Deck 9: Net Present Value and Other Investment Criteria

Question 1

If a project has a net present value equal to zero, then the present value of the cash inflows exceeds the initial cost of the project.

Answer 1

False

Question 2

Net present value is affected by the timing of each and every cash flow related to a project.

Answer 2

True

Question 3

Determining whether to sell bonds or issue stock is a capital budgeting decision.

Answer 3

False

Question 4

NPV lets you know in today's dollars how much better off or worse off you will be if you accept a project.

Question 5

A project which has a discounted payback period longer than its life also has a positive NPV.

Question 6

A payback period that is less than the required period signals an accept decision.

Question 7

The NPV method quickly determines the discount rate that changes an accept decision into a reject decision and vice versa.

Question 8

The advantages of the payback method of project analysis include the bias towards arbitrary cutoff point.

Question 9

The advantages of the payback method of project analysis include the application of a discount rate to each separate cash flow.

Question 10

An increased availability of computers and financial calculators to handle the more complex computations may have contributed to the change in the primary methods used by chief financial officers to evaluate projects over the past forty years.

Question 11

Net present value is the preferred method of analyzing a project even though the cash flows are only estimates.

Question 12

The payback calculation takes the time value of money into account.

Question 13

If a project has a net present value equal to zero, then any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Question 14

Deciding which product markets to enter is a capital budgeting decision.

Question 15

Net present value is highly independent of the rate of return assigned to a particular project.

Question 16

An increasing emphasis by financial executives on accounting values rather than financial values may have contributed to the change in the primary methods used by chief financial officers to evaluate projects over the past forty years.

Question 17

In actual practice, managers frequently use the payback because of its simplicity.

Question 18

The capital budgeting process addresses what products or services are offered or sold, in what markets to compete, and what new products to introduce.

Question 19

The advantages of the payback method of project analysis include the bias towards liquidity.

Question 20

If a project has a net present value equal to zero, then the project is expected to produce only the minimally required cash inflows.

Question 21

Two projects that are mutually exclusive are said to be independent.

Question 22

The average accounting return could lead to incorrect decisions when comparing mutually exclusive investments.

Question 23

A project is accepted if the target AAR exceeds the project AAR.

Question 24

In actual practice, managers frequently use the AAR because the information is so readily available.

Question 25

The payback period and discounted payback are biased in favour of liquid investments.

Question 26

When comparing the payback and discounted payback, the discounted payback is more difficult to compute and thus is not as widely used as the payback method.

Question 27

For most projects, the average accounting return (AAR) should be less than the IRR.

Question 28

A disadvantage with the average accounting return is the difficulty in obtaining necessary information to do computation.

Question 29

Lack of consideration of the time value of money is a weakness of the average accounting return method of analysis.

Question 30

IRR uses an arbitrary cutoff number in its decision rule.

Question 31

The average accounting return calculation takes the time value of money into account.

Question 32

The AAR is based on cash flows and market values.

Question 33

When comparing the payback and discounted payback, both methods are biased towards liquidity.

Question 34

A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.

Question 35

When comparing the payback and discounted payback from a financial point of view, the discounted payback method is preferred over the payback method.

Question 36

AAR is biased in favour of liquid investments.

Question 37

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the profitability index will be greater than 1.0.

Question 38

A disadvantage with the average accounting return is the exclusion of time value of money considerations.

Question 39

A disadvantage with the average accounting return is the accounting basis of the values used in the computation.

Question 40

Average accounting return employs some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project.

Question 41

The IRR is the most widely used capital budgeting technique.

Question 42

The internal rate of return (IRR) is the rate that causes the net present value of a project to exactly equal zero.

Question 43

NPV and IRR can lead to different decisions in situations investment decision involves mutually exclusive choices.

Question 44

The internal rate of return (IRR) rule states that a project with an IRR that is less than the required rate should be accepted.

Question 45

The internal rate of return (IRR) is the rate generated solely by the cash flows of an investment.

