Self-test Questions


1	Streams of money in and out of a business are called the firm’s:

		A)	expenditure.
		B)	income.
		C)	revenue.
		D)	Cash flow.
		E)	Investment return.

2	What is the investment horizon?

		A)	The amount of money invested in a year.
		B)	The number of years an investment will last.
		C)	The time it takes to raise the money for an investment.
		D)	The period over which the payback for an investment is considered.
		E)	The number of years that it takes to pay for an investment.

3	Future values of an investment are calculated using compound growth?

		A)	TRUE
		B)	FALSE

4	Net present values can only be positive.

		A)	TRUE
		B)	FALSE

5	What does an NPV of zero tell us?

		A)	We made a mistake in the calculation.
		B)	A very good investment.
		C)	A very poor investment.
		D)	The investment would provide the same value as not investing at all.
		E)	There is no solution to the investment question.

6	If investment A has an IRR of 8% and investment B has an IRR of 4% then A is probably the better investment.

		A)	TRUE
		B)	FALSE

7	If the IRR is 3% and the discount rate for investment is 4%, then the NPV for the same investment will be?

		A)	Positive
		B)	Negative
		C)	Zero
		D)	Not defined
		E)	Infinity

8	IRR cannot be calculated by:

		A)	A formula.
		B)	Trial and error guesses.
		C)	Bisection.
		D)	Graphical methods.
		E)	Using a spreadsheet.

9	What is the relationship between NPV and IRR?

		A)	Linear.
		B)	Exponential.
		C)	Hyperbolic.
		D)	Multivariate.
		E)	Quadratic.

10	The IRR is:

		A)	A way of discounting using a nominated discount rate.
		B)	The payback period.
		C)	The effective growth on the capital outlay.
		D)	The effective annual percentage rate of return on the capital outlay.
		E)	The effective annual percentage rate of return on the capital inflows.

11	The payback period is the time it takes for future returns to pay back the initial capital outlay.

		A)	TRUE
		B)	FALSE

12	If the payback period is 4 years then NPV for a period greater than 4 years will be:

		A)	Positive. D. E.
		B)	Negative.
		C)	Zero.
		D)	Not defined.
		E)	Infinite.

13	Which of the following is untrue?

		A)	Payback period for an investment can be negative.
		B)	The planning horizon is necessary information to calculate a NPV.
		C)	A positive NPV will always have a payback period within the planning horizon.
		D)	IRR is preferred to NPV when the discount rate is not known.
		E)	For a given investment, the higher the discount rate, the longer the payback period.

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