Question 1

The benefit-cost ratio is equal to profitability index plus one.

Accepted Answer

A) True 
 B)False

Question 2

If the net present value (NPV)  of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

Accepted Answer

A)   +$100
B)   +$60
C)   +$160
D)   None of the above

Question 3

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project?

Accepted Answer

A)   +$100
B)   -$40
C)   +$70
D)   +$120

Question 4

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Accepted Answer

A) True 
 B)False  False

Question 5

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 6

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Accepted Answer

A)   23%
B)   21%
C)   19%
D)   None of the above

Question 7

Which of the following statements regarding the discounted payback period rule is true?

Accepted Answer

A)   The discounted payback rule uses the time value of money concept.
B)   The discounted payback rule is better than the NPV rule.
C)   The discounted payback rule considers all cash flows.
D)   The discounted payback rule exhibits the value additive property.

Question 8

Which of the following investment rules may not use all possible cash flows in its calculations?

Accepted Answer

A)   NPV
B)   Payback period
C)   IRR
D)   All of the above

Question 9

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 approximately.

Accepted Answer

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

Question 10

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which 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 the firm's joint project as it has a positive NPV
B)   Reject the joint project
C)   Break up the project into its components: accept A and C and reject B
D)   None of the above

Question 11

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Accepted Answer

With the modified internal rate of return method, cash flows from the project are explicitly reinvested at the cost of capital, thus eliminating the reinvestment rate assumption problem. This eliminates the multiple IRR problems inherent in complex projects. Also reinvesting the cash flows from the project at the cost of capital is more realistic. But using NPV method is much better.

Question 12

Story Company is investing in a giant crane. It is expected to cost 6.0 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 NPV at 12% (approximately) .

Accepted Answer

A)   2.4 million
B)   1.2. million
C)   0.80 million
D)   0.20 million

Question 13

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Internal rate of return (IRR)  method is also called:

Accepted Answer

A)   Discounted payback period method
B)   Discounted cash-flow (DCF)  rate of return method
C)   Modified internal rate of return (MIRR)  method
D)   None of the above B

Question 16

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

Accepted Answer

A) True 
 B)False

Question 17

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest?
Project A: Cost = $120, NPV = 80
Project B: Cost = $100, NPV = 75

Accepted Answer

A)   .62
B)   .67
C)   .75
D)   .79

Question 18

Benefit-cost ratio is defined as the ratio of:

Accepted Answer

A)   Net present value cash flow to initial investment
B)   Present value of cash flow to initial investment
C)   Net present value of cash flow to IRR
D)   Present value of cash flow to IRR

Question 19

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Accepted Answer

A)   One year
B)   Two years
C)   Three years
D)   None of the above

Question 20

The payback period rule accepts all projects for which the payback period is:

Accepted Answer

A)   Greater than the cut-off value
B)   Less than the cut-off value
C)   Is positive
D)   An integer

Exam 5: Net Present Value and Other Investment Criteria

The benefit-cost ratio is equal to profitability index plus one.

Correct Answer
verified

If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

Correct Answer
verified

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project?

Correct Answer
verified

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Correct Answer
verified
False

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Correct Answer
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Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Correct Answer
verified

Which of the following statements regarding the discounted payback period rule is true?

Correct Answer
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Which of the following investment rules may not use all possible cash flows in its calculations?

Correct Answer
verified

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 approximately.

Correct Answer
verified

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which 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

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Story Company is investing in a giant crane. It is expected to cost 6.0 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 NPV at 12% (approximately) .

Correct Answer
verified

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Correct Answer
verified

A project will have only one internal rate of return if:

Correct Answer
verified

Internal rate of return (IRR) method is also called:

Correct Answer
verified
B

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

Correct Answer
verified

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest? Project A: Cost = $120, NPV = 80 Project B: Cost = $100, NPV = 75

Correct Answer
verified

Benefit-cost ratio is defined as the ratio of:

Correct Answer
verified

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Correct Answer
verified

The payback period rule accepts all projects for which the payback period is:

Correct Answer
verified

Exam 5: Net Present Value and Other Investment Criteria

The benefit-cost ratio is equal to profitability index plus one.

Correct AnswerverifiedShow Answer

If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

Correct AnswerverifiedShow Answer

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project?

Correct AnswerverifiedShow Answer

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Correct AnswerverifiedFalse

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Correct AnswerverifiedShow Answer

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Correct AnswerverifiedShow Answer

Which of the following statements regarding the discounted payback period rule is true?

Correct AnswerverifiedShow Answer

Which of the following investment rules may not use all possible cash flows in its calculations?

Correct AnswerverifiedShow Answer

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 approximately.

Correct AnswerverifiedShow Answer

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which 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

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Story Company is investing in a giant crane. It is expected to cost 6.0 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 NPV at 12% (approximately) .

Correct AnswerverifiedShow Answer

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Correct AnswerverifiedShow Answer

A project will have only one internal rate of return if:

Correct AnswerverifiedShow Answer

Internal rate of return (IRR) method is also called:

Correct AnswerverifiedB

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

Correct AnswerverifiedShow Answer

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest? Project A: Cost = $120, NPV = 80 Project B: Cost = $100, NPV = 75

Correct AnswerverifiedShow Answer

Benefit-cost ratio is defined as the ratio of:

Correct AnswerverifiedShow Answer

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

Correct AnswerverifiedShow Answer

The payback period rule accepts all projects for which the payback period is:

Correct AnswerverifiedShow Answer

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False

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B

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