Question 46

The internal rate of return method of analysis works best for independent projects with conventional cash flows.

Question 47

The internal rate of return method of analysis should not be used to analyze projects with conventional cash flows.

Question 48

An element of the IRR concept is the rate designated as the minimum acceptable rate for a project to be accepted

Question 49

When multiple IRR's exist, a project must have a negative NPV at the highest IRR.

Question 50

The internal rate of return method of analysis is generally more popular in practice than NPV.

Question 51

The internal rate of return method of analysis should not be used for comparing two mutually exclusive projects of similar size.

Question 52

The crossover point occurs where the IRR of two projects are equal.

Question 53

The internal rate of return method of analysis may lead to incorrect decisions when comparing mutually exclusive projects.

Question 54

NPV and IRR can lead to different decisions in situations where project cash flow are conventional.

Question 55

The initial cost of an investment is not an element in computing the internal rate of return method.

Question 56

The internal rate of return method of analysis may produce multiple rates of return for a single project.

Question 57

The internal rate of return method of analysis should not be used for comparing two independent projects of differing sizes.

Question 58

Tim is considering two projects, both of which have an initial cost of $12,000 and total cash inflows of $15,000. The cash inflows of project A are $1,000, $2,000, $4,000, and $8,000 over the next four years, respectively. The cash inflows for project B are $8,000, $4,000, $2,000 and $1,000 over the next four years, respectively. Which one of the following statements is correct if Tim requires a 10 % rate of return and has a required discounted payback period of 3 years? Given this information, Tim should accept project A because it has a payback period of 2.65 years.

Question 59

In actual practice, managers frequently use the IRR because the results are easy to communicate and understand.

Question 60

NPV and IRR can lead to different decisions in situations where the IRR is negative.

Question 61

The profitability index calculation takes the time value of money into account.

Question 62

The use of the profitability index could lead to incorrect decisions in comparing mutually exclusive investments.

Question 63

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the project will have a negative net present value.

Question 64

AAR and payback use an arbitrary cutoff number in their decision rules.

Question 65

Projects should be accepted when the profitability index is less than 1.

Question 66

You are considering a project that costs $300 and has expected cash flows of $110, $121, and $133.10 over the next three years. If the appropriate discount rate for the project's cash flows is 10%, what is the net present value of this project?

A) ($8.58)
B) $0.00
C) $0.71
D) $19.79
E) $64.10

Question 67

A project costs $12,500 to initiate. Cash flows are estimated as $2,500 a year for the first two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for this project is _____ and the internal rate of return is _________ the discount rate.

A) -$2,138.52; more than
B) -$2,138.52; less than
C) $1,800.00; more than
D) $1,800.00; less than
E) $2,138.52; less than

Question 68

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6%%. This implies that you should always accept project A anytime the discount rate is less than 9%%.

Question 69

Profitability index employs some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project.

Question 70

A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the NPV of the project.

A) $0.50 million
B) $0.70 million
C) $0.87 million
D) $1.00 million
E) $1.10 million

Question 71

Calculate the NPV of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

A) ($33,547)
B) ($18,547)
C) $0
D) $18,547
E) $33,547

Question 72

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6 %. This implies that you should always accept project A and always reject project
B.

Question 73

The use of either the internal rate of return or the profitability index could lead to incorrect decisions when comparing mutually exclusive investments.

Question 74

In actual practice, managers frequently use the net present value because it is considered by many to be the best method of analysis.

Question 75

If financial managers only invest in projects that have a profitability index greater than one, then firm value will be maximized.

Question 76

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6 %. This implies that you should always reject project B if the required return is 6 %.

Question 77

The IRR method can produce multiple rates of return if the cash flows are nonconventional.

Question 78

If financial managers only invest in projects that have a profitability index greater than one, then share price will be maximized.

Question 79

If financial managers only invest in projects that have a profitability index greater than one, then shareholder wealth will be maximized.

Question 80

The use of the internal rate of return could lead to incorrect decisions in comparing mutually exclusive investments.