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Chapter 05 - Net Present Value Value and Other Ot her Investment Rules

Chapter 05 Net Present Value and Other Investment Rules

Multiple Choice Questions

1. The difference beteen the present value !f an investment and its c!st is the" A. net present value. #. internal #. internal rate !f return. C. pa$bac% C. pa$bac% peri!d. &. pr!fitabilit$ &. pr!fitabilit$ inde'. (. disc!unted (. disc!unted pa$bac% peri!d.

Difficulty Difficulty level: Easy Easy Topic: NET PRESENT VALUE Type: DEFINITIONS

). *hich !ne !f the f!ll!in+ statements c!ncernin+ net present value ,NPV is c!rrect /. /n /. /n investment sh!uld be accepted if and !nl$ if the NPV is e'actl$ eual e ual t! 2er!. #. /n #. /n investment sh!uld be accepted accep ted !nl$ if the NPV is eual t! the initial cash fl!. C. /n investment sh!uld be accepted if the NPV is p!sitive and re3ected if it is ne+ative. &. /n &. /n investment ith +reater cash infl!s than cash !utfl!s re+ardless !f hen the cash fl!s !ccur ill ala$s have a p!sitive NPV and theref!re sh!uld ala$s be accepted. (. /n$ (. /n$ pr!3ect that has p!sitive cash fl!s f!r ever$ time peri!d after the initial investment sh!uld be accepted.

Difficulty Difficulty level: Easy Easy Topic: NET PRESENT VALUE RULE Type: DEFINITIONS


4. The len+th !f time reuired f!r an investment t! +enerate cash fl!s sufficient t! rec!ver the initial c!st !f the investment is called the" /. net /. net present value. #. internal #. internal rate !f return. C. pa$bac% peri!d. &. pr!fitabilit$ &. pr!fitabilit$ inde'. (. disc!unted (. disc!unted cash peri!d.

Difficulty Difficulty level: Easy Easy Topic: PAYBA! Type: DEFINITIONS

. *hich !ne !f the f!ll!in+ statements is c!rrect c!ncernin+ the pa$bac% peri!d A. /n investment is acceptable if its calculated pa$bac% peri!d is less than s!me pre-specified peri!d !f time. #. /n #. /n investment sh!uld be accepted if the pa$bac% is p!sitive and re3ected if it is ne+ative. C. /n C. /n investment sh!uld be re3ected if the pa$bac% is p!sitive and accepted if it is ne+ative. &. /n &. /n investment is acceptable if its calculated pa$bac% peri!d is +reater than s!me prespecified peri!d !f time. (. /n (. /n investment sh!uld be accepted an$ time the pa$bac% peri!d is less than the disc!unted pa$bac% peri!d +iven a p!sitive disc!unt rate.

Difficulty Difficulty level: Easy Easy Topic: PAYBA! RULE Type: DEFINITIONS

5. The len+th !f time reuired f!r a pr!3ect6s disc!unted cash fl!s t! eual the initial c!st !f the pr!3ect is called the" /. net /. net present value. #. internal #. internal rate !f return. C. pa$bac% C. pa$bac% peri!d. &. disc!unted &. disc!unted pr!fitabilit$ inde'. E. disc!unted pa$bac% peri!d.

Difficulty Difficulty level: Easy Easy Topic: DISOUNTED PAYBA! Type: DEFINITIONS


4. The len+th !f time reuired f!r an investment t! +enerate cash fl!s sufficient t! rec!ver the initial c!st !f the investment is called the" /. net /. net present value. #. internal #. internal rate !f return. C. pa$bac% peri!d. &. pr!fitabilit$ &. pr!fitabilit$ inde'. (. disc!unted (. disc!unted cash peri!d.

Difficulty Difficulty level: Easy Easy Topic: PAYBA! Type: DEFINITIONS

. *hich !ne !f the f!ll!in+ statements is c!rrect c!ncernin+ the pa$bac% peri!d A. /n investment is acceptable if its calculated pa$bac% peri!d is less than s!me pre-specified peri!d !f time. #. /n #. /n investment sh!uld be accepted if the pa$bac% is p!sitive and re3ected if it is ne+ative. C. /n C. /n investment sh!uld be re3ected if the pa$bac% is p!sitive and accepted if it is ne+ative. &. /n &. /n investment is acceptable if its calculated pa$bac% peri!d is +reater than s!me prespecified peri!d !f time. (. /n (. /n investment sh!uld be accepted an$ time the pa$bac% peri!d is less than the disc!unted pa$bac% peri!d +iven a p!sitive disc!unt rate.

Difficulty Difficulty level: Easy Easy Topic: PAYBA! RULE Type: DEFINITIONS

5. The len+th !f time reuired f!r a pr!3ect6s disc!unted cash fl!s t! eual the initial c!st !f the pr!3ect is called the" /. net /. net present value. #. internal #. internal rate !f return. C. pa$bac% C. pa$bac% peri!d. &. disc!unted &. disc!unted pr!fitabilit$ inde'. E. disc!unted pa$bac% peri!d.

Difficulty Difficulty level: Easy Easy Topic: DISOUNTED PAYBA! Type: DEFINITIONS


7. The disc!unted pa$bac% rule states that $!u sh!uld accept pr!3ects" /. hich /. hich have a disc!unted pa$bac% peri!d that is +reater than s!me pre-specified peri!d !f time. #. if #. if the disc!unted pa$bac% is p!sitive and re3ected if it is ne+ative. C. !nl$ C. !nl$ if the disc!unted pa$bac% pa $bac% peri!d euals s!me pre-specified peri!d !f time. . if the disc!unted pa$bac% peri!d is less than s!me pre-specified peri!d !f time. (. !nl$ (. !nl$ if the disc!unted pa$bac% peri!d is eual t! 2er!.

Difficulty Difficulty level: Easy Easy Topic: DISOUNTED PAYBA! RULE Type: DEFINITIONS

8. The disc!unt rate that ma%es the net present value !f an investment e'actl$ eual t! 2er! is called the" /. e'ternal /. e'ternal rate !f return. !. internal rate !f return. C. avera+e C. avera+e acc!untin+ return. &. pr!fitabilit$ &. pr!fitabilit$ inde'. (. euali2er. (. euali2er.

Difficulty Difficulty level: Easy Easy Topic: INTERNAL RATE OF RETURN Type: DEFINITIONS

9. /n investment is acceptable if its IRR" /. is /. is e'actl$ eual t! its net present value ,NPV. #. is #. is e'actl$ eual t! 2er!. C. is C. is less than the reuired return. . e'ceeds the reuired return. (. is (. is e'actl$ eual t! 100:.

Difficulty Difficulty level: Easy Easy Topic: INTERNAL RATE OF RETURN RULE Type: DEFINITIONS


;. The p!ssibilit$ that m!re than !ne disc!unt rate ill ma%e the NPV !f an investment eual t! 2er! is called the <<<<< pr!blem. /. net /. net present value pr!filin+ #. !perati!nal #. !perati!nal ambi+uit$ C. mutuall$ C. mutuall$ e'clusive investment decisi!n &. issues &. issues !f scale E. multiple rates !f return

Difficulty Difficulty level: "e#iu$ "e#iu$ Topic: "ULTIPLE RATES OF RETURN Type: DEFINITIONS

10. / situati!n in hich acceptin+ !ne investment prevents the acce ptance !f an!ther investment is called the" /. net /. net present value pr!file. #. !perati!nal #. !perati!nal ambi+uit$ decisi!n. C. mutuall$ e'clusive investment decisi!n. &. issues &. issues !f scale pr!blem. (. multiple (. multiple ch!ices !f !perati!ns decisi!n.

