Question 1

Discuss some of the advantages of using the payback method.

Accepted Answer

It tells you how quickly you c...

Question 2

There can never be more than one value of IRR for any cash flow.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements regarding the discounted payback period rule is true?

Accepted Answer

A)   The discounted payback rule uses the time value of money concept.
B)   The discounted payback rule is better than the NPV rule.
C)   The discounted payback rule considers all cash flows.
D)   The discounted payback rule exhibits the value additive property.E) A) and B)
F) All of the above

Question 4

The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:

Accepted Answer

A)   12% of firms
B)   20% of firms
C)   57% of firms
D)   75% of firmsE) A) and B)
F) A) and D)

Question 5

Profitability index is the ratio of:

Accepted Answer

A)   Future value of cash flows to investment
B)   Net present value of cash flows to investment
C)   Net present value of cash flows to IRR
D)   Present value of cash flows to IRRE) C) and D)
F) A) and C)

Question 6

What is the profitability index of an investment with cash flows in years zero thru 4 of -
340, 120, 130, 153, and 166, respectively and a discount rate of 16%?

Accepted Answer

A)   .15
B)   .22
C)   .35
D)   .42E) A) and D)
F) All of the above

Question 7

Decommissioning and clean-up cost for any project is always insignificant and should always be ignored.

Accepted Answer

A) True 
 B)False

Question 8

The following are some of the shortcomings of the IRR method except:

Accepted Answer

A)   IRR is conceptually easy to communicate
B)   Projects can have multiple IRRs
C)   IRR method cannot distinguish between a borrowing project and a lending project
D)   It is very cumbersome to evaluate mutually exclusive projects using the IRR methodE) B) and C)
F) A) and D)

Question 9

Discuss some of the disadvantages of the payback rule.

Accepted Answer

The disadvantages are that it ...

Question 10

Present values have value adding-up property.

Accepted Answer

A) True 
 B)False

Question 11

The following are measures used by firms when making capital budgeting decisions except:

Accepted Answer

A)   Payback period
B)   Internal rate of return
C)   P/E ratio
D)   Net present valueE) C) and D)
F) B) and D)

Question 12

Which of the following investment rules has value adding-up property?

Accepted Answer

A)   The payback period method
B)   Net present value method
C)   The book rate of return method
D)   The internal rate of return methodE) A) and B)
F) A) and C)

Question 13

Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 =
2000, calculate the discounted payback period for the project at a discount rate of 20%.

Accepted Answer

A)   1 year
B)   2 years
C)   3 years
D)   None of the aboveE) B) and D)
F) B) and C)

Question 14

If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:

Accepted Answer

A)   +$30
B)   -$60
C)   -$30
D)   None of the above. NPV(A + 
B)   = 30 - 60 = -30E) B) and C)
F) All of the above

Question 15

The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:

Accepted Answer

A)   2 years
B)   2.5 years
C)   3 years
D)   Cannot be determined because of insufficient dataE) C) and D)
F) A) and C)

Question 16

In what way is the modified internal rate of return (MIRR) method better than the IRR
method?

Accepted Answer

With the modified internal rate of retur...

Question 17

If an investment project (normal project)  has IRR equal to the cost of capital, the NPV for that project is:

Accepted Answer

A)   Positive
B)   Negative
C)   Zero
D)   Unable to determineE) B) and D)
F) B) and C)

Question 18

Project X has the following cash flows: C0 = +2000, C1 = -1,150 and C2 = -1,150. If the
IRR of the project is 9.85% and if the cost of capital is 12%, you would:

Accepted Answer

A)   Accept the project
B)   Reject the projectThis is a loan project therefore accept.C) A) and B)
D) undefined

Question 19

What are some of the disadvantages of using the IRR method?

Accepted Answer

There are several disadvantages to IRR m...

Question 20

The IRR rule states that firms should accept any project offering an internal rate of return in
excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Exam 5: Net Present Value and Other Investment Criteria

There can never be more than one value of IRR for any cash flow.

Correct AnswerverifiedShow Answer

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Correct AnswerverifiedShow Answer

The following are measures used by firms when making capital budgeting decisions except:

Correct AnswerverifiedShow Answer

Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 = 2000, calculate the discounted payback period for the project at a discount rate of 20%.

Correct AnswerverifiedShow Answer

The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:

Correct AnswerverifiedShow Answer

Profitability index is the ratio of:

Correct AnswerverifiedShow Answer

Discuss some of the advantages of using the payback method.

Correct AnswerverifiedIt tells you how quickly you c...View AnswerShow Answer

If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:

Correct AnswerverifiedShow Answer

Project X has the following cash flows: C0 = +2000, C1 = -1,150 and C2 = -1,150. If the IRR of the project is 9.85% and if the cost of capital is 12%, you would:

Correct AnswerverifiedShow Answer

The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:

Correct AnswerverifiedShow Answer

What are some of the disadvantages of using the IRR method?

Correct AnswerverifiedThere are several disadvantages to IRR m...View AnswerShow Answer

The following are some of the shortcomings of the IRR method except:

Correct AnswerverifiedShow Answer

Decommissioning and clean-up cost for any project is always insignificant and should always be ignored.

Correct AnswerverifiedShow Answer

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Correct AnswerverifiedWith the modified internal rate of retur...View AnswerShow Answer

Which of the following statements regarding the discounted payback period rule is true?

Correct AnswerverifiedShow Answer

If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is:

Correct AnswerverifiedShow Answer

Discuss some of the disadvantages of the payback rule.

Correct AnswerverifiedThe disadvantages are that it ...View AnswerShow Answer

Which of the following investment rules has value adding-up property?

Correct AnswerverifiedShow Answer

Present values have value adding-up property.

Correct AnswerverifiedShow Answer

What is the profitability index of an investment with cash flows in years zero thru 4 of - 340, 120, 130, 153, and 166, respectively and a discount rate of 16%?

Correct AnswerverifiedShow Answer

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It tells you how quickly you c...
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There are several disadvantages to IRR m...
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With the modified internal rate of retur...
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The disadvantages are that it ...
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