Verified Test Bank NPV & Capital Budgeting Chapter 13

Finance, 5e (Cornett)

Chapter 13 Weighing Net Present Value and Other Capital Budgeting Criteria

1) 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

2) The net present value decision technique uses a statistic denominated in

A) years.

B) currency.

C) a percentage.

D) time lines.

3) 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.

4) When choosing a capital budgeting technique(s) to use, which of the following sub-choices is affected?

A) the statistical format chosen

B) the benchmark used to compare with

C) computations using or not using time value of money

D) all of the above

5) Which capital budgeting technique step in the decision process is not used to evaluate a group of independent projects?

A) compute the statistic

B) have a run off between the mutually exclusive projects choosing the one with the best statistic

C) compare the computed statistic with the benchmark to decide to accept or reject the project.

D) all of the above are used

6) Which of the following statements regarding payback (PB) is/are true?

A) The statistic requires keeping a running subtotal of the cumulative sum of the cash flows up to the point that this sum exactly offsets the initial investment.

B) Is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based on how quickly they return their initial investment.

C) both a and b are true

D) none of the above

7) Which of the following statements regarding discounted payback (DPB) is/are not true?

A) It ignores any cash flows that accrue after the project reaches its respective payback benchmark.

B) Is a capital budgeting method that generates decision rules and associated metrics that choose projects based on how quickly they return their initial investment plus interest.

C) both a and b are not true.

D) none of the above.

8) 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.

9) Rate-based statistics represent summary cash flows, and these summaries tend to lose which two important details?

A) The investment size and cash inflows that occur after the rather arbitrary testing period

B) The investment size and the cash inflows that occur before the testing period

C) The investment size and the cash outflows that occur before the testing period

D) The investment size and the cash inflows that occur during the testing period

10) Which of the following is a technique for evaluating capital projects that 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

11) Which of the following is a technique for evaluating capital projects that 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

12) Which of the following is a technique for evaluating capital projects that 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

13) 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.

14) 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.

15) 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)

16) 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.

17) Which of these describe groups or pairs of projects where you can accept one but not all?

A) Dependent

B) Independent

C) Mutually exclusive

D) Mutually dependent

18) Which of 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

19) Which of these is 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

20) ________ is a decision making process that includes the cost of capital calculation?

A) Interest-rate cognizant

B) Net present value

C) Internal rate of return

D) modified internal rate of return

21) ________ is a decision rule and associated methodology for converting the net present value statistic into a rate-based metric.

A) Profitability index

B) payback method

C) Internal rate of return

D) modified internal rate of return

22) Which of these is 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

23) Which of the following is 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

24) A graph of a project's ________ is a function of cost of capital.

A) internal rate of return

B) net present value

C) modified internal rate of return

D) all of these choices are correct

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

A) $12.93

B) $14.22

C) $62.07

D) $136.90

26) Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

A) −$639.96

B) $360.04

C) $392.44

D) $486.29

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

A) 3.67 years, accept

B) 4.67 years, accept

C) 3.67 years, reject

D) 4.67 years, reject

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

A) 3.4375 years, accept

B) 3.78 years, reject

C) 4.4375 years, reject

D) 4.78 years, accept

29) Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year.

A) 1.25 years, reject

B) 1.25 years, accept

C) 1.33 years, accept

D) 2.25 years, accept

30) Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

A) 2.49 years, accept

B) 2.98 years, accept

C) 3.49 years, reject

D) 4.98 years, reject

31) Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

A) 3.45 years, reject

B) 3.86 years, reject

C) 3.45 years, accept

D) 3.86 years, accept

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

A) 10 percent, accept

B) 10 percent, reject

C) 13.26 percent, accept

D) 13.26 percent, reject

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

A) 9 percent, accept

B) 9 percent, reject

C) 16.61 percent, accept

D) 16.61 percent, reject

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

A) 13.26 percent, accept

B) 13.89 percent, accept

C) 13.26 percent, reject

D) 15.73 percent, accept

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

A) 7.62 percent, accept

B) 7.62 percent, reject

C) 47.09 percent, accept

D) 47.09 percent, reject

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

A) 10 percent, reject

B) 14.22 percent, accept

C) 13.26 percent, accept

D) 18.96 percent, accept

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

A) −0.0977 percent, reject

B) −9.77 percent, reject

C) −24.41 percent, reject

D) 24.41 percent, accept

38) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

39) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

40) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

A) −4.95 percent, reject

B) 4.95 percent, accept

C) −23.18 percent, reject

D) 23.18 percent, accept

41) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

A) −10.60 percent, reject

B) 10.60 percent, accept

C) −15.33 percent, reject

D) 15.33 percent, accept

42) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

43) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.

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

A) −0.39 percent, reject

B) 0.39 percent, accept

C) −38.88 percent, reject

D) 38.88 percent, accept

44) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.

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

A) 0.23 years, accept

B) 1.77 years, accept

C) 2 years, accept

D) 4.33 years, reject

45) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.

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

46) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.

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

A) 12.00 percent, reject

B) 31.21 percent, accept

C) 54.22 percent, accept

D) 80.67 percent, accept

47) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.

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

48) Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.

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

A) −1.21 percent, reject

B) 1.08 percent, accept

C) 1.21 percent, accept

D) 121 percent, accept

49) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

50) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

51) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

52) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

53) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

54) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.

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

55) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.

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

56) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.  

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

57) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.  

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

58) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.  

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

59) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.  

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

60) Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.  

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

61) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.  

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

62) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.  

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

63) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.  

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

64) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.

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

65) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.  

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

66) Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.  

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

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

Project Y

A) $894.37

B) $993.97

C) $964.72

D) $1,008.03

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

Project U

A) $201.69

B) $273.82

C) $383.63

D) $397.21

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

Project I

A) The project's MIRR is 10.29 percent and the project should be rejected.

