CF Chap 5

The difference between the present value of an investment's future cash flows and its initial cost is the:

• A) net present value.
• B) internal rate of return.
• C) payback period.
• D) profitability index.
• E) discounted payback period

If a project is assigned a required rate of return of zero, then:

• A) the timing of the project's cash flows has no bearing on the value of the project.
• B) the project will always be accepted.
• C) the project will always be rejected.
• D) whether the project is accepted or rejected will depend on the timing of the cash flows.
• E) the project can never add value for the shareholders

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

• A) A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
• B) An investment project should be accepted only if the NPV is equal to the initial cash flow.
• C) Any type of project should be accepted if the NPV is positive and rejected if it is negative.
• D) Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
• E) An investment project that has positive cash flows for every time period after the initial investment should be accepted

All else constant, the net present value of a typical investment project increases when:

• A) the discount rate increases.
• B) each cash inflow is delayed by one year.
• C) the initial cost of a project increases.
• D) the required rate of return decreases.
• E) all cash inflows occur during the last year instead of periodically throughout the project's life.

Proposed projects should be accepted when those projects:

• A) create value for the owners of the firm.
• B) have a positive rate of return.
• C) return the initial cash outlay within the life of the project.
• D) have required cash inflows that exceed the actual cash inflows.
• E) have an initial cost that exceeds the present value of the future cash flows

If a project has a net present value equal to zero, then:

• A) the initial cost of the project exceeds the present value of the project's subsequent cash flows.
• B) the internal rate of return exceeds the discount rate.
• C) the project produces cash inflows that exceed the minimum required inflows.
• D) any delay in receiving the projected cash inflows will cause the project's NPV to be negative.
• E) the discount rate exceeds the internal rate of return

Net present value:

• A) cannot be relied upon when deciding between two mutually exclusive projects.
• B) rule for project acceptance must be modified when comparing projects of varying sizes.
• C) is less commonly used in business than the profitability index method of analysis.
• D) is not as widely used in practice as payback and discounted payback.
• E) provides the means for considering the risks associated with a specific project

A project has an initial cost of $26,000, a discount rate of 11.7 percent, a life of 5 years, and an NPV of $11,216. Given this, you know that the project is expected to earn a return:

• A) equal to 11.7 percent of $26,000 plus an additional $11,216.
• B) of $11,216 in total.
• C) equal to 11.7 percent of $37,216 (= $26,000 + 11,216).
• D) of 11.7 percent of $11,216.
• E) of $26,000 minus $11,216.

When a firm commences a positive net present value project, you know:

• A) the project will pay back within the required payback period.
• B) the present value of the expected cash flows is equal to the project's cost.
• C) the inherent risks within the project have been ignored.
• D) that all the projected cash flows will occur as expected.
• E) the stockholders' value in the firm is expected to increase

The net present value method of capital budgeting analysis does all of the following except:

• A) incorporate risk into the analysis.
• B) consider all relevant cash flow information.
• C) discount all future cash flows to their current value.
• D) consider the initial cost of the project.
• E) provide a specific anticipated rate of return