accept the project.
B)  reject the project.

Question 3

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Accepted Answer

A)  +$30.
B)  -$60.
C)  -$30.
D)  -$1,800. C

Question 4

Soft rationing may be used to control managerial behavior.

Accepted Answer

A) True 
 B)False

Question 5

Mass Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year cash flow of $3 million each year for three years.At the end of the fourth year, there will be a $1 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12 percent.

Accepted Answer

A)  17.8 percent
B)  15.3 percent
C)  23.8 percent
D)  22.1 percent

Question 6

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

Accepted Answer

A)  $2.40 million
B)  $1.20 million
C)  $0.80 million
D)  $0.20 million

Question 7

Which investment analysis technique is used the least by CFOs?

Accepted Answer

A)  Net present value
B)  Internal rate of return
C)  Payback
D)  Book rate of return D

Question 8

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?

Accepted Answer

A)  Accept project X as it has a positive NPV.
B)  Reject project X.
C)  Break up the project into its components: Accept A and C, but reject B.
D)  Break up the project into its components: Accept C.

Question 9

Briefly explain the value additivity property.

Accepted Answer

For example, the net present value (NPV) of a combined project-say A and B--is equal to the NPV(A) plus the NPV(B). Naturally, this property holds for present values also. This property is not shared by IRR. The IRR of a combined project does not equal the sum of the individual IRRs. The value additivity property is very useful when making comparative decisions among numerous projects.

Question 10

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.

Accepted Answer

A)  14.6 percent
B)  16.4 percent
C)  18.2 percent
D)  22.1 percent

Question 11

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Accepted Answer

A)  1 year
B)  2 years
C)  3 years
D)  >3 years

Question 12

Which of the following investment rules does not use the time value of money concept?

Accepted Answer

A)  Net present value
B)  Internal rate of return
C)  The payback period
D)  Profitability index

Question 13

How does modified internal rate of return (MIRR)  differ from IRR?

Accepted Answer

A)  MIRR does not consider cash flows occurring after the cut-off date.
B)  MIRR uses NPV, IRR does not.
C)  MIRR calculates the PV of cash inflows and then divides by the PV of the investment.
D)  MIRR reduces the number of sign changes in a cash flow sequence.

Question 14

The following are disadvantages of using the payback rule except the rule

Accepted Answer

A)  ignores all cash flow after the cut-off date.
B)  does not use the time value of money.
C)  is easy to calculate and use.
D)  does not have the value additivity property.

Question 15

A project will have only one internal rate of return if

Accepted Answer

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.

Question 16

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

Accepted Answer

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.

Question 17

What are some of the disadvantages of using the IRR method?

Accepted Answer

There are several disadvantages to the I...

Question 18

A project's internal rate of return depends on its level of risk.

Accepted Answer

A) True 
 B)False

Question 19

Present values have the value additivity property.

Accepted Answer

A) True 
 B)False

Question 20

The payback period rule

Accepted Answer

A)  varies the cut-off point with the interest rate.
B)  determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule.
C)  requires an arbitrary choice of a cut-off point.
D)  varies the cut-off point with the interest rate and requires an arbitrary choice of a cut-off point.

Exam 5: Net Present Value and Other Investment Criteria

The payback rule ignores all cash flows after the cut-off date.

Correct Answer
verified

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 percent and if the cost of capital is 18 percent, you would

Correct Answer
verified

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Correct Answer
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C

Soft rationing may be used to control managerial behavior.

Correct Answer
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Correct Answer
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Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

Correct Answer
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Which investment analysis technique is used the least by CFOs?

Correct Answer
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D

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?

Correct Answer
verified

Briefly explain the value additivity property.

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.

Correct Answer
verified

If the cash flows for project Z are C₀ = -1,000; C₁ = 600; C₂ = 720; and C₃ = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Correct Answer
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Which of the following investment rules does not use the time value of money concept?

Correct Answer
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How does modified internal rate of return (MIRR) differ from IRR?

Correct Answer
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The following are disadvantages of using the payback rule except the rule

Correct Answer
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A project will have only one internal rate of return if

Correct Answer
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The following are some of the shortcomings of the IRR method except

Correct Answer
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What are some of the disadvantages of using the IRR method?

Correct Answer
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There are several disadvantages to the I...
View Answer

A project's internal rate of return depends on its level of risk.

Correct Answer
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Present values have the value additivity property.

Correct Answer
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The payback period rule

Correct Answer
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Exam 5: Net Present Value and Other Investment Criteria

The payback rule ignores all cash flows after the cut-off date.

Correct AnswerverifiedShow Answer

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 percent and if the cost of capital is 18 percent, you would

Correct AnswerverifiedShow Answer

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Correct AnswerverifiedC

Soft rationing may be used to control managerial behavior.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Story Company is investing in a giant crane.It is expected to cost $6 million in initial investment, and it is expected to generate an end-of-year after-tax cash flow of $3 million each year for three years.Calculate the NPV at 12 percent.

Correct AnswerverifiedShow Answer

Which investment analysis technique is used the least by CFOs?

Correct AnswerverifiedD

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively.How would you go about making the decision about whether to accept or reject the project?

Correct AnswerverifiedShow Answer

Briefly explain the value additivity property.

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.

Correct AnswerverifiedShow Answer

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Correct AnswerverifiedShow Answer

Which of the following investment rules does not use the time value of money concept?

Correct AnswerverifiedShow Answer

How does modified internal rate of return (MIRR) differ from IRR?

Correct AnswerverifiedShow Answer

The following are disadvantages of using the payback rule except the rule

Correct AnswerverifiedShow Answer

A project will have only one internal rate of return if

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What are some of the disadvantages of using the IRR method?

Correct AnswerverifiedThere are several disadvantages to the I...View AnswerShow Answer

A project's internal rate of return depends on its level of risk.

Correct AnswerverifiedShow Answer

Present values have the value additivity property.

Correct AnswerverifiedShow Answer

The payback period rule

Correct AnswerverifiedShow Answer

Correct Answer
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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 percent and if the cost of capital is 18 percent, you would

Correct Answer
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C

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D

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If the cash flows for project Z are C₀ = -1,000; C₁ = 600; C₂ = 720; and C₃ = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Correct Answer
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There are several disadvantages to the I...
View Answer

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