21. If the NPV of a project is positive, what will occur?

a. The value of the firm will be increased.

b. The IRR will be greater than the payback period.

c. The equivalent annual annuity will exceed the IRR.

d. The discounted payback period will be greater than the payback period.

22. Why does the NPV method of evaluating an investment proposal require that the cash inflows of a project be discounted to the present?

a. It is the only way to arrive at the correct amount to divide into the cost in order to determine the rate of return.

b. The Inland Revenue Board requires it.

c. This enables the analyst to determine the amount of the investment outlay.

d. It provides a measurement of the value of an investment proposal in terms of todays dollars.

23. Which method of evaluating capital-budgeting decisions has the superior reinvestment assumption?

a. The payback

b. The NPV

c. The IRR

d. The accounting rate of return

24. A project costs $10,000 and is expected to return after-tax cash flows of $3,000 each year for the next 10 years. This projects payback period is:

a. three years.

b. three and one-third years.

c. four years.

d. ten years.

25. Consider a project with the following information:

After-Tax After-Tax

Accounting Cash Flow

Year Profits from Operations

1 $ 550 $ 750

2 $ 800 $1,000

3 $1,000 $1,200

Initial outlay = $1,500

Compute the profitability index if the companys discount rate is 10%.

a. 0.77

b. 1.61

c. 1.81

d. 1.97