Chapter 08 Test bank – Static Key
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 usually 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 high value is preferred over a low value.
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 lowest one is incorrect.
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 with similar lives, 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 equivalent annual
cost of operating the old one with the equivalent annual cost 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.
If a project’s NPV is calculated to be negative what should a project manner do?
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.
A project requires an initial outlay of $10 million. If the cost of capital exceeds the project 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 way 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.
An investment costs $100,000 and provides a cash inflow of $17,000 per year. If the discount rate is 13%, how long must the
cash inflows last for it 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:
46.
As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:
47.
A project can have as many different internal rates of return as it has:
48.
What is the NPV for the following project cash flows at a discount rate of 15%? C0 = −$1,000, C1 = $700, C2 = $700.
49.
What is the IRR of a project with the following cash flows: C0 = −$200, C1 = $ 110, C2 = $121?
50.
A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years, followed by cash outflows of
$1,000 annually for 2 years. At most, this project has ______ different IRR(s).
51.
How many IRRs are possible for the following set of cash flows? CF0 = −$1,000, C1 = $500, C2 = −$300, C3 = $1,000, C4 =
$200.
52.
Given a particular set of project cash flows, which one of the following statements must be correct?
53.
When projects are mutually exclusive, you should choose the project with the:
54.
When managers select correctly from among mutually exclusive projects, they:
55.
When evaluating mutually exclusive projects, remember:
56.
Two mutually exclusive projects have the same IRR. When will you be indifferent between them?
57.
When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:
58.
You are analyzing a project that is equivalent to borrowing money. This project’s:
59.
If two machines produce the same product but have different lives, you should choose the machine with the: