MGF Final

What is the NPV of a project that costs $100,000 and generates cash flows $50,000 annually for 3 years if the cost of capital is 14%? a. $33,748.58 b. $16,081.60 c. $14,473.44 d. $13,397.57

A. $33,748.58 NPV = CF/(1+r)^t , then Sum of all PV(CF)

A project requires an initial outlay of $10 million. If the cost of capital exceeds the project IRR, then the project has a(n): a. Negative NPV b. Acceptable payback period c. positive NPV d. Positive Profitability Index

A. Negative NPV

Which of the following can be defined as a benefit-cost ratio? a. Profitability Index b. Internal Rate of Return c. NPV d. Modified Internal Rate of Return

A. Profitability Index

A project can have as many different Internal Rates of Return (IRR) as it has: a. Periods of Cash Flow b. Changes in the sign of the cash flows c. Cash Inflows d. Cash Outflows

B. Changes in the sign of the Cash Flows

The internal rate of return is the: a. Project's current market rate of return b. Discount rate that results in a zero net present value for the project c. Rate of return required by the project's investors d. Discount rate that causes a project's after tax income to equal zero

B. Discount rate that result in a zero net present value for the project

When projects are mutually exclusive, you should choose the project with the: a. Highest IRR b. Highest NPV c. Longer Life d. Shorter Payback Period

B. Highest NPV

Which of the following statements is correct for a project with a positive NPV? a. The profitability index equals 1 b. The IRR must be greater than 0 c. The discount rate exceeds the cost of capital d. Accepting the project has an indeterminate effect on shareholders' wealth

B. The IRR must be greater than 0

When a project's Internal Rate of Return equals its opportunity cost of capital, then the: a. Project has no cash inflows b. NPV will be positive c. NPV will be 0 d. Project should be rejected

C. NPV will be 0

If a project's NPV is calculated to be negative what should a project manager do? a. The present value of the project cost should be determined b. The profitability index should be calculated c. The project should be rejected d. The discount rate should be decreased

C. The project should be rejected

The Modified Internal Rate of Return (MIRR) can be used to correct for: a. Borrowing Projects b. Negative NPV Calculations c. Undefined Payback Periods d. Multiple Internal Rates of Return

D. Multiple Internal Rates of Return

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? a. Payback Period b. Internal Rate of Return c. Profitability Index d. NPV e. Discounted Payback Period

D. NPV

Which of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? a. Payback b. Internal Rate of Return c. Profitability Index d. Net Present Value

D. Net Present Value

If a project has multiple IRRs, the lowest one is incorrect. True or False?

FALSE: If a project has multiple IRRs, none are necessarily "incorrect", it just tells you the overall cash flows throughout a project.

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital True or False?

FALSE: The IRR is the discount rate, and you need to know the opportunity cost of capital to find this.

The payback rule always makes shareholders better off. True or False?

FALSE: The payback rule has nothing to do with the well-being of the shareholders. It only tells the company when they should expect to break even.

For mutually exclusive projects, the project with the highre IRR is the correct selection True or False?

FALSE: You first and foremost look at the NPV to determine which project to choose

When using a profitability index to select projects, a high value is preferred over a low value. True or False?

TRUE: The higher the profitability index, the more you are likely to make good profit off of a project. Vice versa with a negative profitability Index.