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When choosing among mutually exclusive projects, the choice is easy using the NPV rule.

As long as at least one project has positive NPV, simply choose the project with the highest NPV. 1. True False For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors. 2. True False A project's opportunity cost of capital is: the forgone return from investing in the project. the return earned by investing in the project. equal to the average return on all company projects. designed to be less than the project's IRR. What should occur when a project's net present value is determined to be negative? The discount rate should be decreased. The profitability index should be calculated. The present value of the project cost should be determined. The project should be rejected.

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What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for three years, and the cost of capital is 9%? $101,251.79 $109,200.00 $126,565.00 $130,800.00
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Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project. "A" has a small, but negative, NPV. "B" has a positive NPV when discounted at 10%. 6. "C's" cost of capital exceeds its rate of return. "D" has a zero NPV when discounted at 14%. 7. What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

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8.69 years 14.00 years 27.51 years An infinite number of years. NPV = (65,000/.13) - $500,000 NPV = 500,000 - 500,000 NPV = 0 Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years? NPV = $3,071.01. NPV = $20,000. IRR = 2.8%. IRR is greater than 10%.

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What is the NPV for the following project cash flows at a discount rate of 15%? CF 0 = ($1,000), CF1 = $700, CF2 = $700. ($308.70) ($138.00) $138.00 $308.70
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A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years. At most, this project has ______ different IRR(s). one 10. two three five 11. How many IRRs are possible for the following set of cash flows? CF0 = -1,000, CF1 =

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+500, CF2 = -300, CF3 = +1,000, CF4 = +200. 1 2 3 4 Given a particular set of project cash flows, which of the following statements is correct? There can be only one NPV for the project. There can be only one IRR for the project. 12. There can be more than one NPV for the project. There can be only one profitability index for the project. When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to: postpone until costs reach their lowest. invest now to maximize the NPV. 13. postpone until the opportunity cost reaches its lowest. invest at the date that gives the highest NPV today. Use of a profitability index to select projects in the absence of capital rationing: will provide the same rankings as an NPV criterion. will maximize NPV, but not IRR. 14. can result in misguided selections. is technically impossible. Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%? Its payback period is roughly 3 1/2 years. Its NPV is $2,194. 15. Its IRR is 1.85%. Its profitability index is 0.109. The "gold standard" of investment criteria refers to: net present value. internal rate of return. payback period. profitability index.

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16.

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17. Which of the following investment decision rules tends to improperly reject long-lived projects? net present value. internal rate of return. payback period. profitability index.

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for four years, how much did the project cost? $44,617 $52,200 $60,000 $72,747
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A project has a payback period of five years and the firm employs a 10% cost of capital. Which of the following statements is correct concerning this project's discounted payback? Discounted payback will exceed five years. Discounted payback will be less than five years. 19. Discounted payback will decrease if the project's IRR exceeds 10%. Discounted payback will increase if the project's IRR is less than 10%. You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years. Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance. At a cost of capital of 15%, you should: Buy the new machine and save $600 in equivalent annual costs. Buy the new machine and save $388 in equivalent annual costs. Keep the old machine and save $388 in equivalent annual costs. Keep the old machine and save $580 in equivalent annual costs.

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20.

$12,000 + $16,760.78 = $28,760.78 Total PV of cost, which represents an EAC of $8,579.79, which is $579.79 more annually. A firm uses the profitability index to select between two mutually exclusive investments. If no capital rationing has been imposed, which project should be selected? Select the project with the higher profitability index. 21. Select the project with the lower profitability index. Without capital rationing, both projects can be selected. Without capital rationing, select by NPV method.

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