Question

1. Which of the following statements is correct? a. A project with conventional cash flows is...

1. Which of the following statements is correct?

a. A project with conventional cash flows is one with an initial cash outflow followed by one or more cash inflows.

b. The NPV method determines how much the future value of cash inflows exceeds the present value of costs.

c. All the answers are correct.

d. When two projects are independent, accepting one project implicitly eliminates the other.

e. Conventional cash flow patterns could lead to conflicting decisions by NPV and IRR.

2. Which of the following statements is incorrect?

a. The NPV makes it possible to correctly choose between mutually exclusive projects.

b. Projects may be independent because they are substitutes for one another or because the firm has a funding constraint.

c. The NPV method tells us the amount by which the benefits from a capital expenditure exceed its costs.

d. Most of the answers are correct except one.

e. The decision criterion for the accounting rate of return is inconsistent with the goal of shareholder wealth maximization.

3. Which of the following statements is incorrect?

a. If the NPV is positive, the project should be accepted because all projects with a positive NPV will increase the value of the firm.

b. If a capital project has a positive NPV, the value of the cash flows the project is expected to generate exceeds the project's cost.

c. The NPV uses the discounted cash flow valuation technique to adjust for the time value of money.

d. The accounting rate of return (ARR) provides a direct (dollar) measure of how much a capital project will increase the value of the firm.

e. Most of the answers are correct except one.

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Answer #1

Answer 1

Option A -  A project with conventional cash flows is one with an initial cash outflow followed by one or more cash inflows.

Note - All other options are incorrect.

Answer 2

Option B -  Projects may be independent because they are substitutes for one another or because the firm has a funding constraint.

Note - All other options are correct

Answer 3

Option D -  The accounting rate of return (ARR) provides a direct (dollar) measure of how much a capital project will increase the value of the firm.

Note - All other options are correct

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