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

Question 1

Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable payback is 5 years.

A) 3.67 years, accept
B) 4.67 years, accept
C) 3.67 years, reject
D) 4.67 years, reject

Answer 1

3.67 years, accept

Question 2

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

A) discounted payback
B) net present value
C) internal rate of return
D) profitability index

Answer 2

internal rate of return

Question 3

These are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive.

A) expected cash flows
B) time line cash flows
C) non-normal cash flows
D) normal cash flows

Answer 3

normal cash flows

Question 4

This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors.

A) payback
B) internal rate of return.
C) net present value
D) profitability index

Question 5

A graph of a project's ______ is a function of cost of capital.

A) discounted payback
B) net present value
C) modified internal rate of return
D) profitability index

Question 6

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

A) payback period
B) discounted payback period
C) modified internal rate of return
D) net present value

Question 7

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

A) Internal Rate of Return, IRR
B) Modified Internal Rate of Return, MIRR
C) Profitability Index, PI
D) Net Present Value, NPV

Question 8

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

A) either project if they both are more than managers' maximum payback period.
B) neither project if they both are less than managers' maximum payback period.
C) the project that pays back the soonest.
D) the project that pays back the soonest if it is equal to or less than managers' maximum payback period.

Question 9

The benchmark for the Profitability Index, PI, is the

A) cost of capital
B) managers' maximum number of years
C) zero or anything larger than zero
D) zero or anything less than zero

Question 10

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

A) time value of money.
B) market rates of return.
C) cash flows that occur after payback.
D) cash flows that occur during payback.

Question 11

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project.

A) payback
B) internal rate of return
C) net present value
D) profitability index

Question 12

This technique for evaluating capital projects 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

Question 13

A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule.

A) discounted payback
B) net present value
C) modified internal rate of return
D) profitability index

Question 14

Compute the NPV for Project X and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

A) $12.93
B) $14.22
C) $62.07
D) $136.90

Question 15

These are groups or pairs of projects where you can accept one but not all.

A) dependent
B) independent
C) mutually exclusive
D) mutually dependent

Question 16

Compute the NPV for Project X and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent.

A) $-639.96
B) $360.04
C) $392.44
D) $486.29

Question 17

All capital budgeting techniques

A) render the same investment decision.
B) use the same measurement units.
C) include all crucial information.
D) exclude some crucial information.

Question 18

The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing

A) time or resource constraints.
B) a labor union.
C) the election of a new board of directors.
D) a major investment.

Question 19

The Net Present Value decision technique uses a statistic denominated in

A) years.
B) currency.
C) a percentage.
D) time lines.

Question 20

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows.

A) discounted payback
B) net present value
C) internal rate of return
D) profitability index

Question 21

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years.

A) 2.49 years, accept
B) 2.98 years, accept
C) 3.49 years, reject
D) 4.98 years, reject

Question 22

Use the IRR decision rule to evaluate this project; should it be accepted or rejected?

A) -4.95%, reject
B) 4.95%, accept
C) -23.18%, reject
D) 23.18%, accept

Question 23

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A) -10.60%, reject
B) 10.60%, accept
C) -15.33%, reject
D) 15.33%, accept

Question 24

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

A) 2.45 years, accept
B) 2.83 years, accept
C) 3.45 years, accept
D) 3.83 years, reject

Question 25

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

A) 1.77 years, reject
B) 1.94 years, accept
C) 2.06 years, accept
D) 3.00 years, reject

Question 26

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

A) .23 years, accept
B) 1.77 years, accept
C) 2 years, accept
D) 4.33 years, reject

Question 27

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

A) -.0977%, reject
B) -9.77%, reject
C) -24.41%, reject
D) 24.41%, accept

Question 28

Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent and the maximum allowable payback is 4 years.

A) 3.4375 years, accept
B) 3.78 years, reject
C) 4.4375 years, reject
D) 4.78 years, accept

Question 29

Use the PI decision rule to evaluate this project; should it be accepted or rejected?

A) -.39%, reject
B) .39%, accept
C) -38.88%, reject
D) 38.88%, accept

Question 30

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

A) $9,704.31, reject
B) $84,140.71, accept
C) $134,704.31, accept
D) $150,868.83, accept

Question 31

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

A) 10%, accept
B) 10%, reject
C) 13.26%, accept
D) 13.26%, reject

Question 32

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

A) 1.23 years, accept
B) 2.45 years, accept
C) 2.77 years, accept
D) 5.36 years, reject

Question 33

Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years.

A) 1.25 years, reject
B) 1.25 years, accept
C) 1.33 years, accept
D) 2.25 years, accept

Question 34

Compute the IRR for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent.

A) 9%, accept
B) 9%, reject
C) 16.61%, accept
D) 16.61%, reject

Question 35

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

A) $35,995.86, reject
B) $38,875.53, accept
C) $138,875.53, accept
D) $238,875.53, accept

Question 36

Compute the Discounted Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is 3 years.