Difficulty Difficulty level: Easy Easy Topic: "UTUALLY E%LUSIVE PRO&ETS Type: DEFINITIONS

11. The present value !f an investment6s future cash fl!s divided b$ the initial c!st !f the investment is called the" /. net /. net present value. #. internal #. internal rate !f return. C. avera+e C. avera+e acc!untin+ return. . pr!fitabilit$ inde'. (. pr!file (. pr!file peri!d.

Difficulty Difficulty level: Easy Easy Topic: PROFITABILITY INDE% Type: DEFINITIONS


1). /n investment is acceptable if the pr!fitabilit$ inde' ,PI !f the investment is" A. +reater than !ne. #. less #. less than !ne. C. +reater C. +reater than the internal rate !f return ,IRR. &. less &. less than the net present value ,NPV. (. +reater (. +reater than a pre-specified rate !f return.

Difficulty Difficulty level: Easy Easy Topic: PROFITABILITY INDE% RULE Type: DEFINITIONS

14. /ll else c!nstant the net present value !f a t$pical investment pr!3ect increases hen" /. the /. the disc!unt rate increases. #. each #. each cash infl! is dela$ed b$ !ne $ear. C. the C. the initial c!st !f a pr!3ect increases. . the rate !f return decreases. (. all (. all cash infl!s !ccur durin+ the last $ear !f ! f a pr!3ect6s life instead !f peri!dicall$ thr!u+h!ut the life !f the pr!3ect.

Difficulty Difficulty level: Easy Easy Topic: NET PRESENT VALUE Type: ONEPTS

1. The primar$ reas!n that c!mpan$ pr!3ects ith p!sitive net present values are c!nsidered acceptable is that" A. the$ create value f!r the !ners !f the firm. #. the #. the pr!3ect6s rate !f return e'ceeds the rate !f inflati!n. C. the$ C. the$ return the initial cash !utla$ ithin three $ears !r less. &. the &. the reuired cash infl!s e'ceed the actual cash infl!s. (. the (. the investment6s c!st e'ceeds the present value !f the cash infl!s.

Difficulty Difficulty level: Easy Easy Topic: NET PRESENT VALUE Type: ONEPTS

Chapter 05 - Net Present Value and Other Investment Rules

15. If a pr!3ect has a net present value eual t! 2er! then" I. the present value !f the cash infl!s e'ceeds the initial c!st !f the pr!3ect. II. the pr!3ect pr!duces a rate !f return that 3ust euals the rate reuired t! accept the pr!3ect. III. the pr!3ect is e'pected t! pr!duce !nl$ the minimall$ reuired cash infl!s. IV. an$ dela$ in receivin+ the pr!3ected cash infl!s ill cause the pr!3ect t! have a ne+ative net present value. /. II and III !nl$ #. II and IV !nl$ C. I II and IV !nl$ . II III and IV !nl$ (. I II and III !nl$

Difficulty level: "e#iu$ Topic: NET PRESENT VALUE Type: ONEPTS

17. Net present value" /. cann!t be used hen decidin+ beteen t! mutuall$ e'clusive pr!3ects. !. is m!re useful t! decisi!n ma%ers than the internal rate !f return hen c!mparin+ different si2ed pr!3ects. C. is eas$ t! e'plain t! n!n-financial mana+ers and thus is the primar$ meth!d !f anal$sis used b$ the l!est levels !f mana+ement. &. is n!t an as idel$ used t!!l as pa$bac% and disc!unted pa$bac%. (. is ver$ similar in its meth!d!l!+$ t! the avera+e acc!untin+ return.

Difficulty level: Easy Topic: NET PRESENT VALUE Type: ONEPTS

18. Pa$bac% is freuentl$ used t! anal$2e independent pr!3ects because" /. it c!nsiders the time value !f m!ne$. #. all relevant cash fl!s are included in the anal$sis. C. it is eas$ and uic% t! calculate. &. it is the m!st desirable !f all the available anal$tical meth!ds fr!m a financial perspective. (. it pr!duces better decisi!ns than th!se made usin+ either NPV !r IRR.

Difficulty level: Easy Topic: PAYBA! Type: ONEPTS


19. The advanta+es !f the pa$bac% meth!d !f pr!3ect anal$sis include the" I. applicati!n !f a disc!unt rate t! each separate cash fl!. II. bias t!ards liuidit$. III. ease !f use. IV. arbitrar$ cut!ff p!int. /. I and II !nl$ #. I and III !nl$ C. II and III !nl$ &. II and IV !nl$ (. II III and IV !nl$

Difficulty level: "e#iu$ Topic: PAYBA! Type: ONEPTS

1;. /ll else eual the pa$bac% peri!d f!r a pr!3ect ill decrease henever the" /. initial c!st increases. #. reuired return f!r a pr!3ect increases. C. assi+ned disc!unt rate decreases. . cash infl!s are m!ved earlier in time. (. durati!n !f a pr!3ect is len+thened.

Difficulty level: "e#iu$ Topic: PAYBA! Type: ONEPTS

)0. The disc!unted pa$bac% peri!d !f a pr!3ect ill decrease henever the" /. disc!unt rate applied t! the pr!3ect is increased. #. initial cash !utla$ !f the pr!3ect is increased. C. time peri!d !f the pr!3ect is increased. . am!unt !f each pr!3ect cash infl! is increased. (. c!sts !f the fi'ed assets utili2ed in the pr!3ect increase.

Difficulty level: "e#iu$ Topic: DISOUNTED PAYBA! Type: ONEPTS


)1. The disc!unted pa$bac% rule ma$ cause" /. s!me p!sitive net present value pr!3ects t! be re3ected. #. the m!st liuid pr!3ects t! be re3ected in fav!r !f less liuid pr!3ects. C. pr!3ects t! be inc!rrectl$ accepted due t! i+n!rin+ the time value !f m!ne$. &. s!me pr!3ects ith ne+ative net present values t! be accepted. E. #!th / and &.

Difficulty level: 'alle()e Topic: DISOUNTED PAYBA! Type: ONEPTS

)). The internal rate !f return ,IRR" I. rule states that a t$pical investment pr!3ect ith an IRR that is less than the reuired rate sh!uld be accepted. II. is the rate +enerated s!lel$ b$ the cash fl!s !f an investment. III. is the rate that causes the net present value !f a pr!3ect t! e'actl$ eual 2er!. IV. can effectivel$ be used t! anal$2e all investment scenari!s. /. I and IV !nl$ !. II and III !nl$ C. I II and III !nl$ &. II III and IV !nl$ (. I II III and IV

Difficulty level: "e#iu$ Topic: INTERNAL RATE OF RETURN Type: ONEPTS

)4. The internal rate !f return f!r a pr!3ect ill increase if" A. the initial c!st !f the pr!3ect can be reduced. #. the t!tal am!unt !f the cash infl!s is reduced. C. each cash infl! is m!ved such that it !ccurs !ne $ear later than !ri+inall$ pr!3ected. &. the reuired rate !f return is reduced. (. the salva+e value !f the pr!3ect is !mitted fr!m the anal$sis.



). The internal rate !f return is" /. m!re reliable as a decisi!n ma%in+ t!!l than net present value henever $!u are c!nsiderin+ mutuall$ e'clusive pr!3ects. #. euivalent t! the disc!unt rate that ma%es the net present value eual t! !ne. C. difficult t! c!mpute ith!ut the use !f either a financial calculat!r !r a c!mputer. &. dependent up!n the interest rates !ffered in the mar%etplace. (. a better meth!d!l!+$ than net present value hen dealin+ ith unc!nventi!nal cash fl!s.


