Question 1

The payback period is the length of time it takes to recoup an investment's initial cost from the cash inflows that investment generates.

Accepted Answer

The definition provided is correct and describes the concept of payback period accurately.

Question 2

Net present value and the payback period are examples of discounted cash flow models used in capital budgeting decisions.

Accepted Answer

Net present value (NPV) is a discounted cash flow model used in capital budgeting to assess the profitability of an investment or project. However, the payback period is not a discounted cash flow model; it simply calculates the time it takes for the initial investment to be repaid from the cash inflows, without considering the time value of money.

Question 3

The residual value is not considered in a NPV computation.

Accepted Answer

The residual value is considered in a NPV computation as it represents the value of the asset at the end of its useful life. The calculation of the residual value is important in determining the total cash flows of a project and its impact on the net present value.

Question 4

A project has an internal rate of return which is equal to the company's discount rate.The project's profitability index

Accepted Answer

When a project's internal rate of return is equal to the company's discount rate, it means that the net present value of the project is zero. Therefore, the project's initial investment is equal to the present value of its expected cash flows. In this case, the profitability index would be 1.0, as the present value of expected cash inflows is equal to the initial investment.

Question 5

A series of equal payments or deposits made at equal time intervals are called annuities.

Accepted Answer

An annuity refers to a series of equal payments or deposits made at equal time intervals.

Question 6

The net present value method assumes that the cash inflows from a project are immediately reinvested at the

Accepted Answer

The net present value (NPV) method assumes that the cash inflows from a project are immediately reinvested at the required rate of return. This is because the required rate of return represents the minimum rate of return that an investor expects to receive from an investment to compensate for the time value of money and the risk associated with the investment. The NPV method uses the required rate of return as the discount rate to calculate the present value of the cash flows, and compares it to the initial investment to determine whether the project is financially viable or not.

Question 7

James wants to take the next three years off work to travel around the world.He estimates his annual cash needs at $30,000 (if he needs more,he'll work odd jobs).James believes he can invest his savings at 10% until he depletes his funds.
How much money does James need now to fund his travels?

Accepted Answer

The answer of James wants to take the next three...

Question 8

When evaluating capital investment projects,if the internal rate of return is less than the required rate of return,the project will be rejected.

Accepted Answer

This is because the internal rate of return (IRR) represents the rate at which the project's cash inflows equal its cash outflows, and if it is less than the required rate of return (RRR), it means that the project is not generating enough returns to justify the investment and should be rejected.

Question 9

If the discount rate is decreased from 9% to 7%,what will happen to the internal rate of return (IRR)of a project?

Accepted Answer

The internal rate of return (IRR) is the rate of return at which the net present value (NPV) of all cash flows of a project is equal to zero. It is purely based on the project's cash flows and does not depend on the discount rate. Therefore, a change in the discount rate will not affect the IRR.

Question 10

In calculating the net present value of an investment in equipment,the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.

Accepted Answer

The answer of In calculating the net present value of...

Question 11

The internal rate of return is used as the discount rate when calculating the net present value of a project.

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. It is not used as the discount rate when calculating the NPV; instead, the NPV is calculated using a discount rate determined by the investor, often reflecting the cost of capital or required rate of return.

Question 12

The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.

Accepted Answer

The net present value method assumes that all cash inflows are immediately reinvested at the project's discount rate, not the internal rate of return.

Question 13

If the discount rate is increased from 8% to 10%,what will happen to the net present value (NPV)of a project (assume all future cash flows are positive)?

Accepted Answer

When the discount rate increases, the present value of future cash flows decreases. This means that the NPV of the project will also decrease since the cost of capital has increased. Therefore, the correct answer is option B.

Question 14

A company finds that the residual value of $10,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV)for that project.How does this omission affect the NPV of that project?

Accepted Answer

The answer of A company finds that the residual value...

Question 15

The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.

Accepted Answer

This statement is true. The internal rate of return (IRR) is the interest rate at which the net present value (NPV) of an investment equals zero. In other words, it is the rate at which the present value of cash inflows from an investment equals the present value of cash outflows from the investment.

Question 16

A weakness of the internal rate of return (IRR)method is that it

Accepted Answer

The IRR method assumes that the cash inflows from the project are reinvested at the internal rate of return, which may not be realistic if the IRR is higher than the market rate.

Question 17

When selecting a capital investment project from three alternatives,the project with the highest net present value will always be preferable.

Accepted Answer

The answer of When selecting a capital investment project from...

Question 18

When the profitability index is greater than 1.00 for a project,that project has a positive net present value.

Accepted Answer

The profitability index is calculated by dividing the present value of cash inflows by the initial investment. If the result is greater than 1.00, it means that the present value of cash inflows is higher than the initial investment, resulting in a positive net present value for the project.

Question 19

When evaluating the cash flows from an investment,a reduction in cash flows is also considered.

Accepted Answer

A reduction in cash flows, such as unexpected expenses or decreases in revenue, can have an impact on the overall profitability and value of the investment. Therefore, it should be taken into consideration when evaluating the cash flows from an investment.

Question 20

The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

Accepted Answer

The profitability index is calculated by dividing the present value of net cash inflows from the investment by the cost of the investment.

Quiz 12: Capital Investment Decisions and the Time Value of Money