Question 1

A disadvantage of the payback statistic is that
A) it does not reflect the time value of money.
B) it does not give an indication of the project's riskiness.
C) it does not consider cash flows beyond the payback period.
D) All of these choices are correct.

Accepted Answer

The payback statistic is criticized for not reflecting the time value of money, not indicating the project's riskiness, and not considering cash flows beyond the payback period, making all of these choices correct.

Question 2

The MIRR statistic is different from the IRR statistic in that
A) the MIRR assumes that the cash inflows can be reinvested at the cost of capital.
B) the MIRR assumes that the cash inflows can be reinvested at the IRR.
C) the MIRR uses weighted average dollars.
D) the MIRR uses input from the NPV whereas the IRR does not.

Accepted Answer

The Modified Internal Rate of Return (MIRR) differs from the Internal Rate of Return (IRR) because it assumes that cash inflows are reinvested at the project's cost of capital, rather than at the IRR itself. This provides a more realistic view of the project's profitability.

Question 3

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 12 percent.
Project X
$$\begin{array} { c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 \
\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & - \$ 1,000
\end{array}$$
A) $6,234.93
B) $7,505.96
C) $8,417.80
D) $37,505.96

Accepted Answer

The NPV is calculated as the sum of the present values of the cash flows, discounted at the appropriate cost of capital. The present value of a cash flow is calculated as the cash flow divided by (1 + r)^t, where r is the cost of capital and t is the time period.In this case, the NPV is calculated as follows:NPV = -15,000/(1.12)^0 + 6,000/(1.12)^1 + 10,000/(1.12)^2 + 12,000/(1.12)^3 - 1,000/(1.12)^4= -15,000 + 5,357.14 + 8,033.07 + 9,841.16 - 714.29= $6,234.93

Question 4

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?
A) Yes, the project should be accepted since it has a NPV = $15,391.23.
B) Yes, the project should be accepted since it has a NPV = $13,610.89.
C) Yes, the project should be accepted since it has a NPV = $16,999.62.
D) None of the options are correct.

Accepted Answer

The answer of A project costs $91,000 today and is...

Question 5

Which of the following best describes the NPV profile?
A) A graph of a project's NPV as a function of possible IRRs.
B) A graph of a project's NPV over time.
C) A graph of a project's NPV as a function of possible capital costs.
D) None of the statements are correct.

Accepted Answer

The NPV profile is a graph that shows a project's NPV as a function of various discount rates (which could be interpreted as the cost of capital). It helps in understanding how the value of a project changes with different assumptions about the discount rate.

Question 6

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which project would you accept and why?
A) Project B because it has the higher NPV
B) Project B because it has the higher IRR
C) Project A because it has the higher NPV
D) Project A because it has the higher IRR

Accepted Answer

The answer of Projects A and B are mutually exclusive....

Question 7

How many possible IRRs could you find for the following set of cash flows?
$$\begin{array} { c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 \
\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & \$ 1,000
\end{array}$$
A) 1
B) 2
C) 3
D) Unable to determine unless we have the cost of capital.

Accepted Answer

The number of possible IRRs for a project is determined by the number of times the cash flow changes sign. In this case, there is only one sign change (from negative at time 0 to positive at time 1), indicating there is only one possible IRR.

Question 8

Which of the following statements is correct regarding the NPV profile?
A) The IRR appears as the intersection of the NPV profile with the x-axis.
B) The IRR appears at the crossover point or where the two profiles intersect.
C) NPV profiles for independent projects with normal cash flows will intersect.
D) All of these choices are correct.

Accepted Answer

The IRR (Internal Rate of Return) is the discount rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero. Therefore, on an NPV profile, which plots the NPV of a project against various discount rates, the IRR is found where the profile crosses the x-axis. This is because at the IRR, the NPV is zero. Choices B and C are incorrect as they describe situations that are not universally true about NPV profiles or IRR.

Question 9

We accept projects with a positive NPV because it means that
A) we have recovered all our costs.
B) we are creating wealth for shareholders.
C) the project's expected return exceeds the cost of capital.
D) all of the options.

Accepted Answer

The answer of We accept projects with a positive NPV...

Question 10

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?
A) Project B because it has the higher NPV
B) Project B because it has the higher IRR
C) Project A because it has the higher NPV
D) Project A because it has the higher IRR

Accepted Answer

Project A has the higher NPV, which is the primary criterion for selecting between mutually exclusive projects. The NPV of Project A can be calculated using the formula for NPV = $\sum \frac{C_t}{(1+r)^t} - C_0$, where $C_t$ is the cash inflow at time $t$, $r$ is the discount rate (cost of capital), and $C_0$ is the initial investment. For Project A, the NPV is positive and higher than that of Project B when calculated at a 12% discount rate, making it the preferable choice. Project B's single future cash inflow does not accumulate enough value when discounted back to the present to outweigh the benefits of Project A's multiple cash inflows over time.

Question 11

Which of the following statements is correct?
A) A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
B) Discounted payback uses a more aggressive reinvestment rate assumption than payback.
C) Neither payback nor discounted payback uses time value of money concepts.
D) None of the statements are correct.

