Which of the following investment rules does not use the time value of the money concept?

A)

The payback period

B)

Internal rate of return

C)

Net present value

D)

All of the above use the time value concept

2

If the net present value of project A is +$80, and of project B is +$60, then the net present value of the combined project is:

A)

+$80

B)

+$60

C)

+$140

D)

None of the above

3

You are given a job to make a decision on project X, which is composed of three projects A, B, and C which have NPVs of +$50, -$20 and +$100, respectively. How would you go about making the decision about whether to accept or reject the project?

A)

Accept the firm's joint project as it has a positive NPV

B)

Reject the joint project

C)

Break up the project into its components: accept A and C and reject B

D)

None of the above

4

The payback period rule accepts all projects for which the payback period is:

A)

Greater than the cut-off value

B)

Less than the cut-off value

C)

Is positive

D)

An integer

5

Which of the following capital budgeting methods has the value additive property?

A)

NPV

B)

IRR

C)

Payback period

D)

Discounted payback period

6

The disadvantages of the book rate of return method is/are:

A)

It uses net income instead of cash flows

B)

The pattern of income has no impact on the book rate of return

C)

There is no clear-cut decision rule

D)

All of the above

7

The IRR is defined as:

A)

The discount rate that makes the NPV equal to zero

B)

The difference between the cost of capital and the present value of the cash flows

C)

The discount rate used in the NPV method

D)

The discount rate used in the discounted payback period method

8

Saline Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

A)

14.5%

B)

18.6%

C)

23.4%

D)

20.2%

9

Werney Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 15%.

A)

$16,994

B)

$29,211

C)

$60,000

D)

$25,846

10

Profitability index is the ratio of:

A)

Present value of cash flow to initial investment

B)

Net present value cash flow to initial investment

C)

Net present value of cash flow to IRR

D)

Present value of cash flow to IRR

11

Present values are value additive

A)

True

B)

False

12

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

A)

True

B)

False

13

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

A)

True

B)

False

14

MIRRs have the value additivity property, while IRRs do not.

A)

True

B)

False

15

Soft rationing may be used to control managerial behavior.

A)

True

B)

False

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