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Exam 5: Net Present Value and Other Investment Criteria

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Question 21

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Internal rate of return (IRR) method is also called the

A) discounted payback period method.
B) discounted cash flow (DCF) rate of return method.
C) modified internal rate of return (MIRR) method.
D) book rate of return method.

E) B) and D)
F) B) and C)

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Question 22

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Driscoll Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years.Calculate the IRR for the project.

A) 14.5 percent
B) 18.6 percent
C) 20.2 percent
D) 23.4 percent

E) All of the above
F) A) and C)

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Question 23

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The profitability index is the ratio of the

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

Discuss some of the disadvantages of the payback rule.

The following are measures used by firms when making capital budgeting decisions except

The quickest way to calculate the internal rate of return (IRR) of a project is by

The cost of a new machine is $250,000.The machine has a five-year life and no salvage value.If the cash flow each year is equal to 25 percent of the cost of the machine, calculate the payback period for the project.

The net present value of a project depends upon the

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

Briefly discuss capital rationing.

If the NPV of project A is + $120, that of project B is -$40, and that of project C is + $40, what is the NPV of the combined project?

Which of the following investment rules has the value additivity property?

The following table gives the available projects (in $millions) for a firm. $\begin{array}{rrrrrrll}\underline { \mathrm { A }} & \underline { \mathrm { B } } & \underline { \mathrm { C } } & \underline { \mathrm { D } } & \underline { \mathrm { E } } & \underline { \mathrm { F } } & \underline { \mathrm { G } } & \\5.0 & 4.0 & 5.0 & 1.0 & 2.0 & 7.0 & 8.0 & \text { Initial investment } \\1.5 & -0.5 & 1.0 & 0.5 & 0.5 & 1.0 & 1.0 & \mathrm{NPV}\end{array}$ The firm has only $20 million to invest.What is the maximum NPV that the company can obtain?

If the sign of the cash flows for a project changes two times, then the project likely has

One can use the profitability index most usefully for which situation?

The survey of CFOs indicates that the NPV method is always, or almost always, used for evaluating investment projects by approximately

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

The profitability index of a positive NPV project is always positive.

What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?