Question 1

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.E) A) and C)
F) None of the above

Question 2

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)  positive.
D)  an integer.E) C) and D)
F) None of the above

Question 3

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.E) A) and B)
F) A) and C)

Question 4

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

Accepted Answer

A)  14.5 percent
B)  18.6 percent
C)  20.2 percent
D)  23.4 percentE) B) and C)
F) A) and C)

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The discounted payback method discounts cash flows at the opportunity cost of capital and then calculates the payback period.

Accepted Answer

A) True 
 B)False

Question 7

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately

Accepted Answer

A)  12 percent of firms.
B)  20 percent of firms.
C)  76 percent of firms.
D)  57 percent of firms.E) A) and B)
F) A) and C)

Question 8

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 percentE) A) and C)
F) B) and D)

Question 9

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

Accepted Answer

A)  The discounted payback measure uses the time value of money concept.
B)  The discounted payback measure is better than the NPV rule.
C)  The discounted payback measure considers all cash flows.
D)  The discounted payback measure exhibits the value additivity property.E) All of the above
F) A) and B)

Question 10

Which of the following investment rules has the value additivity property?

Accepted Answer

A)  The payback period method
B)  The net present value method
C)  The book rate of return method
D)  The internal rate of return methodE) All of the above
F) B) and C)

Question 11

A project's "book value" represents, essentially, the market valuation of the project.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a firm has $100 million in excess cash. It could

Accepted Answer

A)  invest the funds in projects with positive NPVs.
B)  pay high dividends to the shareholders.
C)  buy another firm.
D)  do all of the options.E) C) and D)
F) A) and B)

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.E) B) and C)
F) A) and D)

Question 14

The profitability index is always less than 1.

Accepted Answer

A) True 
 B)False

Question 15

If the sign of the cash flows for a project changes two times, then the project likely has

Accepted Answer

A)  one IRR.
B)  two IRRs.
C)  three IRRs.
D)  four IRRs.E) All of the above
F) A) and B)

Question 16

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 projects is

Accepted Answer

A)  +$100.
B)  +$60.
C)  +$160.
D)  +$6,000.E) A) and D)
F) A) and C)

Question 17

The following table gives the available projects (in $millions) for a firm.

If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

Accepted Answer

A)  200
B)  283
C)  307
D)  347E) None of the above
F) B) and C)

Question 18

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

Accepted Answer

The main advantage of IRR is t...

Question 19

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 millionE) B) and C)
F) A) and B)

Question 20

The profitability index is the ratio of the

Accepted Answer

A)  future value of cash flows to investment.
B)  net present value of cash flows to investment.
C)  net present value of cash flows to IRR.
D)  present value of cash flows to IRR.E) B) and C)
F) None of the above

Exam 5: Net Present Value and Other Investment Criteria

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

Correct AnswerverifiedThe main advantage of IRR is t...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

If the sign of the cash flows for a project changes two times, then the project likely has

Correct AnswerverifiedShow Answer

The payback period rule

Correct AnswerverifiedShow Answer

The profitability index is always less than 1.

Correct AnswerverifiedShow Answer

A project's "book value" represents, essentially, the market valuation of the project.

Correct AnswerverifiedShow Answer

The following table gives the available projects (in $millions) for a firm. If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

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.

Correct AnswerverifiedShow Answer

The discounted payback method discounts cash flows at the opportunity cost of capital and then calculates the payback period.

Correct AnswerverifiedShow Answer

Which of the following investment rules has the value additivity property?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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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 AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The profitability index is the ratio of the

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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 projects is

Correct AnswerverifiedShow Answer

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately

Correct AnswerverifiedShow Answer

Suppose a firm has $100 million in excess cash. It could

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

Correct AnswerverifiedShow Answer

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