)5. The internal rate !f return tends t! be" A. easier f!r mana+ers t! c!mprehend than the net present value. #. e'tremel$ accurate even hen cash fl! estimates are fault$. C. i+n!red b$ m!st financial anal$sts. &. used primaril$ t! differentiate beteen mutuall$ e'clusive pr!3ects. (. utili2ed in pr!3ect anal$sis !nl$ hen multiple net present values appl$.

Difficulty level: Easy Topic: INTERNAL RATE OF RETURN Type: ONEPTS

)7. =!u are tr$in+ t! determine hether t! accept pr!3ect / !r pr!3ect #. These pr!3ects are mutuall$ e'clusive. /s part !f $!ur anal$sis $!u sh!uld c!mpute the incremental IRR b$ determinin+" /. the internal rate !f return f!r the cash fl!s !f each pr!3ect. #. the net present value !f each pr!3ect usin+ the internal rate !f return as the disc!unt rate. C. the disc!unt rate that euates the disc!unted pa$bac% peri!ds f!r each pr!3ect. &. the disc!unt rate that ma%es the net present value !f each pr!3ect eual t! 1. E. the internal rate !f return f!r the differences in the c ash fl!s !f the t! pr!3ects.

Difficulty level: "e#iu$ Topic: INRE"ENTAL INTERNAL RATE OF RETURN Type: ONEPTS


)8. >raphin+ the NPVs !f mutuall$ e'clusive pr!3ects !ver different disc!unt rates helps dem!nstrate" /. h! the incremental IRR varies ith chan+es in the disc!unt rate. !. h! decisi!ns c!ncernin+ mutuall$ e'clusive pr!3ects are derived. C. h! the durati!n !f a pr!3ect affects the decisi!n as t! hich pr!3ect t! accept. &. h! the pa$bac% peri!d and the initial cash !utfl! !f a pr!3ect are related. (. h! the pr!fitabilit$ inde' and the net present value are related.

Difficulty level: "e#iu$ Topic: INRE"ENTAL INTERNAL RATE OF RETURN Type: ONEPTS

)9. The pr!fitabilit$ inde' is cl!sel$ related t!" /. pa$bac%. #. disc!unted pa$bac%. C. avera+e acc!untin+ return. . net present value. (. internal rate !f return.

Difficulty level: Easy Topic: PROFITABILITY INDE% Type: ONEPTS

);. /nal$sis usin+ the pr!fitabilit$ inde'" /. freuentl$ c!nflicts ith the accept and re3ect decisi!ns +enerated b$ the applicati!n !f the net present value rule. !. is useful as a decisi!n t!!l hen investment funds are limited. C. cann!t be used t! aid capital rati!nin+. &. utili2es the same basic variables as th!se used in the avera+e acc!untin+ return. (. pr!duces results hich t$picall$ are difficult t! c!mprehend !r appl$.

Difficulty level: "e#iu$ Topic: PROFITABILITY INDE% Type: ONEPTS


40. If $!u ant t! revie a pr!3ect fr!m a benefit-c!st perspective $!u sh!uld use the <<<<<<< meth!d !f anal$sis. /. net present value #. pa$bac% C. internal rate !f return &. avera+e acc!untin+ return E. pr!fitabilit$ inde'


41. *hen the present value !f the cash infl!s e'ceeds the initial c!st !f a pr!3ect then the pr!3ect sh!uld be" /. accepted because the internal rate !f return is p!sitive. !. accepted because the pr!fitabilit$ inde' is +reater than 1. C. accepted because the pr!fitabilit$ inde' is ne+ative. &. re3ected because the internal rate !f return is ne+ative. (. re3ected because the net present value is ne+ative.


4). *hich !ne !f the f!ll!in+ is the best e'ample !f t! mutuall$ e'clusive pr!3ects /. plannin+ t! build a areh!use and a retail !utlet side b$ side. #. bu$in+ sufficient euipment t! manufacture b!th des%s and chairs simultane!usl$. C. usin+ an empt$ areh!use f!r st!ra+e !r rentin+ it entirel$ !ut t! an!ther firm. &. usin+ the c!mpan$ sales f!rce t! pr!m!te sales !f b!th sh!es and s!c%s. (. bu$in+ b!th invent!r$ and fi'ed assets usin+ funds fr!m the same b!nd issue.

Difficulty level: "e#iu$ Topic: "UTUALLY E%LUSIVE PRO&ETS Type: ONEPTS


44. The ?ibert$ C!. is c!nsiderin+ t! pr!3ects. Pr!3ect / c!nsists !f buildin+ a h!lesale b!!% !utlet !n l!t @17; !f the (n+le!!d Retail Center. Pr!3ect # c!nsists !f buildin+ a sitd!n restaurant !n l!t @17; !f the (n+le!!d Retail Center. *hen tr$in+ t! decide hether t! build the b!!% !utlet !r the restaurant mana+ement sh!uld rel$ m!st heavil$ !n the anal$sis results fr!m the <<<<< meth!d !f anal$sis. /. pr!fitabilit$ inde' #. internal rate !f return C. pa$bac% . net present value (. acc!untin+ rate !f return


4. *hen t! pr!3ects b!th reuire the t!tal use !f the same limited ec!n!mic res!urce the pr!3ects are +enerall$ c!nsidered t! be" /. independent. #. mar+inall$ pr!fitable. C. mutuall$ e'clusive. &. acceptable. (. internall$ pr!fitable.

Difficulty level: Easy Topic: "UTUALLY E%LUSIVE PRO&ETS Type: ONEPTS


45. Aatt is anal$2in+ t! mutuall$ e'clusive pr!3ects !f similar si2e and has prepared the f!ll!in+ data. #!th pr!3ects have 5 $ear lives.

Aatt has been as%ed f!r his best rec!mmendati!n +iven this inf!rmati!n. Bis rec!mmendati!n sh!uld be t! accept" /. pr!3ect # because it has the sh!rtest pa$bac% peri!d. #. b!th pr!3ects as the$ b!th have p!sitive net present values. C. pr!3ect / and re3ect pr!3ect # based !n their net present values. &. pr!3ect # and re3ect pr!3ect / based !n !ther criteria n!t menti!ned in the pr!blem. (. pr!3ect # and re3ect pr!3ect / based !n b!th the pa$bac% peri!d and the avera+e acc!untin+ return.


47. >iven that the net present value ,NPV is +enerall$ c!nsidered t! be the best meth!d !f anal$sis h$ sh!uld $!u still use the !ther meth!ds A. The !ther meth!ds help validate hether !r n!t the results fr!m the net present value anal$sis are reliable. #. =!u need t! use the !ther meth!ds since c!nventi!nal practice dictates that $!u !nl$ accept pr!3ects after $!u have +enerated three accept indicat!rs. C. =!u need t! use !ther meth!ds because the net present value meth!d is unreliable hen a pr!3ect has unc!nventi!nal cash fl!s. &. The internal rate !f return must ala$s indicate acceptance since this is the best meth!d fr!m a financial perspective. (. The disc!unted pa$bac% meth!d must ala$s be c!mputed t! determine if a pr!3ect returns a p!sitive cash fl! since NPV d!es n!t measure this aspect !f a pr!3ect.

