1.

A project is selected among mutually exclusive projects:

a.when the project has the largest net present value.

b.when the project's payback period is the longest.

c.when the project has a negative accounting rate of return.

2.

Which of the following statements is true about independent projects?

a.Independent projects are projects that, if accepted or rejected, do not affect the cash flows of other projects.

b.Independent projects are projects that, if accepted or rejected, affect the net profit of other projects.

c.Independent projects are projects that, if accepted, have a negative effect on the company's profit.

d.Independent projects are projects that, if accepted, have to accept one small project to assist other independent projects.

d.when the project has the lowest internal rate of return.

3.

Due to which of the following reasons is the net present value (NPV) method preferred over the internal rate of return (IRR) method when choosing among mutually exclusive alternatives?

a.The NPV method considers the time value of money while making a capital investment decision, whereas the IRR method considers the accounting rate of return while making a capital investment decision.

b.The NPV method assumes that each cash inflow received is reinvested at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR.

c.The NPV method measures the return in terms of income, whereas the IRR method measures the return in terms of a project's cash flows.

d.The NPV method measures profitability in relative terms, whereas the IRR method measures it in absolute terms.

4.

Carriage Inc., a steel manufacturing company, is planning to buy a new plant. The internal rate of return provided by the new plant is 6%. The cost of capital for Carriage Inc. is 8%. Based on the given scenario, which of the following statements is true in the context of internal rate of return?

a.Carriage Inc. should not invest in the new plant because the IRR of the project is less than its cost of capital.

b.Carriage Inc. should invest in the new plant because IRR is the true or actual simple rate of return that is earned by the initial investment.

c.Carriage Inc. should not invest in the new plant because IRR is not a reliable model for making capital investment decisions.

d.Carriage Inc. should invest in the new plant because the project will earn more than zero IRR from the project.

5.

Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $255,000; expected annual savings is $74,000; incremental working capital is $24,000. The incremental working capital will be recovered at the end of the project's life. In an NPV analysis, the incremental working capital will be considered as:

a.a cash inflow at the project's inception.

b.a sunk cost that cannot be recovered.

c.a cash outflow at the project's inception.

d.an opportunity cost that can be recovered.