Deck 8: Net Present Value and Other Investment Criteria

Question 1

When the NPV of an investment is positive, then the IRR will be:

A)Equal to the opportunity cost of capital
B)Greater than the opportunity cost of capital
C)less than the opportunity cost of capital
D)Less than or equal to the opportunity cost of capital

Answer 1

Greater than the opportunity cost of capital

Question 2

If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10 percent, then the:

A)Project's IRR equals 10 percent
B)Project's internal rate of return is greater than 10 percent
C)Net present value of the cash inflows is $4,500
D)Project's cash inflows total $25,000

Answer 2

Project's internal rate of return is greater than 10 percent

Question 3

Which of the following can be deduced about a three-year investment project that has a two-year payback period?

A)The NPV is positive
B)The IRR is greater than the cost of capital
C)Both 'a' and 'b' can be deduced
D)Neither 'a' nor 'b' can be deduced

Answer 3

Neither 'a' nor 'b' can be deduced

Question 4

Which of the following statements is correct for a project with a positive NPV?

A)IRR exceeds the cost of capital
B)Accepting the project has an indeterminate effect on shareholders
C)The discount rate exceeds the cost of capital
D)The profitability index equals one

Question 5

One method that can be used to increase the NPV of a project is to decrease the:

A)Project's payback
B)Project's cost of capital
C)Time until receipt of cash inflows
D)Number of project IRRs

Question 6

If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n):

A)Positive NPV
B)Negative NPV
C)Acceptable payback period
D)Positive profitability index

Question 7

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?

A)$33,520
B)$56,860
C)$62,540
D)$75,000 PV = $15,000

Question 8

When a Project's internal rate of return equals its opportunity cost of capital, then:

A)The project should be rejected
B)The project has no cash inflows
C)The net present value will be positive
D)The net present value will be zero

Question 9

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

A)$3,397.57
B)$4,473.44
C)$16,100.00
D)$35,000.00 NPV = PV of inflows - required investment
= $45,000

Question 10

Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects:

A)With short lives
B)With long lives
C)With early cash inflows
D)That have negative NPVs

Question 11

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9 percent?

A)$101,251.79
B)$109,200.00
C)$117,871.97
D)$130,800.00 0 = $40,000

Question 12

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

A)0.57 percent
B)2.00 percent
C)5.69 percent
D)56.87 percent $100,000 = $17,000

Question 13

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12 percent for each project.

A)"A" has a small, but negative, NPV
B)"B" has a positive NPV when discounted at 10 percent
C)"C's" cost of capital exceeds its rate of return
D)"D" has a zero NPV when discounted at 14 percent

Question 14

Which of the following changes will increase the NPV of a project?

A)A decrease in the discount rate
B)A decrease in the size of the cash inflows
C)An increase in the initial cost of the project
D)A decrease in the number of cash inflows

Question 15

The decision rule for net present value is to:

A)Accept all projects with cash inflows exceeding initial cost
B)Reject all projects with rates of return exceeding the opportunity cost of capital
C)Accept all projects with positive net present values
D)Reject all projects lasting longer than 10 years

Question 16

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for six years?

A)19.9 percent
B)30.0 percent
C)32.3 percent
D)80.0 percent $100,000 = $30,000

Question 17

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

A)Project's initial cost
B)Project's NPV
C)Project's discounted cash flows
D)Soft capital rationing budget

Question 18

A Project's opportunity cost of capital is:

A)The forgone return from investing in the project
B)The return earned by investing in the project
C)Equal to the average return on all company projects
D)Designed to be less than the Project's IRR

Question 19

What should occur when a Project's net present value is determined to be negative?

A)The discount rate should be decreased
B)The profitability index should be calculated
C)The present value of the project cost should be determined
D)The project should be rejected

Question 20

As the discount rate is increased, the NPV of a specific project will:

A)Increase
B)Decrease
C)Remain constant
D)Decrease to zero, and then remain constant

Question 21

When mutually exclusive projects have different lives, the project which should be selected will have the:

A)Highest IRR
B)Longest life
C)Lowest equivalent annual cost
D)Highest NPV, discounted at the opportunity cost of capital

Question 22

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

A)NPV = $3,071.01
B)NPV = $20,000
C)IRR = 2.8 percent
D)IRR is greater than 10 percent $50,000 = $14,000

Question 23

Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15 percent; Project A with three annual cash flows of $1,000, or Project B, with three years of zero cash flow followed by three years of $1,500 annually?

