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Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

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Question 61

Multiple Choice

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A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years.At what rate is the NPV equal to zero?

A) 30.10 percent
B) 29.83 percent
C) 22.47 percent
D) 31.38 percent

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Question 62

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Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

A) Payback
B) Discounted payback
C) Net present value
D) Profitability index

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Question 63

Multiple Choice

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Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

All of the following are strengths of NPV EXCEPT:

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J

Suppose your firm is considering two mutually exclusive,required projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 8 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and three years,respectively. Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively. Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

The least-used capital budgeting technique in industry is:

We accept projects with a positive NPV because it means that:

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years.What is the IRR of this financial asset?

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects,one would choose:

Suppose your firm is considering two mutually exclusive,required projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 10 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years,respectively. Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 10 percent,and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years,respectively.Use the MIRR decision to evaluate this project; should it be accepted or rejected?