Deck 7: Investment Decision Rules

Question 1

The IRR of Palin's book deal is closest to:

A)-27.25%
B)-37.50%
C)27.25%
D)37.50%

Answer 1

-27.25%

Question 2

The NPV for this project is closest to:

A)$29,200
B)$39,500
C)$129,200
D)$139,500

Answer 2

$39,500

Question 3

Assuming that Palin's cost of capital is 10%,then the NPV of her book deal is closest to:

A)$2.00 million
B)$2.20 million
C)$3.00 million
D)$3.75 million

Answer 3

$3.75 million

Question 4

Assuming that Dewey's cost of capital is 12% EAR,then the IRR of his retainer offer is closest to:

A)-39.3%
B)-3.3%
C)20.0%
D)39.3%

Question 5

Assuming that Dewey's cost of capital is 12% EAR,then the NPV of his retainer offer is closest to:

A)-$7500
B)-$7400
C)$6000
D)$7400

Question 6

The NPV for this project is closest to:

A)$176,270
B)$123,420
C)$450,000
D)$179,590

Question 7

Use the table for the question(s)below.
Consider the following two projects:

The NPV for project Alpha is closest to:

A)$20.96
B)$16.92
C)$24.01
D)$14.41

Question 8

Which of the following statements is FALSE?

A)About 75% of firms surveyed used the NPV rule for making investment decisions.
B)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
C)To decide whether to invest using the NPV rule,we need to know the cost of capital.
D)NPV is positive only for discount rates greater than the internal rate of return.

Question 9

Use the table for the question(s)below.
Consider the following two projects:

The NPV of Larry's three movie Larry Boy offer is closest to:

A)3.5 million
B)-1.6 million
C)1.6 million
D)-1.0 million

Question 10

Which of the following statements is FALSE?

A)In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
B)The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)If the cost of capital estimate is more than the IRR,the NPV will be positive.

Question 11

Use the table for the question(s)below.
Consider the following two projects:

The NPV for Boulderado's snowboard project is closest to:

A)$228,900
B)$46,900
C)$51,600
D)$23,800

Question 12

Use the table for the question(s)below.
Consider the following two projects:

The NPV of project B is closest to:

A)12.6
B)23.3
C)12.0
D)15.0

Question 13

Use the table for the question(s)below.
Consider the following two projects:

The NPV for project Beta is closest to:

A)$24.01
B)$16.92
C)$20.96
D)$14.41

Question 14

The decision you should take regarding this project is

A)reject the project since the NPV is negative.
B)reject the project since the NPV is positive.
C)accept the project since the IRR < 20%.
D)accept the project since the IRR > 20%.

Question 15

The NPV profile graphs:

A)the project's NPV over a range of discount rates.
B)the project's IRR over a range of discount rates.
C)the project's cash flows over a range of NPVs.
D)the project's IRR over a range of NPVs.

Question 16

The IRR for this project is closest to:

A)15.60%
B)18.95%
C)20.00%
D)25.85%

Question 17

Assume that once her book is finished,it is expected to generate royalties of $5 million in the first year (paid at the end of the year)and these royalties are expected to decrease by 40% per year in perpetuity.Assuming that Palin's cost of capital is 10% and given these royalties payments,the NPV of Palin's book deal is closest to:

A)$3.75 million
B)$12.20 million
C)$13.00 million
D)$13.75 million

Question 18

The NPV profile:

A)shows the payback period-the point at which NPV is positive.
B)shows the internal rate of return-the point at which NPV is zero.
C)shows the NPV over a range of discount rates.
D)B and C are correct.

Question 19

Use the table for the question(s)below.
Consider the following two projects:

The NPV of project A is closest to:

A)12.0
B)12.6
C)15.0
D)42.9

Question 20

Use the table for the question(s)below.
Consider a project with the following cash flows:

If the appropriate discount rate for this project is 15%,then the NPV is closest to:

A)$6000
B)-$867
C)$1420
D)$867

Question 21

Use the table for the question(s)below.
Consider the following two projects:

The internal rate of return (IRR)for project B is closest to:

A)21.6%
B)23.3%
C)42.9%
D)7.7%

Question 22

Larry should:

A)reject the offer because the NPV < 0.
B)accept the offer even though the IRR < 10%,because the NPV > 0.
C)reject the offer because the IRR < 10%.
D)accept the offer because the IRR > 0%.