A)Project A
B)Project B
C)You are indifferent since the NPVs are equal
D)Neither project should be selected

Question 24

Which of the following best illustrates the problem imposed by capital rationing?

A)Accepting projects with the highest NPVs first
B)Accepting projects with the highest IRRs first
C)Bypassing projects that have positive NPVs
D)Bypassing projects that have positive IRRs

Question 25

What is the NPV for the following project cash flows at a discount rate of 15 percent? CF₀ = ($1,000), CF₁ = $700, CF₂ = $700.

A)($308.70)
B)($138.00)
C)$138.00
D)$308.70 NPV = $700

Question 26

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

A)The rate corresponding to the crossover NPV exceeds the opportunity cost of capital
B)The rate corresponding to the crossover NPV is less than the opportunity cost of capital
C)That IRR exceeds the opportunity cost of capital
D)The NPV is negative when discounted at the IRR

Question 27

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

A)8.69 years
B)14.00 years
C)27.51 years
D)An infinite number of years NPV = (65,000/.13) - $500,000
NPV = 500,000 - 500,000

Question 28

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

A)Postpone until costs reach their lowest
B)Invest now to maximize the NPV
C)Postpone until the opportunity cost reaches its lowest
D)Invest at the date that gives the highest NPV today

Question 29

When managers select correctly from among mutually exclusive projects, they:

A)May give up rate of return for NPV
B)May give up NPV for rate of return
C)Have a tendency to select the largest project
D)Focus on payback method to avoid conflicting signals

Question 30

Soft capital rationing:

A)is costly to shareholders
B)Is used to determine mutually exclusive projects
C)Should be costless to the shareholders of the firm
D)Solves the problem of investment timing

Question 31

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years.At most, this project has ______ different IRR(s).

A)One
B)Two
C)three
D)five

Question 32

Given a particular set of project cash flows, which of the following statements is correct?

A)There can be only one NPV for the project
B)There can be only one IRR for the project
C)There can be more than one NPV for the project
D)There can be only one profitability index for the project

Question 33

If the IRR for a project is 15 percent, then the Project's NPV would be:

A)Negative at a discount rate of 10 percent
B)Positive at a discount rate of 20 percent
C)Negative at a discount rate of 20 percent
D)Positive at a discount rate of 15 percent

Question 34

When projects are mutually exclusive, selection should be made according to the project with the:

A)Longer life
B)Larger initial size
C)Highest IRR
D)Highest NPV

Question 35

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

A)Internal rate of return is positive
B)Net present value does not equal zero
C)Rate of return exceeds the cost of capital
D)Cash inflows exceed the initial cost

Question 36

A project can have as many different internal rates of return as it has:

A)Cash inflows
B)Cash outflows
C)Periods of cash flow
D)Changes in the sign of the cash flows

Question 37

Which of the following is incorrect for a borrowing project?

A)Its NPV graph rises as discount rates increase
B)Its cash flow at time zero is typically an inflow
C)Its NPV is positive
D)it's acceptable if IRR exceeds cost of capital

Question 38

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10 percent: CF₀ = -6,000, CF₁ = +3,300, CF₂ = +3,300.

A)Accept, since IRR exceeds opportunity cost
B)Reject, since opportunity cost exceeds IRR
C)Accept, since opportunity cost exceeds IRR
D)Reject, since IRR exceeds opportunity cost

Question 39

How many IRRs are possible for the following set of cash flows? CF₀ = -1,000, CF₁ = + 500, CF₂ = -300, CF₃ = + 1,000, CF₄ = + 200.

A)1
B)2
C)3
D)4

Question 40

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

A)The NPVs of these projects cross over at some discount rate
B)Discounted cash flow is not considered with mutually exclusive projects
C)IRR performs better with accounting returns than with cash flows
D)Mutually exclusive projects have multiple IRRs

Question 41

The use of a profitability index will always provide results consistent with selecting the project with the:

A)Highest NPV
B)Highest IRR
C)Largest dollar invested per rate of return
D)Largest return per dollar invested

Question 42

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources.

A)Internal; external
B)Internal; internal
C)External; internal
D)External; external

Question 43

What is the minimum cash flow that could be received at the end of year three to make the following project "acceptable?" Initial cost = $100,000; cash flows at end of years one and two = $35,000; opportunity cost of capital = 10 percent.

A)$29,494
B)$30,000
C)$39,256
D)$52,250 NPV = 35,000

Question 44

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years, how much did the project cost?

A)$44,617
B)$52,200
C)$60,000
D)$72,747 PV = 15,000

Question 45

The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:

A)0.139
B)0.320
C)0.500
D)0.861 PV = 15,000

Question 46

When hard capital rationing exists, projects may be accurately evaluated by use of:

A)Payback period
B)Mutually exclusive IRRs
C)A profitability index
D)Borrowing, rather than lending, projects

Question 47

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

A)Internal rate of return
B)Opportunity cost of capital
C)risk-free interest rate
D)Accounting rate of return

Question 48

When calculating a Project's payback period, cash flows are discounted at:

A)The opportunity cost of capital
B)The internal rate of return
C)The risk-free rate of return
D)A discount rate of zero

Question 49

Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15 percent?

A)Its payback period is roughly 3 1/2 years
B)Its NPV is $2,194
C)Its IRR is 1.85 percent
D)Its profitability index is 0.109

Question 50

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for five years?

A)The NPV is negative
B)The NPV is zero
C)The profitability index is 1.0
D)The IRR is zero

Question 51

A Project's payback period is determined to be four years.If it is later discovered that additional cash flows will be generated in years five and six, then:

A)The Project's payback period will be reduced
B)The Project's payback period will be increased
C)The Project's payback period will be unchanged
D)The discount rate must be known to determine whether the payback period changes

Question 52

Borrowing and lending projects usually can be distinguished by whether:

A)They have positive or negative IRRs
B)The time-zero cash flow is positive or negative
C)Their IRR increases as the discount rate increases
D)Their rate of return is high or low

Question 53

Use of a profitability index to select projects in the absence of capital rationing:

A)Will provide the same rankings as an NPV criterion
B)Will maximize NPV, but not IRR
C)Can result in misguided selections
D)is technically impossible

Question 54

The investment timing decision is aimed at analyzing whether the:

A)Cash flows occur at the beginning or end of a year
B)Payback period or NPV analysis should be used
C)Project is a borrowing or lending project
D)Investment should occur now or at some future point

Question 55

If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:

A)The profitability index to exceed 1.0
B)The opportunity cost of capital to be too low
C)The IRR to exceed the opportunity cost of capital
D)The NPV to be zero

Question 56

If two projects offer the same, positive NPV, then:

A)They also have the same IRR
B)They have the same payback period
C)They are mutually exclusive projects
D)They add the same amount to the value of the firm

Question 57

The opportunity cost of capital is equal to:

A)The discount rate that makes project NPV equal zero
B)The return offered by other projects of equal risk
C)A Project's internal rate of return
D)The average rate of return for a firm's projects

Question 58

If a project has a cost of $50,000 and a profitability index of 0.4, then:

A)Its cash inflows are $70,000
B)The present value of its cash inflows is $30,000
C)Its IRR is 20 percent
D)Its NPV is $20,000

Question 59

A project with an IRR that is less than the opportunity cost of capital should be:

A)Accepted for all project types
B)Accepted for all lending projects
C)Accepted for all borrowing projects
D)Rejected for all projects

Question 60

In order for a manager to correctly decide to postpone an investment until one year into the future, the NPV of the investment should:

A)Grow more rapidly than the IRR
B)Grow more rapidly than the cost of capital
C)Not decrease
D)Remain stable

Question 61

A project has a payback period of five years and the firm employs a 10 percent cost of capital.Which of the following statements is correct concerning this Project's discounted payback?