B) The project's MIRR is 12.67 percent and the project should be rejected.

C) The project's MIRR is 17.17 percent and the project should be accepted.

D) The project's MIRR is 18.19 percent and the project should be accepted.

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

Project J

A) The project's MIRR is 14.77 percent and the project should be accepted.

B) The project's MIRR is 9.29 percent and the project should be rejected.

C) The project's MIRR is 13.76 percent and the project should be accepted.

D) The project's MIRR is 15.31 percent and the project should be accepted.

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

Project Z

A) The project's PI is 8.48 percent and the project should be accepted.

B) The project's PI is 8.48 percent and the project should be rejected.

C) The project's PI is 16.48 percent and the project should be accepted.

D) The project's PI is 21.48 percent and the project should be accepted.

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

Project Q

A) The project's PI is −8.70 percent and the project should be rejected.

B) The project's PI is −11.70 percent and the project should be rejected.

C) The project's PI is 3.70 percent and the project should be accepted.

D) The project's PI is 5.70 percent and the project should be accepted.

73) 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.

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

A) 1

B) 2

C) 3

D) 4

75) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half 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

76) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half 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

77) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 percent, accept the project

B) IRR = 7.123 percent, reject the project

C) IRR = 18.32 percent, accept the project

D) IRR = 7.59 percent, reject the project

78) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half 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

79) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?

A) MIRR = 13.59 percent, accept the project

B) MIRR = 7.96 percent, reject the project

C) MIRR = 7.19 percent, reject the project

D) MIRR = 12.58 percent, accept the project

80) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected? 

A) PI = 6.94 percent, reject the project

B) PI = 7.52 percent, reject the project

C) PI = 23.61 percent, accept the project

D) PI = 35.33 percent, accept the project

81) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and three and a half 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

82) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half 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

83) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

A) IRR = 16.92 percent, accept the project

B) IRR = 7.123 percent, reject the project

C) IRR = 8.81 percent, reject the project

D) IRR = 10.59 percent, accept the project

84) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half 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

85) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected?

A) MIRR = 11.59 percent, accept the project

B) MIRR = 9.21 percent, reject the project

C) MIRR = 7.19 percent, reject the project

D) MIRR = 10.58 percent, accept the project

86) Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?

A) PI = 6.94 percent, reject the project

B) PI = −7.52 percent, reject the project

C) PI = −4.21 percent, reject the project

D) PI = 5.33 percent, accept the project

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

A) NPV

B) IRR

C) MIRR

D) None are suitable

88) All of the following capital budgeting tools are suitable for firms facing time constraints EXCEPT

A) NPV.

B) payback.

C) discounted payback.

D) All of these choices are correct.

89) All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

A) MIRR.

B) profitability index.

C) payback.

D) NPV.

90) All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

A) MIRR.

B) profitability index.

C) discounted payback.

D) NPV.

91) All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

A) MIRR.

B) profitability index.

C) IRR.

D) NPV.

92) A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as

A) NPV.

B) profitability index.

C) MIRR.

D) discounted payback.

93) A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as

A) IRR.

B) EAR.

C) NPV.

D) MIRR.

94) 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 is referred to as

A) PI.

B) IRR.

C) NPV.

D) MIRR.

95) Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

A) The discounted payback will be greater than zero.

B) It will have a PI and NPV of zero.

C) The NPV and IRR will yield the same decision.

D) The IRR will just equal the cost of capital.

96) Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

A) Independent projects that are evaluated at a high cost of capital.

B) Mutually exclusive projects that are evaluated at a low cost of capital.

C) Any projects that exhibit differences in scale or timing.

D) Mutually exclusive projects that exhibit differences in scale or timing.

97) A project's IRR is the interest rate that

A) causes the project's NPV to equal zero.

B) is used to discount cash flows when computing the project's NPV.

C) is used to determine which one of two mutually exclusive projects should be accepted.

D) is used to compute the project's discounted payback period.

98) A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

A) The project has only one negative cash flow.

B) The project's MIRR is less than 15 percent but greater than 10 percent.

C) The project's discounted payback is less than the project's payback.

D) The project's NPV > 0.

99) All of the following are strengths of NPV EXCEPT

A) it works equally well for independent and mutually exclusive projects.

B) managers have a preference for using a statistic that is in percent instead of dollars.

C) it uses a conservative reinvestment rate assumption.

D) these are all strengths of the NPV statistic.

100) All of the following are strengths of payback EXCEPT

A) its benchmark is not determined by a relevant external constraint.

B) it incorporates the time value of money.

C) it uses a conservative reinvestment rate.

D) none of the options.

101) 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.

102) 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.

103) 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.

104) 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.

105) 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.

106) 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

107) 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

108) 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

109) 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

110) 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

111) 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

112) 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

113) The least-used capital budgeting technique in industry is

A) NPV.

B) IRR.

C) Payback

D) MIRR.

114) 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.

115) 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.

116) 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.

117) 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.

118) 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

119) 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.

120) Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 12 percent.

Project X

A) $6,234.93

B) $7,505.96

C) $8,417.80

D) $37,505.96

121) Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 10 percent.

Project X

A) $183,507.96

B) $247,410.67

C) $248,962.50

D) $262,622.77

122) Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

A) $183,507.96

B) $247,410.67

C) $248,962.50

D) $262,622.77

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

Project Y

A) −$19,594.29

B) $7,788.34

C) $9,367.11

D) $107,788.34

124) Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

A) −$2,013.18

B) −$175.66

C) $486.29

D) $9,824.34

125) Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 12 percent.

Project Y

A) $18,133,88

B) −$1,366.99

C) −$1,539.14

D) −$1,866.12