Question 23

The maximum number of IRRs that could exist for project B is:

A)3
B)1
C)2
D)0

Question 24

Which of the following statements is correct?

A)You should accept project A since its IRR > 15%.
B)You should reject project B since its NPV > 0.
C)Your should accept project A since its NPV < 0.
D)You should accept project B since its IRR < 15%.

Question 25

When using the internal rate of return (IRR)investment rule,we compare:

A)the average return on the investment opportunity to returns on all other investment opportunities in the market.
B)the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.
C)the NPV of the investment opportunity to the average return on the investment opportunity.
D)the average return on the investment opportunity to the risk-free rate of return.

Question 26

Which of the following statements is correct?

A)You should invest in project Beta since NPV_Beta > 0.
B)You should invest in project Alpha since IRR_Alpha > IRR_Beta.
C)Your should invest in project Alpha since NPV_Alpha < 0.
D)You should invest in project Beta since IRR_Beta > 0.

Question 27

Use the table for the question(s)below.
Consider the following two projects:

The internal rate of return (IRR)for project Alpha is closest to:

A)25.0%
B)22.2%
C)24.5%
D)22.7%

Question 28

Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:

A)11.0%
B)0.0%
C)2.5%
D)1.0%

Question 29

Use the table for the question(s)below.
Consider the following two projects:

The internal rate of return (IRR)for project A is closest to:

A)7.7%
B)21.6%
C)23.3%
D)42.9%

Question 30

Which of the following statements is FALSE?

A)The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.
B)The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital.
C)Since the IRR rule is based upon the rate at which the NPV equals zero,like the NPV decision rule,the IRR decision rule will always identify the correct investment decisions.
D)There are situations in which multiple IRRs exist.

Question 31

Use the table for the question(s)below.
Consider a project with the following cash flows:

Assume the appropriate discount rate for this project is 15%.The IRR for this project is closest to:

A)21%
B)22%
C)15%
D)60%

Question 32

The internal rate of return rule can result in the wrong decision if the projects being compared have:

A)differences in scale.
B)differences in timing.
C)differences in NPV.
D)A and B are correct.

Question 33

One of the IRRs for Rearden's mining operation is closest to:

A)0%
B)10.6%
C)12.4%
D)72.0%

Question 34

Which of the following statements is FALSE?

A)The IRR investment rule will identify the correct decision in many,but not all,situations.
B)By setting the NPV equal to zero and solving for r,we find the IRR.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)The simplest investment rule is the NPV investment rule.

Question 35

The IRR for this project is closest to:

A)18.9%
B)22.7%
C)34.1%
D)39.1%

Question 36

The IRR for Larry's three movie deal offer is closest to:

A)3.5%
B)1.6%
C)-3.5%
D)-1.6%

Question 37

The IRR for Boulderado's snowboard project is closest to:

A)10.4%
B)10.0%
C)11.0%
D)15.1%

Question 38

Assuming that Dewey's cost of capital is 12% EAR,then the number of potential IRRs that exist for this problem is equal to:

A)0
B)1
C)2
D)12

Question 39

Use the table for the question(s)below.
Consider the following two projects:

The internal rate of return (IRR)for project Beta is closest to:

A)25.0%
B)22.7%
C)24.5%
D)22.2%

Question 40

The number of potential IRRs that exist for Rearden's mining operation is equal to:

A)0
B)1
C)2
D)12

Question 41

An incremental IRR of Project B over Project A is closest to:

A)12.6%
B)23.3%
C)1.7%
D)17.3%

Question 42

You are trying to decide between three mutually exclusive investment opportunities.The most appropriate tool for identifying the correct decision is:

A)NPV.
B)profitability index.
C)IRR.
D)incremental IRR.

Question 43

Which of the following statements is FALSE?

