Finance Chapter 8 2 Which Mutually Exclusive Project Would You

60.

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A

with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?

61.

What is the possible cost of capital rationing?

62.

Soft capital rationing:

63.

Soft capital rationing is imposed upon a firm by _____, while hard capital rationing is imposed by _____.

64.

If a project has a cost of $50,000 and a profitability index of 2, then:

65.

In simple cases when hard capital rationing exists, projects may be evaluated by :

66.

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing:

67.

The profitability index selects projects based on the:

68.

Which of the following investment criteria takes the time value of money into consideration?

69.

When calculating a project’s payback period, cash flows are:

70.

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost

of capital of 12%?

71.

Which of the following statements is true for a project with a $20,000 initial cost, cash inflows of $6,667 per year for 6

years, and a discount rate of 15%?

72.

The “gold standard” of investment criteria refers to the:

73.

Which of the following investment decision rules tends to improperly reject long-lived projects?

74.

The ratio of net present value to initial investment is known as the:

75.

For mutually exclusive projects, the IRR can be used to select the best project:

76.

The opportunity cost of capital is equal to:

77.

Occasionally projects may have positive initial cash flows. Such projects:

78.

A project with an IRR that is less than the opportunity cost of capital should be:

79.

If a project’s expected rate of return exceeds its opportunity cost of capital, one would expect:

80.

Which one of the following should be assumed about a project that requires a $100,000 investment at time zero, then returns

$20,000 annually for 5 years?

81.

If two projects offer the same positive NPV, then they:

82.

What is the minimum cash flow that could be received at the end of year 3 to make the following project “acceptable”?

Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

83.

According to the NPV rule, all projects should be accepted if NPV is positive when discounted at the:

84.

If a project’s IRR is 13% and the project provides annual cash flows of $15,000 for 4 years, how much did the project cost?

85.

A project’s payback period is determined to be 4 years. If it is later discovered that additional cash flows will be generated in

years 5 and 6, then the project’s payback period will:

86.

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the discount rate is 10% and the polisher

will last for 5 years, what is the equivalent annual cost of the tool?

87.

Selecting the project(s) with the highest NPV(s) is not the correct decision rule when:

88.

The investment timing problem arises when:

89.

A company owns a tract of timber that will keep growing for a number of years. It calculates that the timber’s value less the

cost of harvesting is currently $50,000 and that this figure will grow by 10% in the next year and by 5% in the following

year. If the cost of capital is 8%, when should the company harvest the timber?

90.

To justify postponing a project for one year, the NPV needs to increase over that year by a rate that is equal to or greater

than:

91.

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

92.

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero, and a $10,000 annual

expense during each of the next 4 years, if the opportunity cost of capital is 10%?

93.

A currently used machine costs $10,000 annually to run. What is the maximum that should be paid to replace the machine

with one that will last 3 years and cost only $4,000 annually to run? The opportunity cost of capital is 12%.

94.

Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing

$8,000. Both vehicles would be expected to last 4 more years, at which point they will be valueless. If your opportunity cost

is 8%, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

95.

Projects A and B are mutually exclusive lending projects. Project A has an IRR of 20% while Project B has an IRR of 30%.

You would be more likely to choose B unless:

96.

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

97.

If a project has a payback period of 5 years and a cost of capital of 10%, then the discounted payback will:

98.

You can continue to use your less efficient machine at a cost of $8,000 annually. Alternatively, you can purchase a more

efficient machine for $12,000 plus $5,000 annual maintenance. If the new machine lasts 5 years and the cost of capital is

15%, you should:

99.

A firm is considering a project with the following cash flows: Time 0 = +$20,000, Years 1–5 = −$4,500. Should the project

be accepted if the cost of capital is 10%?

100.

A firm plans to use the profitability index to select between two mutually exclusive investments. If no capital rationing has

been imposed, which project should be selected?

Chapter 08 Test bank – Static Summary