Difficulty level: "e#iu$ Topic: INVEST"ENT ANALYSIS Type: ONEPTS


48. In actual practice mana+ers ma$ use the" I. IRR because the results are eas$ t! c!mmunicate and understand. II. pa$bac% because !f its simplicit$. III. net present value because it is c!nsidered b$ man$ t! be the best meth!d !f anal$sis. /. I and II !nl$ #. II and III !nl$ C. I and III !nl$ . I II and III (. N!ne !f the ab!ve


49. N! matter h! man$ f!rms !f investment anal$sis $!u d!" A. the actual results fr!m a pr!3ect ma$ var$ si+nificantl$ fr!m the e'pected results. #. the internal rate !f return ill ala$s pr!duce the m!st reliable results. C. a pr!3ect ill never be accepted unless the pa$bac% peri!d is met. &. the initial c!sts ill +enerall$ var$ c!nsiderabl$ fr!m the estimated c!sts. (. !nl$ the first three $ears !f a pr!3ect ever affect its final !utc!me.

Difficulty level: Easy Topic: INVEST"ENT ANALYSIS Type: ONEPTS

4;. *hich !f the f!ll!in+ meth!ds !f pr!3ect anal$sis are biased t!ards sh!rt-term pr!3ects I. internal rate !f return II. net present value III. pa$bac% IV. disc!unted pa$bac% /. I and II !nl$ !. III and IV !nl$ C. II and III !nl$ &. I and IV !nl$ (. II and IV !nl$



0. If a pr!3ect is assi+ned a reuired rate !f return eual t! 2er! then" A. the timin+ !f the pr!3ect6s cash fl!s has n! bearin+ !n the value !f the pr!3ect. #. the pr!3ect ill ala$s be accepted. C. the pr!3ect ill ala$s be re3ected. &. hether the pr!3ect is accepted !r re3ected ill depend !n the timin+ !f the cash fl!s. (. the pr!3ect can never add value f!r the shareh!lders.


1. =!u are c!nsiderin+ a pr!3ect ith the f!ll!in+ data" Internal rate !f return 9.8: Pr!fitabilit$ rati! .;9 Net present value -4;4 Pa$bac% peri!d ). $ears Reuired return ;.5: *hich !ne !f the f!ll!in+ is c!rrect +iven this inf!rmati!n /. The disc!unt rate used in c!mputin+ the net present value must have been less than 9.8:. #. The disc!unted pa$bac% peri!d ill have t! be less than ). $ears. C. The disc!unt rate used t! c!mpute the pr!fitabilit$ rati! as eual t! the internal rate ! f return. &. This pr!3ect sh!uld be accepted based !n the pr!fitabilit$ rati!. E. This pr!3ect sh!uld be re3ected based !n the internal rate !f return.

Difficulty level: "e#iu$ Topic: DEISION RULES Type: ONEPTS

). /cceptin+ p!sitive NPV pr!3ects benefits the st!c%h!lders because" /. it is the m!st easil$ underst!!d valuati!n pr!cess. #. the present value !f the e'pected cash fl!s are eual t! the c!st. C. the present value !f the e'pected cash fl!s are +reater than the c!st. &. it is the m!st easil$ calculated. (. N!ne !f the ab!ve.



4. *hich !f the f!ll!in+ d!es n!t characteri2e NPV A. NPV d!es n!t e'plicitl$ inc!rp!rate ris% int! the anal$sis. #. NPV inc!rp!rates all relevant cash fl! inf!rmati!n. C. NPV uses all !f the pr!3ect6s cash fl!s. &. NPV disc!unts all future cash fl!s. (. Dsin+ NPV ill lead t! decisi!ns that ma'imi2e shareh!lder ealth.


. The pa$bac% peri!d rule" /. disc!unts cash fl!s. #. i+n!res initial c!st. C. ala$s uses all p!ssible cash fl!s in its calculati!n. &. #!th / and C. E. N!ne !f the ab!ve.


5. The pa$bac% peri!d rule accepts all investment pr!3ects in hich the pa$bac% peri!d f!r the cash fl!s is" /. +reater than !ne. #. +reater than the cut!ff p!int. C. less than the cut!ff p!int. &. p!sitive. (. N!ne !f the ab!ve.



7. The pa$bac% peri!d rule is a c!nvenient and useful t!!l because" /. it pr!vides a uic% estimate !f h! rapidl$ the initial investment ill be rec!uped. #. results !f a sh!rt pa$bac% rule decisi!n ill be uic%l$ seen. C. it d!es n!t have t! ta%e int! acc!unt time value !f m!ne$. . /ll !f the ab!ve. (. N!ne !f the ab!ve.


8. The disc!unted pa$bac% peri!d rule" A. c!nsiders the time value !f m!ne$. #. disc!unts the cut!ff p!int. C. i+n!res uncertain cash fl!s. &. is preferred t! the NPV rule. (. N!ne !f the ab!ve.

Difficulty level: Easy Topic: DISOUNTED PAYBA! Type: ONEPTS

9. The pa$bac% peri!d rule" /. determines a cut!ff p!int s! that all pr!3ects accepted b$ the NPV rule ill be accepted b$ the pa$bac% peri!d rule. #. determines a cut!ff p!int s! that depreciati!n is 3ust eual t! p!sitive cash fl!s in the pa$bac% $ear. C. reuires an arbitrar$ ch!ice !f a cut!ff p!int. &. varies the cut!ff p!int ith the interest rate. (. #!th / and &.



;. A!dified internal rate !f return" /. handles the multiple IRR pr!blem b$ c!mbinin+ cash fl!s until !nl$ !ne chan+e in si+n chan+e remains. #. reuires the use !f a disc!unt rate. C. d!es n!t reuire the use !f a disc!unt rate. . #!th / and #. (. #!th / and C.

Difficulty level: "e#iu$ Topic: "ODIFIED INTERNAL RATE OF RETURN Type: ONEPTS

50. / mutuall$ e'clusive pr!3ect is a pr!3ect h!se" /. acceptance !r re3ecti!n has n! effect !n !ther pr!3ects. #. NPV is ala$s ne+ative. C. IRR is ala$s ne+ative. . acceptance !r re3ecti!n affects !ther pr!3ects. (. cash fl! pattern e'hibits m!re than !ne si+n chan+e.

Difficulty level: Easy Topic: "UTUALLY E%LUSIVE PRO&ETS Type: ONEPTS

51. The t! fatal flas !f the internal rate !f return rule are" /. arbitrar$ determinati!n !f a disc!unt rate and failure t! c!nsider initial e'penditures. #. arbitrar$ determinati!n !f a disc!unt rate and failure t! c!rrectl$ anal$2e mutuall$ e'clusive investment pr!3ects. C. arbitrar$ determinati!n !f a disc!unt rate and the multiple rate !f return pr!blem. &. failure t! c!nsider initial e'penditures and failure t! c! rrectl$ anal$2e mutuall$ e'clusive investment pr!3ects. E. failure t! c!rrectl$ anal$2e mutuall$ e'clusive investment pr!3ects and the multiple rate !f return pr!blem.



5). / pr!3ect ill have m!re than !ne IRR if" /. the IRR is p!sitive. #. the IRR is ne+ative. C. the NPV is 2er!. . the cash fl! pattern e'hibits m!re than !ne si+n chan+e. (. the cash fl! pattern e'hibits e'actl$ !ne si+n chan+e.

Difficulty level: Easy Topic: INTERNAL RATE OF RETURN Type: ONEPTS

54. Dsin+ internal rate !f return a c!nventi!nal pr!3ect sh!uld be accepted if the internal rate !f return is" /. eual t! the disc!unt rate. !. +reater than the disc!unt rate. C. less than the disc!unt rate. &. ne+ative. (. p!sitive.

Difficulty level: Easy Topic: INTERNAL RATE OF RETURN RULES Type: ONEPTS

5. The internal rate !f return ma$ be defined as" A. the disc!unt rate that ma%es the NPV eual t! 2er!. #. the difference beteen the mar%et rate !f interest and the NPV. C. the mar%et rate !f interest less the ris%-free rate. &. the pr!3ect acceptance rate set b$ mana+ement. (. N!ne !f the ab!ve.



55. The pr!blem !f multiple IRRs can !ccur hen" /. there is !nl$ !ne si+n chan+e in the cash fl!s. #. the first cash fl! is ala$s p!sitive. C. the cash fl!s decline !ver the life !f the pr!3ect. . there is m!re than !ne si+n chan+e in the cash fl!s. (. N!ne !f the ab!ve.

Difficulty level: Easy Topic: "ULTIPLE INTERNAL RATE OF RETURNS Type: ONEPTS

57. The elements that cause pr!blems ith the use !f the IRR in pr!3ects that are mutuall$ e'clusive are" /. the disc!unt rate and scale pr!blems. !. timin+ and scale pr!blems. C. the disc!unt rate and timin+ pr!blems. &. scale and reversin+ fl! pr!blems. (. timin+ and reversin+ fl! pr!blems.

Difficulty level: "e#iu$ Topic: TI"IN* AND SALE ISSUES +IT, INTERNAL RATE OF RETURN Type: ONEPTS

58. If there is a c!nflict beteen mutuall$ e'clusive pr!3ects due t! the IRR !ne sh!uld" /. dr!p the t! pr!3ects immediatel$. #. spend m!re m!ne$ !n +atherin+ inf!rmati!n. C. depend !n the NPV as it ill ala$s pr!vide the m!st value. &. depend !n the pa$bac% because it d!es n!t suffer fr!m these same pr!blems. (. N!ne !f the ab!ve.

Difficulty level: "e#iu$ Topic: NET PRESENT VALUE DEISION Type: ONEPTS


59. The pr!fitabilit$ inde' is the rati! !f" /. avera+e net inc!me t! avera+e investment. #. internal rate !f return t! current mar%et interest rate. C. net present value !f cash fl!s t! internal rate !f return. &. net present value !f cash fl!s t! return !n euit$. E. present value !f cash fl!s t! initial investment c!st.


5;. *hich !f the f!ll!in+ statement is true A. One must %n! the disc!unt rate t! c!mpute the NPV !f a pr!3ect but !ne can c!mpute the IRR ith!ut referrin+ t! the disc!unt rate. #. One must %n! the disc!unt rate t! c!mpute the IRR !f a pr!3ect but !ne can c!mpute the NPV ith!ut referrin+ t! the disc!unt rate. C. Pa$bac% acc!unts f!r time value !f m!ne$. &. There ill ala$s be !ne IRR re+ardless !f cash fl!s. (. Return !n euit$ is the rati! !f t!tal assets t! t!tal net inc!me.

Difficulty level: "e#iu$ Topic: INVEST"ENT DEISION RULES Type: ONEPTS

70. >raham and Barve$ ,)001 f!und that <<< and <<< ere the t! m!st p!pular capital bud+etin+ meth!ds. /. Internal Rate !f ReturnE Pa$bac% Peri!d !. Internal Rate !f ReturnE Net Present Value C. Net Present ValueE Pa$bac% Peri!d &. A!dified Internal Rate !f ReturnE Internal Rate !f Return (. A!dified Internal Rate !f ReturnE Net Present Value

Difficulty level: "e#iu$ Topic: APITAL BUD*ETIN* PRATIE Type: ONEPTS


71. *hat is the net present value !f a pr!3ect ith the f!ll!in+ cash fl!s and a reuired return !f 1):

/. -)98.)) !. -188.7) C. 188.7) &. )0.47 (. )98.))

Difficulty level: Easy Topic: NET PRESENT VALUE Type: PROBLE"S


7). *hat is the net present value !f a pr!3ect that has an initial cash !utfl! !f 1)780 and the f!ll!in+ cash infl!s The reuired return is 11.5:.

A. )19.79 #. 480.17 C. 879.)0 &. 1);.75 (. 1481.0)



74. / pr!3ect ill pr!duce cash infl!s !f 1850 a $ear f!r f!ur $ears. The pr!3ect initiall$ c!sts 10700 t! +et started. In $ear five the pr!3ect ill be cl!sed and as a result sh!uld pr!duce a cash infl! !f 9500. *hat is the net present value !f this pr!3ect if the reuired rate !f return is 14.85: /. -58.87 !. -1011.0 C. -;45.57 &. 1011.0 (. 58.87



7. =!u are c!nsiderin+ the f!ll!in+ t! mutuall$ e'clusive pr!3ects that ill n!t be repeated. The reuired rate !f return is 11.)5: f!r pr!3ect / and 10.85: f!r pr!3ect #. *hich pr!3ect sh!uld $!u accept and h$

A. pr!3ect /E because its NPV is ab!ut 445 m!re than the NPV !f pr!3ect #. #. pr!3ect /E because it has the hi+her reuired rate !f return. C. pr!3ect #E because it has the lar+est t!tal cash infl!. &. pr!3ect #E because it returns all its cash fl!s ithin t! $ears. (. pr!3ect #E because it is the lar+est si2ed pr!3ect.

&ifference in NPVs F )4)7.7 - 1;;1.57 F 44.;0 The anser states that the NPV !f Pr!3ect / e'ceeds the NPV !f pr!3ect # b$ ab!ut 445.

Chapter 05 - Net Present Value and Other Investment Rules Difficulty level: "e#iu$ Topic: NET PRESENT VALUE Type: PROBLE"S


75. =!u are c!nsiderin+ t! mutuall$ e'clusive pr!3ects ith the f!ll!in+ cash fl!s. *ill $!ur ch!ice beteen the t! pr!3ects differ if the reuired rate !f return is 9: rather than 11: If s! hat sh!uld $!u d!

A. $esE Gelect / at 9: and # at 11:. #. $esE Gelect # at 9: and / at 11:. C. $esE Gelect / at 9: and select neither at 11:. &. n!E Re+ardless !f the reuired rate pr!3ect / ala$s has the hi+her NPV. (. n!E Re+ardless !f the reuired rate pr!3ect # ala$s has the hi+her NPV.


/t 9: Pr!3ect / has the hi+her NPV. /t 11: Pr!3ect # has the hi+her NPV.

Difficulty level: "e#iu$ Topic: NET PRESENT VALUE Type: PROBLE"S


77. *hat is the internal rate !f return !n an investment ith the f!ll!in+ cash fl!s

/. 5.;4: !. 5.;7: C. 7.0: &. 7.0;: (. 7.14:

Difficulty level: Easy Topic: INTERNAL RATE OF RETURN Type: PROBLE"S


78. /n investment has the f!ll!in+ cash fl!s. Gh!uld the pr!3ect be accepted if it has been assi+ned a reuired return !f ;.5: *h$ !r h$ n!t

A. $esE because the IRR e'ceeds the reuired return b$ ab!ut 0.4;:. #. $esE because the IRR is less than the reuired return b$ ab!ut 4.;:. C. $esE because the IRR is p!sitive. &. n!E because the IRR e'ceeds the reuired return b$ ab!ut 4.;:. (. n!E because the IRR is ;.9;:.

The pr!3ect sh!uld be accepted because the IRR !f ;.9;: e'ceeds the reuired return !f ;.5:.

Difficulty level: "e#iu$ Topic: INTERNAL RATE OF RETURN Type: PROBLE"S


79. =!u are c!nsiderin+ t! independent pr!3ects ith the f!ll!in+ cash fl!s. The reuired return f!r b!th pr!3ects is 10:. >iven this inf!rmati!n hich !ne !f the f!ll!in+ statements is c!rrect

/. =!u sh!uld accept pr!3ect # since it has the hi+her IRR and re3ect pr!3ect / because $!u can n!t accept b!th pr!3ects. #. =!u sh!uld accept pr!3ect / because it has the l!er NPV and re3ect pr!3ect #. C. =!u sh!uld accept pr!3ect / because it has the hi+her NPV and $!u can n!t accept b!th pr!3ects. &. =!u sh!uld accept pr!3ect # because it has the hi+her IRR and re3ect pr!3ect /. E. =!u sh!uld accept b!th pr!3ects if the funds are available t! d! s! since b!th NPV6s are H 0.

Gince these are independent pr!3ects and b!th the IRR and NPV rules sa$ accept $!u sh!uld accept b!th pr!3ects if there are sufficient funds t! d! s!.

Difficulty level: "e#iu$ Topic: INTERNAL RATE OF RETURN AND NET PRESENT VALUE Type: PROBLE"S


7;. =!u are c!nsiderin+ an investment ith the f!ll!in+ cash fl!s. If the reuired rate !f return f!r this investment is 14.5: sh!uld $!u accept it based s!lel$ !n the internal rate !f return rule *h$ !r h$ n!t

/. =esE because the IRR e'ceeds the reuired return. #. =esE because the IRR is a p!sitive rate !f return. C. N!E because the IRR is less than the reuired return. &. N!E because the IRR is a ne+ative rate !f return. E. =!u can n!t appl$ the IRR rule in this case because there are multiple IRRs. Gince C04 is a ne+ative value resultin+ in m!re than !ne si+n chan+e there are multiple IRRs. Thus the IRR rule d!es n!t appl$.



80. *hat is the pr!fitabilit$ inde' f!r an investment ith the f!ll!in+ cash fl!s +iven a ;: reuired return

/. .;7 #. .;9 C. 1.00 . 1.0) (. 1.0

Difficulty level: Easy Topic: PROFITABILITY INDE% Type: PROBLE"S


81. #ased !n the pr!fitabilit$ inde' ,PI rule sh!uld a pr!3ect ith the f!ll!in+ cash fl!s be accepted if the disc!unt rate is 9: *h$ !r h$ n!t

/. $esE because the PI is 1.009. #. $esE because the PI is .;;). C. $esE because the PI is .;;;. &. n!E because the PI is 1.009. E. n!E because the PI is .;;).

Difficulty level: "e#iu$ Topic: PROFITABILITY INDE% Type: PROBLE"S


8). =!u are c!nsiderin+ t! independent pr!3ects b!th !f hich have been assi+ned a disc!unt rate !f 9:. #ased !n the pr!fitabilit$ inde' hat is $!ur rec!mmendati!n c!ncernin+ these pr!3ects

/. =!u sh!uld accept b!th pr!3ects since b!th !f their PIs are p!sitive. #. =!u sh!uld accept pr!3ect / since it has the hi+her PI. C. =!u sh!uld accept b!th pr!3ects since b!th !f their PIs are +reater than 1. &. =!u sh!uld !nl$ accept pr!3ect # since it has the lar+est PI and the PI e'ceeds 1. (. Neither pr!3ect is acceptable.

#ecause the pr!3ects are independent and their PIs e'ceed 1.0 b!th pr!3ects sh!uld be accepted.

Difficulty level: "e#iu$ Topic: PROFITABIILITY INDE% Type: PROBLE"S


84. =!u !uld li%e t! invest in the f!ll!in+ pr!3ect.

Vict!ria $!ur b!ss insists that !nl$ pr!3ects that can return at least  1.10 in t!da$6s d!llars f!r ever$ 1 invested can be accepted. Ghe als! insists !n appl$in+ a 10: disc!unt rate t! all cash fl!s. #ased !n these criteria $!u sh!uld" /. accept the pr!3ect because it returns alm!st 1.)) f!r ever$ 1 invested. #. accept the pr!3ect because it has a p!sitive PI. C. accept the pr!3ect because the NPV is )951. . re3ect the pr!3ect because the PI is 1.05. (. re3ect the pr!3ect because the IRR e'ceeds 10:.

=!u sh!uld re3ect the pr!3ect since the PI !f 1.05 is less than Vict!ria6s reuirement !f 1.10. It is !rth menti!nin+ that the NPV !f this pr!3ect is )951.) and the IRR is 14.81: b!th !f hich !uld n!rmall$ indicate pr!3ect acceptance. B!ever neither the NPV n!r the IRR meet the reuirement !f returnin+ 1.10 f!r ever$ 1 spent.

Difficulty level: 'alle()e Topic: PROFITABILITY INDE% Type: PROBLE"S


8. It ill c!st )700 t! acuire a small ice cream cart. Cart sales are e'pected t! be 100 a $ear f!r three $ears. /fter the three $ears the cart is e'pected t! be !rthless as that is the e'pected remainin+ life !f the c!!lin+ s$stem. *hat is the pa$bac% peri!d !f the ice cream cart /. .97 $ears #. 1.7 $ears C. 1.97 $ears &. ).7 $ears (. ).97 $ears

Difficulty level: Easy Topic: PAYBA! PERIOD Type: PROBLE"S

85. =!u are c!nsiderin+ a pr!3ect ith an initial c!st !f 400. *hat is the pa$bac% peri!d f!r this pr!3ect if the cash infl!s are 550 ;80 )700 and 500 a $ear !ver the ne't f!ur $ears /. ).0 $ears #. ).47 $ears C. ).9; $ears &. 4.0 $ears E. 4.47 $ears



87. / pr!3ect has an initial c!st !f 1;00. The cash infl!s are 0  500 ;00 and 800 !ver the ne't f!ur $ears respectivel$. *hat is the pa$bac% peri!d /. ).81 $ears #. ).;9 $ears C. 4.11 $ears . 4.81 $ears (. never


88. ac% is c!nsiderin+ addin+ t!$s t! his +eneral st!re. Be estimates that the c!st !f invent!r$ ill be )00. The rem!delin+ and shelvin+ c!sts are estimated at 1500. T!$ sales are e'pected t! pr!duce net cash infl!s !f 1)00 1500 1700 and 1850 !ver the ne't f!ur $ears respectivel$. Gh!uld ac% add t!$s t! his st!re if he assi+ns a three-$ear pa$bac% peri!d t! this pr!3ect /. $esE because the pa$bac% peri!d is ).; $ears. #. $esE because the pa$bac% peri!d is ).0) $ears. C. $esE because the pa$bac% peri!d is 4.90 $ears. &. n!E because the pa$bac% peri!d is ).0) $ears. E. n!E because the pa$bac% peri!d is 4.90 $ears.

ac% sh!uld re3ect the t!$ pr!3ect because the pa$bac% peri!d e'ceeds 4 $ears.