A)The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea.
B)An IRR will always exist for an investment opportunity.
C)A NPV will always exist for an investment opportunity.
D)In general,there can be as many IRRs as the number of times the project's cash flows change sign over time.

Question 44

Which of the following statements is FALSE?

A)It is possible that an IRR does not exist for an investment opportunity.
B)If the payback period is less than a pre-specified length of time,you accept the project.
C)The internal rate of return (IRR)investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity,you should undertake the investment opportunity.
D)It is possible that there is no discount rate that will set the NPV equal to zero.

Question 45

Use the table for the question(s)below.
Consider the following two projects:

Assume that projects A and B are mutually exclusive.The correct investment decision and the best rational for that decision is to:

A)invest in project A since NPV_B < NPV_A.
B)invest in project B since IRR_B > IRR_A.
C)invest in project B since NPV_B > NPV_A.
D)invest in project A since NPV_A > 0.

Question 46

Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.

Question 47

Which of the following statements is FALSE?

A)The incremental IRR need not exist.
B)If a change in the timing of the cash flows does not affect the NPV,then the change in timing will not impact the IRR.
C)Although the incremental IRR rule can provide a reliable method for choosing among projects,it can be difficult to apply correctly.
D)When projects are mutually exclusive,it is not enough to determine which projects have positive NPVs.

Question 48

Which of the following statements is FALSE?

A)The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives.
B)When a manager must choose among mutually exclusive investments,the NPV rule provides a straightforward answer.
C)The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule.
D)Problems can arise using the IRR method when the mutually exclusive investments have differences in scale.

Question 49

Which of the following statements is FALSE?

A)The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.
B)The payback rule is reliable because it considers the time value of money and depends on the cost of capital.
C)For most investment opportunities,expenses occur initially and cash is received later.
D)Fifty percent of firms surveyed reported using the payback rule for making decisions.

Question 50

Which of the following statements is FALSE?

A)In general,the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows.
B)There is no easy fix for the IRR rule when there are multiple IRRs.
C)The payback rule is primarily used because of its simplicity.
D)No investment rule that ignores the set of alternative investment alternatives can be optimal.

Question 51

Use the table for the question(s)below.
Consider the following two projects:

The payback period for project A is closest to:

A)2.0 years
B)2.4 years
C)2.5 years
D)2.2 years

Question 52

Use the table for the question(s)below.
Consider the following two projects:

The payback period for project B is closest to:

A)2.5 years
B)2.0 years
C)2.2 years
D)2.4 years

Question 53

Which of the following statements is FALSE?

A)When using the incremental IRR rule,you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative.
B)Picking one project over another simply because it has a larger IRR can lead to mistakes.
C)Problems arise using the IRR method when the mutually exclusive investments have differences in scale.
D)When the risks of two projects are different,only the NPV rule will give a reliable answer.

Question 54

The payback period for Rearden's mining operation is closest to:

A)5.00 years
B)6.00 years
C)6.25 years
D)6.50 years

Question 55

Which of the following statements is FALSE?

A)Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns.
B)The IRR is affected by the scale of the investment opportunity.
C)Multiple incremental IRRs might exist.
D)The incremental IRR rule assumes that the riskiness of the two projects is the same.

Question 56

Use the table for the question(s)below.
Consider a project with the following cash flows:

Assume the appropriate discount rate for this project is 15%.The payback period for this project is closest to:

A)3.0
B)2.5
C)2.0
D)4.0

Question 57

Use the table for the question(s)below.
Consider the following two projects:

The payback period for project Alpha is closest to:

A)3.2 years
B)2.9 years
C)3.1 years
D)2.6 years

Question 58

Use the table for the question(s)below.
Consider the following two projects:

The payback period for project Beta is closest to:

A)2.9 years
B)3.1 years
C)2.6 years
D)3.2 years

Question 59

The payback period for this project is closest to:

A)2.1 years
B)3.0 years
C)2.0 years
D)2.2 years

Question 60

Consider two mutually exclusive projects A & B.If you subtract the cash flows of opportunity B from the cash flows of opportunity A,then you should:

A)take opportunity A if the regular IRR exceeds the cost of capital.
B)take opportunity A if the incremental IRR exceeds the cost of capital.
C)take opportunity B if the regular IRR exceeds the cost of capital.
D)take opportunity B if the incremental IRR exceeds the cost of capital.

