Multiple-Choice Questions
1. Net present value is calculated by using
a. Accounting income.
b. The required rate of return.
c. The IRR.
d. The future value of cash flows.
e. None of the above.
2. Using Net present value, a project is rejected if it is
a. Equal to zero.
b. Positive.
c. Negative.
d. Less than the hurdle rate.
e. Greater than the cost of capital.
3. If the present value of future cash flows is $1,200 for an investment that requires an outlay of $1,000, the Net present value
a. Is $200.
b. Is $1,000.
c. Is $1,200.
d. Is $2,200.
e. Cannot be determined.
4. Assume that an investment of $1,000 produces a future cash flow of $1,000. The discount factor for this future cash flow is 0.89. The Net present value is
a. $0.
b. $110.
c. $2,000.
d. $911.
e. None of the above.
5. Which of the following is not true regarding the internal rate of return?
a. The IRR is the interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost.
b. The IRR is the interest rate that sets the NPVequal to zero.
c. The IRR is the most reliable of the capital budgeting methods.
d. If the IRR is greater than the required rate of return, then the project is acceptable.
e. The popularity of IRR may be attributable to the fact that it is a rate of return, a concept that is comfortably used by managers.
6. Using internal rate of return, a project is rejected if the IRR
a. Is less than the required rate of return.
b. Is equal to the required rate of return.
c. Is greater than the cost of capital.
d. Is greater than the required rate of return.
e. Produces an NPVequal to zero.
7. A postaudit
a. Is a follow-up analysis of a capital project, once implemented.
b. Compares the actual benefits with the estimated benefits.
c. Evaluates the overall outcome of the investment.
d. Proposes corrective action, if needed.
e. Does all of the above.
8. Postaudits of capital projects are useful because
a. They are not very costly.
b. They help to ensure that resources are used wisely.
c. The assumptions underlying the original analyses are often invalidated by changes in the actual working environment.
d. They have no significant limitations.
e. Of all of the above.
9. For competing projects, Net present value is preferred to internal rate of return because
a. Maximizing IRR may not maximize the wealth of the owners.
b. In the final analysis, total dollars earned, not relative profitability, are what count.
c. Choosing the project with the largest NPV maximizes the wealth of the shareholders.
d. Assuming that cash flows are reinvested at the required rate of return is more realistic than assuming that cash flows are reinvested at the computed IRR.
e. Of all of the above.
10. Assume that there are two competing projects, A and B. Project A has a Net present value of $1,000 and an internal rate of return of 15 percent; Project B has an NPV of $800 and an IRR of 20 percent. Which of the following is true?
a. It is not possible to use NPVor IRR to choose between the two projects.
b. Project B should be chosen because it has a higher IRR.
c. Project A should be chosen because it has a higher NPV.
d. Neither project should be chosen.
e. None of the above.