Difficulty level: "e#iu$ Topic: PAYBA! PERIOD Type: PROBLE"S


89. / pr!3ect has an initial c!st !f 9500 and pr!duces cash infl!s !f )700 ;00 and 1500 !ver the ne't three $ears respectivel$. *hat is the disc!unted pa$bac% peri!d if the reuired rate !f return is 8: /. ).14 $ears #. ).44 $ears C. ).78 $ears &. ).;1 $ears E. never The pr!3ect never pa$s bac% !n a disc!unted basis. &CJ F 8;4.)0 hich is less than the initial c!st !f 9500

Difficulty level: "e#iu$ Topic: DISOUNTED PAYBA! PERIOD Type: PROBLE"S

8;. =anc$ is c!nsiderin+ a pr!3ect hich ill pr!duce cash infl!s !f ;00 a $ear f!r  $ears. The pr!3ect has a ;: reuired rate !f return and an initial c!st !f )900. *hat is the disc!unted pa$bac% peri!d /. 4.11 $ears #. 4.19 $ears C. 4.9) $ears &. .19 $ears (. never



90. >inn$ Truebl!!d is c!nsiderin+ an investment hich ill c!st her 1)0000. The investment pr!duces n! cash fl!s f!r the first $ear. In the sec!nd $ear the cash infl! is 45000. This infl! ill increase t! 55000 and then 85000 f!r the f!ll!in+ t! $ears bef!re ceasin+ permanentl$. >inn$ reuires a 10: rate !f return and has a reuired disc!unted pa$bac% peri!d !f three $ears. >inn$ sh!uld <<<<< this pr!3ect because the disc!unted pa$bac% peri!d is <<<<. /. acceptE ).04 $ears #. acceptE ).;8 $ears C. acceptE 4.;8 $ears &. re3ectE 4.04 $ears E. re3ectE 4.;8 $ears

>inn$ sh!uld re3ect the pr!3ect since the pa$bac% peri!d !f 4.;8 $ears e'ceeds the reuired 4 $ears.



91. =!u are anal$2in+ t! mutuall$ e'clusive pr!3ects and have devel!ped the f!ll!in+ inf!rmati!n. *hat is the incremental IRR

/. 11.11: #. 14.01: C. 1.;1: &. 17.85: E. 18.;0:

Difficulty level: "e#iu$ Topic: INRE"ENTAL INTERNAL RATE OF RETURN Type: PROBLE"S


9). The *inst!n C!. is c!nsiderin+ t! mutuall$ e'clusive pr!3ects ith the f!ll!in+ cash fl!s. The incremental IRR is <<<<< and if the reuired rate is hi+her than the cr!ss!ver rate then pr!3ect <<<<< sh!uld be accepted.

/. 14.;:E / !. 14.;:E # C. 15.:E / &. 15.:E # (. 15.97:E /

The cr!ss!ver rate is 14.;:. /t a rate hi+her than the cr!ss!ver rate such as 15: Pr!3ect # ill have the hi+her NPV and sh!uld be accepted.

Difficulty level: "e#iu$ Topic: INRE"ENTAL INTERNAL RATE OF RETURN Type: PROBLE"S


=!u are anal$2in+ a pr!3ect and have prepared the f!ll!in+ data"

Reuired pa$bac% peri!d ).5 $ears Reuired return 9.50:

94. #ased !n the pr!fitabilit$ inde' !f <<<<< f!r this pr!3ect $!u sh!uld <<<<< the pr!3ect. /. .;8E accept !. 1.05E accept C. 1.19E accept &. .;8E re3ect (. 1.05E re3ect

Difficulty level: Easy Topic: PROFITABILITY INDE% Type: PROBLE"S


9. #ased !n the internal rate !f return !f <<<<< f!r this pr!3ect $!u sh!uld <<<<< the pr!3ect. /. 9.;5:E accept !. 10.85:E accept C. 9.:E re3ect &. ;.78:E re3ect (. 10.44:E re3ect

=!u sh!uld accept because the IRR !f 10.85: e'ceeds the reuired return !f 9.50:.

Difficulty level: Easy Topic: INTERNAL RATE OF RETURN Type: PROBLE"S


95. #ased !n the net present value !f <<<<< f!r this pr!3ect $!u sh!uld <<<<< the pr!3ect. /. -)0)1.)9E re3ect #. -07.1;E re3ect C. 8;89.8)E accept &. ;947.8E accept (. 1)79.)4E accept

=!u sh!uld accept because the NPV is p!sitive.


97. #ased !n the pa$bac% peri!d !f <<<<< f!r this pr!3ect $!u sh!uld <<<<< the pr!3ect. /. 1.98 $earsE accept #. ).98 $earsE accept C. ).98 $earsE re3ect &. 4.14 $earsE re3ect (. 4.98 $earsE re3ect

#ased !n pa$bac% the pr!3ect sh!uld be re3ected because the pa$bac% peri!d !f ).98 $ears e'ceeds the reuired peri!d !f ).5 $ears.



=!u are c!nsiderin+ the f!ll!in+ t! mutuall$ e'clusive pr!3ects. #!th pr!3ects ill be depreciated usin+ strai+ht-line depreciati!n t! a 2er! b!!% value !ver the life !f the pr!3ect. Neither pr!3ect has an$ salva+e value.

Reuired rate !f return 10: 14: Reuired pa$bac% peri!d ).0 $ears ).0 $ears


98. #ased !n the net present value meth!d !f anal$sis and +iven the inf!rmati!n in the pr!blem $!u sh!uld" /. accept b!th pr!3ect / and pr!3ect #. #. accept pr!3ect / and re3ect pr!3ect #. C. accept pr!3ect # and re3ect pr!3ect /. &. re3ect b!th pr!3ect / and pr!3ect #. (. accept hichever !ne $!u ant as the$ represent eual !pp!rtunities.

Pr!3ect # sh!uld be accepted and pr!3ect / sh!uld be re3ected.

Difficulty level: "e#iu$ Topic: NET PRESENT VALUE Type: PROBLE"S


99. #ased up!n the internal rate !f return ,IRR and the inf!rmati!n pr!vided in the pr!blem $!u sh!uld" /. accept b!th pr!3ect / and pr!3ect #. #. re3ect b!th pr!3ect / and pr!3ect #. C. accept pr!3ect / and re3ect pr!3ect #. &. accept pr!3ect # and re3ect pr!3ect /. E. i+n!re the IRR rule and use an!ther meth!d !f anal$sis. #ecause these are mutuall$ e'clusive pr!3ects the IRR rule sh!uld n!t be applied.


9;. #ased up!n the pa$bac% peri!d and the inf!rmati!n pr!vided in the pr!blem $!u sh!uld" /. accept b!th pr!3ect / and pr!3ect #. !. re3ect b!th pr!3ect / and pr!3ect #. C. accept pr!3ect / and re3ect pr!3ect #. &. accept pr!3ect # and re3ect pr!3ect /. (. reuire that mana+ement e'tend the pa$bac% peri!d f!r pr!3ect / since it has a hi+her initial c!st.

Neither pr!3ect pa$s bac% ithin ) $ears thus the$ sh!uld b!th be re3ected.

Difficulty level: "e#iu$ Topic: PAYBA! PERIOD Type: PROBLE"S


;0. #ased up!n the pr!fitabilit$ inde' ,PI and the inf!rmati!n pr!vided in the pr!blem $!u sh!uld" /. accept b!th pr!3ect / and pr!3ect #. #. accept pr!3ect / and re3ect pr!3ect #. C. accept pr!3ect # and re3ect pr!3ect /. &. re3ect b!th pr!3ect / and pr!3ect #. E. disre+ard the PI meth!d in this case. #ecause these are mutuall$ e'clusive pr!3ects the PI rule sh!uld n!t be applied.

