1. Which of the following statements is correct? (Points : 1)       

The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.
      The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the IRR.
       The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate.
       The NPV method does not consider the inflation premium.
       The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period.

2. Which of the following statements is correct? (Points : 1)       Because discounted payback takes account of the required rate of return, a project's discounted payback is normally shorter than its regular payback.        The NPV and IRR methods use the same basic equation, but in the NPV method the discount rate is specified and the equation is solved for NPV, while in the IRR method the NPV is set equal to zero and the discount rate is found.        If the required rate of return is less than the crossover rate for two mutually exclusive projects' NPV profiles, a NPV/IRR conflict will not occur.        If you are choosing between two projects which have the same life, and if their NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.        If the required rate of return is relatively high, this will favor larger, longer-term projects over smaller, shorter-term alternatives because it is good to earn high rates on larger amounts over longer periods.

 

3. Which of the following statements is correct? (Points : 1)        An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project.        Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions.       It is unrealistic to expect that increases in net working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project.        Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value.        All of the above are false.

 

4. Which of the following statements is correct? (Points : 1)        In general, the NPVs of riskier cash flows should be found using relatively high discount rates. However, if a cash flow is negative, it should be evaluated using a low discount rate.        If a project has only costs (no revenues) as would certain environmental projects, then the project is likely to have two regular IRRs.        If the NPV and IRR methods give conflicting rankings for two mutually exclusive projects, the payback period should be used to choose the project that should be purchased.        It is better to use the NPV method to evaluate independent projects, but for mutually exclusive projects, especially if projects vary greatly in size, the IRR method is better.        None of the above is a correct statement.

 

5. Which of the following is not considered a relevant concern in determining incremental cash flows for a new product? (Points : 1)        The use of factory floor space which is currently unused but available for production of any product.        Revenues from the existing product that would be lost as a result of some customers switching to the new product.        Shipping and installation costs associated with preparing the machine to be used to produce the new product.        The cost of a product analysis completed in the previous tax year and specific to the new product.        None of the above (All are relevant concerns in estimating relevant cash flows attributable to a new product project.)

 

6. The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR? (Points : 1)        8%        14%        18%       -5%       12%

 

7. Two projects being considered are mutually exclusive and have the following cash flows:    If the required rate of return on these projects is 10 percent, which would be chosen and why? (Points : 1)        Project B because of higher NPV.        Project B because of higher IRR.        Project A because of higher NPV.        Project A because of higher IRR.        Neither, because both have IRRs less than the cost of capital.

 

8. The Oneonta Chemical Company is evaluating two mutually exclusive pollution control systems. Since the company's revenue stream will not be affected by the choice of control systems, the projects are being evaluated by finding the PV of each set of costs. The firm's required rate of return is 13 percent, and it adds or subtracts 3 percentage points to adjust for project risk differences. System A is judged to be a high-risk project (it might end up costing much more to operate than is expected). The appropriate risk-adjusted discount rate that should be used to evaluate System A is (Points : 1)        10%; this might seem illogical at first, but it correctly adjusts for risk where outflows, rather than inflows, are being discounted.        13%; the firm's cost of capital should not be adjusted when evaluating outflow only projects.        16%; since A is more risky, its cash flows should be discounted at a higher rate, because this correctly penalizes the project for its high risk.        Somewhere between 10% and 16%, with the answer depending on the riskiness of the relevant inflows.        Indeterminate, or, more accurately, irrelevant, because for such projects we would simply select the process that meets the requirements with the lowest required investment.

 

9. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years. Find the internal rate of return to the nearest whole percentage point. (Points : 1)        9%        7%        5%        3%        11%

 

10. Whitney Crane Inc. has the following independent investment opportunities for the coming year:    The IRRs for Project A and C, respectively, are: (Points : 1)

       16% and 14%
     
       18% and 20%
      18% and 13%
      16% and 13%