1. Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?

a. The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

b. The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.

c. The NPV model ignores the time value of money while making a capital investment decision.

d. The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

2. Ebony Inc., a tire manufacturing company, is planning to invest $900,000 for the production of soft compound tires. The investment is expected to provide an annual return of $100,000. The estimated life of the project is 10 years. Additionally, working capital is expected to increase by $100,000. The firm expects to recover the investment in working capital at the end of the project's life. If the required rate of return for the project is 7%, what is the net present value (NPV) of the project?

Period	1	2	3	4	5
7%	0.93458	0.87344	0.81630	0.76290	0.71299
Period	6	7	8	9	10
7%	0.66634	0.62275	0.58201	0.54393	0.50835

a.$-246,806

b.$-923,671

c.$-441,677

d.$700,000

3. Assume that 'P' is present value of cash inflows and 'I' is present value of cash outflows of a project. Which of the following equations is used to calculate the net present value (NPV) of an investment?

a. NPV = P – I

b. NPV = (P – I) / I

c. NPV = P + I

d. NPV = (P × I) – I

4. Which of the following is a limitation of using the payback period model for making capital budgeting decisions?

a. The payback period model evaluates the profitability of investment by considering the time value of cash flows from a project.

b. The payback period model ignores the cash flow performance of investments beyond the recovery of the original investment.

c. The payback period model is dependent upon net income, which is something that can be easily manipulated by managers.

d. The payback period model is dependent upon the required rate of return of investment.

5. Which of the following statements is true about independent projects?

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

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

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

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

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