Reference no: EM133629958
1. What is true about the relationship between the NPV and IRR methods?
They are basically the same method and use the same cash flows.
The two methods are quite different and will give you different answers to the question of whether an investment should be pursued.
The NPV is less reliable than the IRR.
The IRR is less reliable than the NPV.
2. What is the payback of an investment that requires a 10 percent minimum rate of return and has the following projected cash flows: Yr0 = -100 , Yr1 = 25, Yr2 = 35, Yr3 = 45, Yr4 = 35, and Yr5 = 30?
3.51 years
5.22 years
4.12 years
2.88 years
3. The IRR calculation of the Cloudy Corporation is evaluating an investment generating a result of 7.8 percent. The Cloudy Corporation has a minimum required rate of return of 8 percent on its projects. Given the result of its calculation, should the Cloudy Corporation pursue this investment?
This cannot be determined from this information.
An examination of the project's projected cash flows is necessary for a decision to be made.
A calculation of the project's NPV will allow the company to make a decision.
This project should not be pursued because it does not generate the minimum required rate of return.
4. Why is the MIRR method an improvement over the IRR method?
The modification is more sophisticated than the original method.
One can see clearly the impact of compounding on future cash flows.
It is a more accurate method than the NPV method.
It allows the analyst to set the reinvestment rate for intermediate cash flows instead of allowing the calculation to set it.
5. Why is the MIRR method an improvement over the IRR method?
The modification is more sophisticated than the original method.
One can see clearly the impact of compounding on future cash flows.
It is a more accurate method than the NPV method.
It allows the analyst to set the reinvestment rate for intermediate cash flows instead of allowing the calculation to set it.
6. What is the modified internal rate of return of an investment that projects a reinvestment rate of return of 10 percent and has the following projected cash flows: Yr0 = -100, Yr1 = 25, Yr2 = 35, Yr3 = 45, Yr4 = 35, and Yr5 = 30?
16.51 percent
15.56 percent
14.75 percent
13.74 percent
7. What is the discounted payback of an investment that requires a 10 percent minimum rate of return and has the following projected cash flows: Yr0 = -100, Yr1 = 25, Yr2 = 35, Yr3 = 45, Yr4 = 35, and Yr5 = 30?
3.60 years
5.21 years
4.32 years
2.83 years
8. The NPV calculation of the Cloudy Corporation is evaluating an investment generating a result of $10,000. The Cloudy Corporation has a minimum required rate of return of 8 percent on its projects. Given the result of their calculation, should the Cloudy Corporation pursue this investment?
This project should not be pursued because it does not generate the minimum required rate of return.
Since the NPV is positive, this project should be pursued.
This cannot be determined from this information.
A calculation of the project's IRR will allow the company to make a decision.
9. Mutually exclusive projects are defined as which of the following?
Projects that, if undertaken, will exclude the performance of another
Projects that, if undertaken, will allow the performance of another
Projects that exist in a place separate from that of others
Projects that facilitate the performance of others
10. What is the net present value of an investment that requires a 10 percent minimum rate of return and has the following projected cash flows: Yr0 = -100, Yr1 = 25, Yr2 = 35, Yr3 = 45, Yr4 = 35, and Yr5 = 30?
35
41
28
34
11. What is the internal rate of return of an investment that requires a 10 percent minimum rate of return and has the following projected cash flows: Yr0 = -100, Yr1 = 25, Yr2 = 35, Yr3 = 45, Yr4 = 35, and Yr5 = 30?
19.33 percent
22.24 percent
20.05 percent
21.35 percent
12. When choosing between two projects of different scales, which of the following methodologies is best employed?
Replacement chain method
Equivalent annuities method
IRR method
Profitability index to rank projects
13. The IRR method might generate two answers, both of which are correct, if the projected cash flows of the project are what?
Abnormal, which means that their signs switch from negative to positive several times
Normal, which means that a negative cash flow is followed by positive cash flows
Not aligned
Sporadic and unpredictable
14. Which of these is a flaw of the payback method?
It is intuitive and easy to understand.
It facilitates investment decisions.
It does not take into account the Time Value of Money.
It prevents the use of other investment criteria in making an investment decision.
15. The Orange Corporation has to make a decision as to which of four investment proposals it should pursue. The four projects have the following NPVs and initial investment amounts:
Project A: NPV = 1,000, initial investment = -100
Project B: NPV = 2,400, initial investment = -300
Project C: NPV = 750, initial investment = -83
The firm has limited funds available to spend on capital projects this year. How would you rank these projects in terms of their priority?
A, C, B
B, C, A
A, B, C
B, A, C
16. The principal advantage of the payback method is that it is easy to understand.
True
False
17. If the NPV calculation generates a negative NPV, the investment should not be undertaken.
True
False
18. The discounted payback method takes into account the Time Value of Money and is therefore an improvement over the payback method.
True
False
19. The NPV and IRR methods are two distinct methods.
True
False
20. The primary difference between the NPV and IRR methods is that the former will give an answer in terms of value created by the investment while the latter will give an answer in terms of the investment's rate of return.
True
False