A) 3.45 years, reject
B) 3.86 years, reject
C) 3.45 years, accept
D) 3.86 years, accept

Question 37

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

A) 7.62%, accept
B) 7.62%, reject
C) 47.09%, accept
D) 47.09%, reject

Question 38

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A) 12.00%, reject
B) 31.21%, accept
C) 54.22%, accept
D) 80.67%, accept

Question 39

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

A) 10%, reject
B) 14.22%, accept
C) 13.26%, accept
D) 18.96%, accept

Question 40

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

A) 13.26%, accept
B) 13.89%, accept
C) 13.26%, reject
D) 15.73%, accept

Question 41

Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 42

Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 43

Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 44

Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 45

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 46

Use the PI decision rule to evaluate this project; should it be accepted or rejected?

A) -1.21%, reject
B) 1.08%, accept
C) 1.21%, accept
D) 121%, accept

Question 47

Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 48

Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 49

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 50

Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 51

Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 52

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 53

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent. Project Y

A) $894.37
B) $993.97
C) $964.72
D) $1,008.03

Question 54

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 55

Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 56

Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 57

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 58

Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 59

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 60

Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B

Question 61

Compute the MIRR statistic for Project I and note whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 15 percent. Project I

A) The project's MIRR is 10.29% and the project should be rejected.
B) The project's MIRR is 12.67% and the project should be rejected.
C) The project's MIRR is 17.17% and the project should be accepted.
D) The project's MIRR is 18.19% and the project should be accepteD.Cash flows will be moved as shown below:

Question 62

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent. Project Z

A) The project's PI is 8.48% and the project should be accepted.
B) The project's PI is 8.48% and the project should be rejected.
C) The project's PI is 16.48% and the project should be accepted.
D) The project's PI is 21.48% and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = 214.78; Step 2: 214.78/1000 = 21.48% and since PI>0 accept.

Question 63

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent. Project Q

A) The project's PI is -8.70% and the project should be rejected.
B) The project's PI is -11.70% and the project should be rejected.
C) The project's PI is 3.70% and the project should be accepted.
D) The project's PI is 5.70% and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = -86.95; Step 2: -86.95/1000 = -8.70% and since PI<0 reject.

Question 64

How many possible IRRs could you find for the following set of cash flows?

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

Question 65

How many possible IRRs could you find for the following set of cash flows?

A) 1
B) 2
C) 3
D) Unable to determine unless we have the cost of capital.

Question 66

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3 and 3.5 years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?

A) Payback = 4.90 years; reject
B) Payback = 4.40 years; reject
C) Payback = 5.80 years; reject
D) Payback > 6.00 years; reject

Question 67

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

A) IRR = 16.92%; accept the project
B) IRR = 7.123%; reject the project
C) IRR = 8.81%; reject the project
D) IRR = 10.59%; accept the project

Question 68

Compute the NPV statistic for Project U given the following cash flows and if the appropriate cost of capital is 9 percent. Project U

A) $201.69
B) $273.82
C) $383.63
D) $397.21

Question 69

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?

A) MIRR = 11.59%; accept the project
B) MIRR = 9.21%; reject the project
C) MIRR = 7.19%; reject the project
D) MIRR = 10.58%; accept the project

Question 70

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?

A) PI = 6.94%; reject the project
B) PI = -7.52%; reject the project
C) PI = -4.21%; reject the project
D) PI = 5.33%; accept the project

Question 71

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

A) IRR = 16.92%; accept the project
B) IRR = 7.123%; reject the project
C) IRR = 18.32%; accept the project
D) IRR = 7.59%; reject the project

Question 72

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?

A) NPV = $1,766.55; accept the project
B) NPV = -$892.19; reject the project
C) NPV = $1,288.94; accept the project
D) NPV = -$3,577.90; reject the project

Question 73

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected?

A) Discounted payback = 4.29 years; accept the project
B) Discounted payback = 3.97 years; accept the project
C) Discounted payback > 4.5 years; reject the project
D) Discounted payback = 4.4 years; accept the project

Question 74

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

A) The project's MIRR is 14.77% and the project should be accepted.
B) The project's MIRR is 9.29% and the project should be rejected.
C) The project's MIRR is 13.76% and the project should be accepted.
D) The project's MIRR is 15.31% and the project should be accepteD.

Question 75

Suppose your firm is considering investing in a project with the cash flows shown below, 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 3.5 and 4.5 years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected?

A) Discounted payback = 4.25 years; accept the project
B) Discounted payback = 3.50 years; accept the project
C) Discounted payback > 5 years; reject the project
D) Discounted payback = 4.67 years; reject the project

Question 76

Which of the following tools is suitable for choosing between mutually exclusive projects?

A) Profitability Index
B) IRR
C) MIRR
D) NPV

Question 77

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?

A) Payback = 4.44 years; reject
B) Payback = 3.44 years; accept
C) Payback = 3.54 years; reject
D) Payback = 3.24 years; reject

Question 78

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?

A) PI = 6.94%; reject the project
B) PI = 7.52%; reject the project
C) PI = 23.61%; accept the project
D) PI = 35.33%; accept the project

Question 79

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?

A) MIRR = 13.59%; accept the project
B) MIRR = 7.96%; reject the project
C) MIRR = 7.19%; reject the project
D) MIRR = 12.58%; accept the project

Question 80

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?

A) NPV = $1,766.55; accept the project
B) NPV = $892.19; accept the project
C) NPV = $1,288.94; accept the project
D) NPV = -$104.73; reject the project