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1. As the opportunity cost of capital decreases, the net present value of a project increases.
2. The IRR is the rate of return on the cash flows of the investment, also known as the
opportunity cost of capital.
3. Projects with an NPV of zero decrease shareholders' wealth by the cost of the project.
4. When calculating IRR with a trial and error process, discount rates should be raised when
NPV is positive.
5. Unlike using IRR, selecting projects according to their NPV will always lead to a correct
accept-reject decision.
6. For mutually exclusive projects, the project with the higher IRR is the correct selection.
7. When using a profitability index to select projects, a value of .63 is preferred over a value
of 0.21.
8. A project's payback period is the length of time necessary to generate an NPV of zero.
9. The payback period considers all project cash flows.
10. Both the NPV and the internal rate of return methods recognize that the timing of cash
flows affects project value.
11. If a project has multiple IRRs, the highest one is assumed to be correct.
12. Because of deficiencies associated with the payback method, it is seldom used in
corporate financial analysis today.
13. A risky dollar is worth more than a safe one.
14. 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.
15. When we compare assets with different lives, we should select the machine that has the
lowest equivalent annual cost.
16. For many firms the limits on capital funds are "soft." By this we mean that the capital
rationing is not imposed by investors.
17. Soft rationing should never cost the firm anything.
18. For most managers, discounted cash-flow analysis is in fact the dominant tool for project
evaluation.
19. The payback rule states that a project is acceptable if you get your money back within a
specified period.
20. The payback rule always makes shareholders better off.
21. When you have to choose between projects with different lives, you should put them on an
equal footing by computing the equivalent annual annuity or benefit of the two projects.
22. When you are considering whether to replace an aging machine with a new one, you
should compare the annual cost of operating the old one with the equivalent annual annuity of
the new one.
23. A project's opportunity cost of capital is:
24. Which one of the following statements is correct for a project with a positive NPV?
25. If the net present value of a project that costs $20,000 is $5,000 when the discount rate is
10%, then the:
26. What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years
if the opportunity cost of capital is 14%?
27. The decision rule for net present value is to:
28. What should occur when a project's net present value is determined to be negative?
29. Which one of the following changes will increase the NPV of a project?
30. What is the maximum that should be invested in a project at time zero if the inflows are
estimated at $50,000 annually for 3 years, and the cost of capital is 9%?
31. When a manager does not accept a positive-NPV project, shareholders face an
opportunity cost in the amount of the:
32. What is the maximum amount a firm should pay for a project that will return $15,000
annually for 5 years if the opportunity cost is 10%?
33. Which of the following projects would you feel safest in accepting? Assume the
opportunity cost of capital to be 12% for each project.
34. As the discount rate is increased, the NPV of a specific project will:
35. If the opportunity cost of capital for a lending project exceeds the project's IRR, then the
project has a(n):
36. The modified internal rate of return can be used to correct for:
37. The internal rate of return is most reliable when evaluating:
38. When a project's internal rate of return equals its opportunity cost of capital, then the:
39. Firms that make investment decisions based on the payback rule may be biased toward
rejecting projects:
40. One method that can be used to increase the NPV of a project is to decrease the:
41. What is the IRR for a project that costs $100,000 and provides annual cash inflows of
$30,000 for 6 years starting one year from today?
42. What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000
annually for 6 years?
43. What is the minimum number of years in which an investment costing $210,000 must
return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?
44. If a project costs $72,000 and returns $18,500 per year for 5 years, what is its IRR?
45. If the IRR for a project is 15%, then the project's NPV would be:
