Multiple Choice Questions
1. NPV is calculated by using
a. The required rate of return.
b. Accounting income.
c. The IRR.
d. The future value of cash flows.
e. None of these.
2. Using NPV, a project is rejected if it is
a. Equal to zero.
d. Equal to the required rate of return.
e. Greater than the cost of capital.
3. If the present value of future cash flows is $ 4,200 for an investment that requires an out-lay of $ 2,000, the NPV
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 0.80. The NPV is
a. $ 0.
b. $ 110.
c. ($ 200).
d. $ 911.
e. none of these.
5. Which of the following is not true regarding the IRR?
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 NPV equal to zero.
c. 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.
d. If the IRR is greater than the required rate of return, then the project is acceptable.
e. The IRR is the most reliable of the capital budgeting methods.
6. Using IRR, a project is rejected if the IRR
a. Is equal to the required rate of return.
b. is less than 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 NPV equal 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 these.
8. Postaudits of capital projects are useful because
a. They are not very costly.
b. They have no significant limitations.
c. The assumptions underlying the original analyses are often invalidated by changes in the actual working environment.
d. They help to ensure that resources are used wisely.
e. Of all of these.
9. For competing projects, NPV is preferred to IRR because
a. Maximizing IRR maximizes the wealth of the owners.
b. In the final analysis, relative profitability is what counts.
c. Choosing the project with the largest NPV maximizes the wealth of the shareholders.
d. Assuming that cash flows are reinvested at the computed IRR is more realistic than Assuming that cash flows are reinvested at the required rate of return.
e. Of all of the above.
10. Assume that there are two competing projects, A and B. Project A has a NPV of $ 1,000 and an IRR of 15 percent. Project B has an NPV of $ 800 and an IRR of 20 percent. Which of the following is true?
a. Project A should be chosen because it has a higher NPV.
b. Project B should be chosen because it has a higher IRR.
c. It is not possible to use NPV or IRR to choose between the two projects.
d. Neither project should be chosen.
e. None of these.