Question

11.    You are considering two independent projects both of which have been assigned a discount rate of 15 percent. Based on the NPV rule, what is your recommendation concerning these projects?

(a) You should accept both projects.
(b) You should reject both projects.
(c) You should accept project A and reject project B.
(d) You should accept project B and reject project A.
(e) None of the above is correct.

12.    New Labs just announced that it has received a patent for a product that will eliminate Flu virus. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the stock market is efficient?
(a) The price of New Labs stock remains unchanged.
(b) The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.
(c) The price of New Labs stock increases rapidly to a higher price and then remains at that price.
(d) All stocks quickly increase in value and then all but New Labs stock fall back to their original values.
(e) The values of all stocks suddenly increase and then level off at their higher values.

13.    Which one of the following statements is correct?
(a) If IRR exceeds the required return, the profitability index will be less than 1.0.
(b) The profitability index will be greater than 1.0 when the NPV is negative.
(c) When the internal rate of return is greater than the required return, the NPV is positive for projects with conventional cash flows.
(d) Projects with conventional cash flows have multiple internal rates of return.
(e) If two projects are mutually exclusive, you should select the project with the longest payback period.

Answer 1

*If there is further data for Question 11, please provide . Any doubt please comment.

11. Option (a) You should accept both projects.[ Assuming NPV is positive, since no other data is given]

12. Option (c), The price of New Labs stock increases rapidly to a higher price and then remains at that price. [ In a efficient market, the prices do not adjust for market reactions to a equilibrium]

13. Option (c) When the internal rate of return is greater than the required return, the NPV is positive for projects with conventional cash flows.