Question

1)

If the NPV of a project with one sign reversal is positive, then its IRR:

Select one:

a. must be greater than the required rate of return

b. must be less than the required rate of return

c. could be greater or less than the required rate of return

d. cannot be determined without actual cash flows

2)

Which of the following statements is INCORRECT?

Select one:

a. An acceptable project should have an NPV greater than or equal to zero and a profitability index greater than or equal to one.

b. If the IRR is greater than the required return, then the profitability index will be greater than one.

c. If two projects are mutually exclusive, then the IRR is more important than the NPV in deciding the project that should be chosen.

d. Advantages of the payback period include that it is easy to calculate, easy to understand, and that it is based on cash flows rather than accounting profits.

3)

In the case of non-conventional cash flows:

Select one:

a. only one IRR can be found

b. IRR method is superior to NPV method

c. more than one NPV may be found

d. more than one IRR may be found

4)

The NPV method:

Select one:

a. is not ideal because sometimes there will be more than one NPV for a project

b. produces a percentage result that is easy to describe

c. may be used to select among projects of different sizes

d. has an inadequate reinvestment assumption

5)

Which of the following statements is CORRECT?

Select one:

a. Neither NPV criteria nor IRR criteria assume reinvestment of future cash flows.

b. NPV criteria for capital budgeting decisions assume that expected future cash flows are reinvested at the IRR. IRR criteria assume that expected future cash flows are reinvested at IRR.

c. NPV criteria for capital budgeting decisions assume that expected future cash flows are reinvested at the IRR. IRR criteria assume that expected future cash flows are reinvested at the company discount rate.

d. NPV criteria for capital budgeting decisions assume that expected future cash flows are reinvested at the company discount rate. IRR criteria assume that expected future cash flows are reinvested at IRR.

Answer 1

1. a. must be greater than the required rate of return

Positive NPV projects have IRR greater than the required rate of return

2. c. If two projects are mutually exclusive, then the IRR is more important than the NPV in deciding the project that should be chosen.

NPV is more important

3. d. more than one IRR may be found

4. d. has an inadequate reinvestment assumption

5. d. NPV criteria for capital budgeting decisions assume that expected future cash flows are reinvested at the company discount rate. IRR criteria assume that expected future cash flows are reinvested at IRR.

answered by: anonymous