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Chapter 05 Net Present Value and Other Investment Criteria

1. Which of the following investment rules does not use the time value of the money
concept?
A. Net present value
B. Internal rate of return
C. The payback period
D. All of the above use the time value concept

2. Suppose a firm has a $100 million in excess cash. It could:


A. Invest the funds in projects with positive NPVs
B. Pay high dividends to the shareholders
C. Buy another firm
D. All of the above

6. Which of the following investment rules has value adding-up property?


A. The payback period method
B. Net present value method
C. The book rate of return method
D. The internal rate of return method

7. If the net present value (NPV) of project A is + $100, and that of project B is + $60, then
the net present value of the combined project is:
A. +$100
B. +$60
C. +$160
D. None of the above

9. You are given a job to make a decision on project X, which is composed of three
independent projects A, B, and C which have NPVs of + $70, -$40 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

10. If the NPV of project A is + $120, and that of project B is -$40 and that of project C is +
$40, what is the NPV of the combined project?
A. +$100
B. -$40
C. +$70
D. +$120
11. The net present value of a project depends upon:
A. company's choice of accounting method
B. manager's tastes and preferences
C. project's cash flows and opportunity cost of capital
D. all of the above

12. Which of the following investment rules may not use all possible cash flows in its
calculations?
A. NPV
B. Payback period
C. IRR
D. All of the above

13. The payback period rule:


A. Varies the cut-off point with the interest rate.
B. Determines a cut-off point so that all projects accepted by the NPV rule will be accepted by
the payback period rule.
C. Requires an arbitrary choice of a cut-off point.
D. Both A and C.

14. 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

15. The main advantage of the payback rule is:


A. Adjustment for uncertainty of early cash flows
B. It is simple to use
C. Does not discount cash flows
D. Both A and C

16. The following are disadvantages of using the payback rule except:
A. The payback rule ignores all cash flow after the cutoff date
B. The payback rule does not use the time value of money
C. The payback period is easy to calculate and use
D. The payback rule does not have the value additive property

17. Which of the following statements regarding the discounted payback period rule is true?
A. The discounted payback rule uses the time value of money concept.
B. The discounted payback rule is better than the NPV rule.
C. The discounted payback rule considers all cash flows.
D. The discounted payback rule exhibits the value additive property.
18. Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 =
+1500, calculate the payback period.
A. One year
B. Two years
C. Three years
D. None of the above

21. Internal rate of return (IRR) method is also called:


A. Discounted payback period method
B. Discounted cash-flow (DCF) rate of return method
C. Modified internal rate of return (MIRR) method
D. None of the above

22. The quickest way to calculate the internal rate of return (IRR) of a project is by:
A. Trial and error method
B. Using the graphical method
C. Using a financial calculator
D. Guessing the IRR

25. 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

26. Which of the following methods of evaluating capital investment projects incorporates the
time value of money concept?
I) Payback Period, II) Discounted Payback Period, III) Net Present Value (NPV), IV) Internal
Rate of Return
A. I, II, and III only
B. II, III, and IV only
C. III and IV only
D. I, II, III, and IV

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