Question 61

When choosing between projects,an alternative to comparing their IRRs is:

A)to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other.
B)to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other.
C)to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other.
D)There is no alternative selection criterion to comparing IRRs.

Question 62

Use the table for the question(s)below.
Consider the following list of projects:

Assuming that your capital is constrained,which project should you invest in first?

A)Project C
B)Project G
C)Project B
D)Project F

Question 63

If the discount rate for project A is 16%,then what is the NPV for project A?

Question 64

Use the table for the question(s)below.
Consider two mutually exclusive projects with the following cash flows:

You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.How many potential incremental IRRs could there be?

A)3
B)0
C)2
D)1

Question 65

Use the table for the question(s)below.
Consider the following two projects:

Assume that projects Alpha and Beta are mutually exclusive.Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

A)The incremental IRR should not be used since the projects have different lives.
B)The incremental IRR should not be used since the projects have different discount rates.
C)The incremental IRR should not be used since the projects have different cash flow patterns.
D)Both the NPV and incremental IRR approaches are appropriate to solve this problem.

Question 66

The maximum number of incremental IRRs that could exist for project B over project A is:

A)1
B)2
C)0
D)3

Question 67

Use the table for the question(s)below.
Consider the following two projects:

The profitability index for project B is closest to:

A)23.34
B)12.64
C)0.17
D)0.12

Question 68

Use the table for the question(s)below.
Consider the following list of projects:

Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which projects should you invest in and in what order?

A)CBFH
B)CBGF
C)BCFG
D)CBFG

Question 69

Use the table for the question(s)below.
Consider the following two projects:

The profitability index for project A is closest to:

A)0.12
B)21.65
C)0.17
D)12.04

Question 70

Which of the following statements is FALSE?

A)The profitability index measures the value created in terms of NPV per unit of resource consumed.
B)The profitability index is the ratio of value created to resources consumed.
C)The profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.
D)The profitability index measures the "bang for your buck."

Question 71

Use the table for the question(s)below.
Consider the following list of projects:

Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?

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

Question 72

Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,then given that these are mutually exclusive projects,which project would you take and why?

Question 73

Use the table for the question(s)below.
Consider the following list of projects:

Assuming that your capital is constrained,which project should you invest in last?

A)Project A
B)Project I
C)Project D
D)Project C

Question 74

Which of the following statements is FALSE?

A)If there is a fixed supply of a resource available,you should rank projects by the profitability index,selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed.
B)Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources.
C)If there is a fixed supply of resources available,so that you cannot undertake all possible opportunities,then simply picking the highest NPV opportunity might not lead to the best decision.
D)The profitability index is calculated as the NPV divided by the resources consumed by the project.

Question 75

Use the table for the question(s)below.
Consider the following list of projects:

Assuming that your capital is constrained,what is the fifth project that you should invest in?

A)Project H
B)Project I
C)Project B
D)Project A

Question 76

Use the table for the question(s)below.
Consider the following two projects:

Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rational for that decision is to:

A)invest in project Beta since NPV_Beta > 0.
B)invest in project Alpha since NPV_Beta < NPV_Alpha.
C)invest in project Beta since IRR_B > IRR_A.
D)invest in project Beta since NPV_Beta > NPV_Alpha > 0.

Question 77

If the discount rate for project B is 15%,then what is the NPV for project B?

Question 78

What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?

Question 79

Use the table for the question(s)below.
Consider a project with the following cash flows:

Assume the appropriate discount rate for this project is 15%.The profitability index for this project is closest to:

A).14
B).22
C).60
D).15

Question 80

You are opening up a brand new retail strip mall.You presently have more potential retail outlets wanting to locate in your mall than you have space available.What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

A)IRR
B)Payback period
C)NPV
D)Profitability index