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1 | |
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 |
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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 |
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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 |
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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 |
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5 | |
Which of the following capital budgeting methods has the value additive property? |
| | A) | NPV |
| | B) | IRR |
| | C) | Payback period |
| | D) | Discounted payback period |
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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 |
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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 |
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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% |
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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) | $169,935 |
| | B) | $292,110 |
| | C) | $600,000 |
| | D) | $258,460 |
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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 |
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11 | |
Present values are value additive. |
| | A) | True |
| | B) | False |
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12 | |
The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital. |
| | A) | True |
| | B) | False |
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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 |
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14 | |
IRR does not consider the risk of the project. |
| | A) | True |
| | B) | False |
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15 | |
Soft rationing may be used to control managerial behavior. |
| | A) | True |
| | B) | False |
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16 | |
The payback rule gives equal weight to all cash flows after the cutoff date. |
| | A) | True |
| | B) | False |
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17 | |
The book rate of return does not depend on how rapid a capital investment is depreciated: |
| | A) | True |
| | B) | False |
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18 | |
What is the IRR for a project with the following cash flows: Year 0 -5000, Year 1 +3000, Year 2 +4000? |
| | A) | 10.1% |
| | B) | 15.0% |
| | C) | 24.3% |
| | D) | 31.0% |
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19 | |
What is the payback period for the project in Question 3? |
| | A) | 1 year |
| | B) | 2 years |
| | C) | 3 years |
| | D) | 4 years |
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20 | |
A project requires an investment of $10 million and has an NPV of $16 million. What is its profitability index? |
| | A) | 1.0 |
| | B) | 1.6 |
| | C) | 0.6 |
| | D) | 3.2 |
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21 | |
Hard capital rationing reflects a barrier between a firm and the capital markets. |
| | A) | True |
| | B) | False |
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22 | |
The average profitability of past investments is a good indication of the right hurdle for new investments. |
| | A) | True |
| | B) | False |
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23 | |
Net present value depends solely on the forecasted cash flows from the project and the risk-free interest rate. |
| | A) | True |
| | B) | False |
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