Difficulty level: "e#iu$ Topic: PROFITABILITY INDE% Type: PROBLE"S

;1. / )5 investment pr!duces )8.50 at the end !f the $ear ith n! ris%. *hich !f the f!ll!in+ is true /. NPV is p!sitive if the reuired return is less than 10:. #. NPV is ne+ative if the reuired return is less than 10:. C. NPV is 2er! if the reuired return is eual t! 10:. . #!th / and C. (. N!ne !f the ab!ve. NPV F ,)8.50K1.1 - )5.00 F 0

Difficulty level: 'alle()e Topic: NET PRESENT VALUE Type: PROBLE"S


;). C!nsider an investment ith an initial c!st !f )0000 and is that e'pected t! last f!r 5 $ears. The e'pected cash fl!s in $ears 1 and ) are 5000 in $ears 4 and  are 5500 and in $ear 5 is 1000. The t!tal cash infl! is e'pected t! be ))000 !r an avera+e !f 00 per $ear. C!mpute the pa$bac% peri!d in $ears. /. 4.19 $ears !. 4.9) $ears C. .00 $ears &. .55 $ears (. N!ne !f the ab!ve Pa$bac% Peri!d F ,5000 L 5000 L 5500 F 15500 f!r 4 $earsE remainder )0000 15500 F 500. 500K5500 F .91919 F .9) F Pa$bac% Peri!d F 4.9) $ears

Difficulty level: "e#iu$ Topic: PAYBA! Type: PROBLE"S

;4. /n investment ith an initial c!st !f 15000 pr!duces cash fl!s !f 5000 annuall$ f!r 5 $ears. If the cash fl! is evenl$ spread !ut !ver the $ear and the firm can b!rr! at 10: the disc!unted pa$bac% peri!d is <<<<< $ears. /. 4 #. 4.) C. 4.85 &.  (. 5 &isc!unted Pa$bac%" n F 15000K5000 F 4. PAT F 1 PV F -4 JV F 0 IK=R F 10 N F  F 4.85

Difficulty level: "e#iu$ Topic: DISOUNTED PAYBA! Type: PROBLE"S


;. /n investment pr!3ect has the cash fl! stream !f -)50 85 1)5 100 and 50. The c!st !f capital is 1):. *hat is the disc!unted pa$bac% peri!d /. 4.15 $ears !. 4.49 $ears C. 4.5 $ears &. 4.70 $ears (. .05 $ears 85K1.1) F 77.;7 1)5K1.1) F ;;.75 100K1.1) F 81.19 50K1.1) F 41.89 4 $r. CJ" )50 - 77.;7 - ;;.75 - 81.19 F 1).)1 Jracti!n F 1).)1K41.89 F .49 &isc!unted Pa$bac%" 4 L .49 F 4.49 $ears

Difficulty level: "e#iu$ Topic: DISOUNTED PAYBA! Type: PROBLE"S

;5. /n investment c!st 10000 ith e'pected cash fl!s !f 4000 f!r 5 $ears. The disc!unt rate is 15.)49):. The NPV is <<< and the IRR is <<< f!r the pr!3ect. A. 0E 15.)49): #. 4.44E )8.))): C. 5000E 0: &. Can n!t anser ith!ut !ne !r the !ther value as input. (. N!ne !f the ab!ve. NPV F -10000 L ,4000 ' PVIJ/ 5 .15)49)  F 0

Difficulty level: Easy Topic: NET PRESENT VALUE AND INTERNAL RATE OF RETURN Type: PROBLE"S

Essa" Questions


;7. ?ist and briefl$ discuss the advanta+es and disadvanta+es !f the internal rate !f return ,IRR rule. T'e a#va(ta)es of t'e -ule a-e its close -elatio(s'ip .it' NPV a(# t'e ease .it' .'ic' it is u(#e-stoo# a(# co$$u(icate#/ T'e t.o #isa#va(ta)es a-e t'at t'e-e $ay 0e $ultiple solutio(s a(# t'e -ule $ay lea# to a -a(1i() co(flict i( evaluati() $utually e2clusive i(vest$e(ts/ T'e stu#e(t s'oul# a## a 0-ief e2pla(atio( #e$o(st-ati() t'ei- u(#e-sta(#i() of eac'/

Topic: INTERNAL RATE OF RETURN Type: ESSAYS

;8. ('plain the differences and similarities beteen net present value ,NPV and the pr!fitabilit$ inde' ,PI. T'e NPV a(# PI a-e 0asically t'e sa$e calculatio(3 a(# 0ot' -ules lea# to t'e sa$e accept4-e5ect #ecisio(/ T'e $ai( #iffe-e(ce 0et.ee( t'e t.o is t'at t'e PI $ay 0e useful i( #ete-$i(i() .'ic' p-o5ects to accept if fu(#s a-e li$ite#6 'o.eve-3 t'e PI $ay lea# to i(co--ect #ecisio(s i( co(si#e-i() $utually e2clusive i(vest$e(ts/

Topic: NPV VS/ PI Type: ESSAYS

;9. >iven the +!al !f ma'imi2ati!n !f firm value and shareh!lder ealth e have stressed the imp!rtance !f net present value ,NPV. /nd $et man$ financial decisi!n-ma%ers at s!me !f the m!st pr!minent firms in the !rld c!ntinue t! use less desirable measures such as the pa$bac% peri!d and the avera+e acc!untin+ return ,//R. *h$ d! $!u thin% this is the case T'is is a( ope(7e(#e# 8uestio( .'ic' allo.s t'e c-eative stu#e(t to speculate o( t'e value of (o(7#iscou(te# cas' flo. evaluatio( $easu-es/ +e use it as a sp-i()0oa-# to st-ess t'at eve( -atio(al fi(a(cial $a(a)e-s so$eti$es fi(# it e2pe#ie(t to use a )-oup of $easu-es/ Foe2a$ple3 fi-$s $ay -ely o( t'e IRR 0ecause it is easie- to e2plai( to 0oa-# $e$0e-s t'a( NPV/ Also3 fo- la-)e p-o5ects3 AAR p-ovi#es s'a-e'ol#e-s .it' so$e i(si)'ts as to t'e p-o5ect9s i$pact o( (et i(co$e a(# ea-(i()s pe- s'a-e/

Topic: NPV AND PRO&ET VALUE Type: ESSAYS


;;. The Mi++$ Trim and Cut C!mpan$ can purchase euipment !n sale f!r 400. The asset has a three-$ear life ill pr!duce a cash fl! !f 1)00 in the first and sec!nd $ear and 4000 in the third $ear. The interest rate is 1):. Calculate the pr!3ect6s pa$bac%. /ls! calculate the pr!3ect6s IRR. Gh!uld the pr!3ect be ta%en Chec% $!ur anser b$ c!mputin+ the pr!3ect6s NPV. Pay0ac1 7 /;< yea-s/ IRR = >?/@>/ Do (ot ta1e p-o5ect as IRR  > Re5ect t'e p-o5ect NPV = C><;/;?

Topic: INTERNAL RATE OF RETURN Type: ESSAYS

100. The Mi++$ Trim and Cut C!mpan$ can purchase euipment !n sale f!r 400. The asset has a three-$ear life ill pr!duce a cash fl! !f 1)00 in the first and sec!nd $ear and 4000 in the third $ear. The interest rate is 1):. Calculate the pr!3ect6s &isc!unted Pa$bac% and Pr!fitabilit$ Inde' assumin+ end !f $ear cash fl!s. Gh!uld the pr!3ect be ta%en If the /vera+e /cc!untin+ Return as p!sitive h! !uld this affect $!ur decisi!n Ti$e ? 7 as' flo.s = 7@3 a(#  7 as' flo.s = >3?? eac' pe-io#3 P-ese(t Value of as' flo.s = 3?/?; fo- 0ot' pe-io#s3 Su$ of P-ese(t Value of as' flo.s = 73G>/H@ at t'e e(# of ti$e  Ti$e < 7 as' flo.s = <3???3 P-ese(t Value of as' flo.s = 3></<@3 Su$ of P-ese(t Value of as' flo.s = 7><;/;? Discou(te# Pay0ac1 ca((ot 0e calculate# as NPV  ?6 NPV = 7><;/;? PI = ∑ FATt4I(itial I(vest$e(t = @3>;
Topic: "ULTIPLE "ET,ODS OF VALUATION Type: ESSAYS

Chap005.doc

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