A)Discounted payback will exceed five years
B)Discounted payback will be less than five years
C)Discounted payback will decrease if the Project's IRR exceeds 10 percent
D)Discounted payback will increase if the Project's IRR is less than 10 percent

Question 62

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:

A)Equal to $50
B)less than 0 if the discount rate is less than 5 percent
C)Zero if the discount rate is equal to 5 percent
D)Positive if the discount rate is greater than 5 percent

Question 63

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

A)It increases
B)It decreases
C)It is not affected
D)It depends on whether or not the projects are mutually exclusive

Question 64

Because of its age, your car costs $4,000 annually in maintenance expense.You could replace it with a newer vehicle costing $8,000.Both vehicles would be expected to last four more years.If your opportunity cost is 8 percent, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

A)$1,250
B)$1,585
C)$2,000
D)$2,415 8,000 = Annuity

Question 65

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

A)Select the lowest IRR to be conservative
B)Select the highest IRR to maximize the benefits
C)Any or all of the IRRs are justified to use
D)Evaluate the project according to NPV

Question 66

Suppose project A has an IRR of 10 percent and project B has an IRR of 20 percent.One can then conclude that:

A)Project A is preferred to B
B)Project A has a negative NPV while project B has a positive NPV
C)Project B has a negative NPV while project A has a positive NPV
D)It is impossible to rank the two projects without further information

Question 67

The appropriate discount rate for a firm is:

A)The bank rate
B)Its opportunity cost of capital
C)The prime rate
D)Its depreciation rate

Question 68

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

A)33.33%
B)40.00%
C)66.67%
D)80.00%

Question 69

If the NPV of a project is greater than 0, then its profitability index is:

A)Greater than 1
B)Greater than 0
C)Less than 1
D)None of these

Question 70

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent, you should:

A)Buy the new machine and save $600 in equivalent annual costs
B)Buy the new machine and save $388 in equivalent annual costs
C)Keep the old machine and save $388 in equivalent annual costs
D)Keep the old machine and save $580 in equivalent annual costs $12,000 + $5,000

Question 71

A firm considers a project with the following cash flows: time-zero = +20,000, years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10 percent?

A)Yes, the IRR of the project is 4.06 percent
B)Yes, the IRR of the project is 12.5 percent
C)No, the IRR of the project is 4.06 percent
D)No, the IRR of the project is 12.5 percent

Question 72

Which of the following investment criteria takes the time value of money into consideration?

A)Payback period
B)Profitability index
C)Internal rate of return for borrowing projects
D)Payback period, profitability index and IRR

Question 73

The NPV of an investment made today is $10,000.If postponed for one year, the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

A)Postpone; the NPV increases by a positive amount
B)Postpone; the NPV will be larger
C)Invest now; NPV does not grow at a sufficient rate
D)Invest now; always accept positive NPV projects

Question 74

Project A has an IRR of 20 percent while Project B has an IRR of 30 percent.Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects?

A)Project A is more risky
B)Project A requires a smaller initial investment
C)Project A requires a larger initial investment
D)Project A requires cash outflows in the final period

Question 75

The acceptance of an investment project implies that: 1.Its IRR is greater than 15 percent
2)Its NPV is greater than its IRR
3)Its NPV is greater than 0

A)1
B)2
C)3
D)Both 2 and 3

Question 76

A firm uses the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed, which project should be selected?

A)Select the project with the higher profitability index
B)Select the project with the lower profitability index
C)Without capital rationing, both projects can be selected
D)Without capital rationing, select by NPV method

Question 77

The "gold standard" of investment criteria refers to:

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

Question 78

A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.

A)$2,000
B)$9,607
C)$14,411
D)$24,018 NPV = 6,000

Question 79

If projects A and B are independent, which of the following is true?

A)Value (A + B) > value (A) + value (B)
B)Value (A + B) < value (A) + value (B)
C)Value (A + B) = value (A) + value (B)
D)Value (A + B) - value (B) > value (A)

Question 80

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10 percent?

A)$20,000.00
B)$21,356.95
C)$22,618.83
D)$25,237.66 NPV = 40,000 + 10,000