Accepted Answer

The payback and discounted payback methods both ignore cash flows that occur after the payback period, which is a limitation of these methods. Discounted payback does consider the time value of money by discounting the cash flows, unlike the regular payback method.

Question 12

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50, and $230. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.
A) 15.45 percent
B) 15.12 percent
C) 13.57 percent
D) 12.71 percent

Accepted Answer

The answer of A company is considering two mutually exclusive...

Question 13

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?
A) 30.10 percent
B) 29.83 percent
C) 22.47 percent
D) 31.38 percent

Accepted Answer

The NPV is equal to zero when the present value of the cash flows is equal to the initial investment. The present value of the cash flows can be calculated using the following formula:PV = CF / (1 + r)^nwhere:PV is the present valueCF is the cash flowr is the discount raten is the number of yearsIn this case, the initial investment is $101,000, the cash flow is $31,000 per year, and the number of years is 15. We can use the above formula to solve for the discount rate that makes the NPV equal to zero:0 = 31,000 / (1 + r)^15 - 101,000Solving for r using a financial calculator or spreadsheet, we get:r = 30.10%Therefore, the correct answer is A) 30.10 percent.

Question 14

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $100, followed by cash flows of $95, $20, and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20, and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.
A) 15.24 percent
B) 15.96 percent
C) 16.17 percent
D) 15.42 percent

Accepted Answer

The IRR of Project A is 15.24 percent, while the IRR of Project B is 15.96 percent. Therefore, Project B is the better investment for the company's shareholders.

Question 15

Which of the following statements is correct?
A) Discounted payback solves all the shortcomings of payback.
B) The reinvestment rates of NPV and MIRR are the same.
C) The MIRR and IRR have the same reinvestment rate.
D) All of these choices are correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 16

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?
A) 33.26 percent
B) 34.98 percent
C) 35.93 percent
D) 36.72 percent

Accepted Answer

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the cash flows are -$175 for 10 years and +$10,000 at the end of the 10th year. The IRR can be found using financial calculators or spreadsheet software by setting the NPV of these cash flows to zero. The correct IRR for these cash flows is approximately 35.93 percent, making option C the correct answer.

Question 17

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?
A) 4.88 years
B) 4.48 years
C) 5.88 years
D) 5.48 years

Accepted Answer

The payback period is the time it takes for the investment to generate cash flows to recover the initial investment cost. Here, the investment generates $100 annually for the first 4 years, totaling $400, and then $400 annually for the next 3 years. By the end of year 4, the investment has recovered $400 of the initial $750. In year 5, it generates another $400, fully recovering the initial investment and providing an excess. To find the exact payback period, calculate how much of year 5's cash flow is needed to reach $750. Since $400 in year 5 covers the remaining $350 needed ($750 - $400 from years 1-4), the payback period is 4 years plus the fraction of year 5 needed to recover the full investment. This fraction is $350 (the remaining amount to be recovered by the end of year 4) divided by $400 (the cash flow in year 5), which equals 0.875 (or 7/8) of a year. Therefore, the total payback period is 4 years + 0.875 years = 4.875 years, or approximately 4.88 years when rounded.

Question 18

Which of the following is incorrect regarding the IRR statistic?
A) For independent projects, IRR will give the same accept/reject decision as NPV.
B) For the IRR statistic to give a different accept/reject decision from NPV, the cash flows must be non-normal and the projects must be mutually exclusive.
C) To solve for the IRR, one can simply solve the NPV formula for the rate that will make the NPV equal to zero.
D) None of the statements are incorrect.

Accepted Answer

The IRR can give a different accept/reject decision from NPV even if the cash flows are normal, as long as the projects are mutually exclusive.

Question 19

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?
A) 8.64 percent
B) 9.02 percent
C) 10.51 percent
D) 11.29 percent

Accepted Answer

The IRR is the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. By calculating the IRR for the given cash flows, it is found to be approximately 9.02 percent.

Question 20

The least-used capital budgeting technique in industry is
A) NPV.
B) IRR.
C) Payback
D) MIRR.

Accepted Answer

The answer of The least-used capital budgeting technique in industry...

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

A disadvantage of the payback statistic is that

The MIRR statistic is different from the IRR statistic in that

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 12 percent. Project X $\begin{array} { c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 \\\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & - \$ 1,000\end{array}$

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

Which of the following best describes the NPV profile?

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12 percent. Which project would you accept and why?

How many possible IRRs could you find for the following set of cash flows? $\begin{array} { c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 \\\text { Cash Flow } & - \$ 15,000 & \$ 6,000 & \$ 10,000 & \$ 12,000 & \$ 1,000\end{array}$

Which of the following statements is correct regarding the NPV profile?

We accept projects with a positive NPV because it means that

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

Which of the following statements is correct?

A project costs $101,000 today and is expected to generate cash flows of $31,000 per year for the next 15 years. At what rate is the NPV equal to zero?

Which of the following statements is correct?

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

Which of the following is incorrect regarding the IRR statistic?

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

The least-used capital budgeting technique in industry is