Question

11.	The discount rate that makes the net present value of an investment exactly equal to zero is the:
A)	Payback period.
B)	Internal rate of return.
C)	Average accounting return.
D)	Profitability index.
E)	Discounted payback period.

12.	The internal rate of return (IRR) rule can be best stated as:
A)	An investment is acceptable if its IRR is exactly equal to its net present value (NPV).
B)	An investment is acceptable if its IRR is exactly equal to zero.
C)	An investment is acceptable if its IRR is less than the required return, else it should be rejected.
D)	An investment is acceptable if its IRR is higher than the required return by 2 percentage points, else it should be rejected.

5. None of the above

13.	A situation in which taking one investment prevents the taking of another is called:
A)	Net present value profiling.
B)	Operational ambiguity.
C)	Mutually exclusive investment decisions.
D)	Issues of scale.
E)	Multiple rates of return.

14.	The _______ decision rule is considered the "best" in principle.
A)	internal rate of return
B)	payback period
C)	average accounting return
D)	net present value
E)	profitability index

15.	Project selection ambiguity can arise if one relies on IRR instead of NPV when:
A)	The first cash flow is negative and the remaining cash flows are positive.
B)	Projects are independent of one another.
C)	A project has more than one NPV.
D)	The profitability index is greater than one.
E)	Project cash flows are not conventional.

Answer 1

11.B)Internal rate of return

IRR is the rate at which NPV = 0

Payback period is the time period in which initial investment is recovered

Average Accounting return = Net Profit/Average investment

12.E. None of the above

The correct rule is

Investment should be accepted if IRR is higher than the required rate of return, else rejected

13.C)

Mutually exclusive investment decisions.

Mutually exclusive investments are those out of which only one can be accepted

14.D)

net present value

NPV is considered as they are drawbacks of other methods

15.E) Project cash flows are not conventional.

IRR results are not accurate in that case as there is more than one IRR