Net Present Value and Other Investment Criteria

Q#1
A firm that only accepts projects for which the internal rate of return (IRR) is
equal to the
firm's required return will, on average, neither create nor destroy wealth for
its
shareholders.
A) True
B) False
Q#2
The net present value (NPV) decision rule is considered the best in theory.
A) True
B) False
Q#3
An advantage of the payback rule is that it is easy to understand.
A) True
B) False
Q#4
Two projects that are mutually exclusive are said to be independent.
A) True
B) False
Q#5
If a project has conventional cash flows, it may also have more than one IRR.
A) True
B) False
Q#6
A company that has a policy of making only cash sales is considering
allowing customers
to buy on credit. Which one of the following will probably occur?
A) The accounts receivable will likely increase.
B) The change will provide a source of funds.
C) Total sales will likely decrease.
D) Net working capital will decrease if funding needs are met with
long-term liabilities.
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E) Expenses will decrease due to monthly billing and collection
efforts.
Q#7
It is important to identify and use only incremental cash flows in capital
investment
decisions:
A) because they are the simplest to identify.
B) only when the stand-alone principle fails to hold.
C) because ultimately it is the change in a firm's overall future
cash flows that matter.

D) in order to accommodate unforeseen changes that might occur.

E) whenever sunk costs are involved.
Q#8
You are advising Peter who is attempting to decide whether or not to drop
one of the
college courses he is currently enrolled in. If he drops the course, he will
forfeit half of
the money spent on tuition. If he stays in the class, he will have to give up
his part-time
job. His textbook is being replaced by a new edition, so is worthless at this
time. Which
of the following conclusions is consistent with capital budgeting principles?
I. Remaining in the class incurs an opportunity cost.
II. The entire tuition is irrelevant because it is a sunk cost.
III. The cost of the book is a sunk cost.
A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II, and III
Q#9
If net working capital grows from $1,000 to $1,500 as a result of taking on a
new project,
the $500 increase should be included in the initial outlay for the new project.
A) True
B) False
Q#10
For a cost cutting project, the net present value will generally be negative,
but the project
should still be accepted.
A) True
B) False

PROBLEMS
Q#1
You undertake a project that requires an initial investment of $9,000. You
expect to
receive $3,100 a year for the next 4 years. If the required return is 15
percent, what is the
net present value (NPV)?
A) -$235.26
B) -$149.57
C) -$7.58
D) $4.63

E) $9.44
Q#2
You are trying to choose between two projects as you do not have sufficient
funding to
accept both projects. Each project costs $80,000. Project A pays $25,000 a
year for 4
years and project B pays $20,000 a year for 5 years. If your required return is
14 percent,
which project should you choose and why?
A) A; because it pays back sooner
B) A; because it has a higher IRR
C) B; because it has a higher NPV
D) You should reject both projects.
E) You are indifferent between the two projects because each project
pays back the same amount.
Q#3
Consider a $10,000 machine that will reduce pretax operating costs by
$3,000 per year
over a 5-year period. Assume no changes in net working capital and a zero
scrap value
after five years. For simplicity, assume straight-line depreciation to zero, a
marginal tax
rate of 34 percent, and a required return of 10 percent. The net present
value of acquiring
this machine is:
A) $83.
B) $449.
C) $689.
D) $827.
E) $1,235.