8.6.3 8.7.1

Which of the following best describes the Net Present Value rule? Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

A. Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.

Assume that your capital is constrained, so that you only have $500,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to ________.

B. $69,000

Which of the following is NOT a limitation of the payback period rule? It does not account for the time value of money. It is difficult to calculate. It ignores cash flows after payback. It does not account for changes in the discount rate.

B. It is difficult to calculate.

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following? A) profitability index B) payback period C) net present value (NPV) D) internal rate of return (IRR)

C

Which of the following is true regarding the profitability index? It does not use the net present value (NPV) to assess benefits. It is very simple to compute. Attention must be taken when using it to make sure that all of the constrained resource is utilized. It is unreliable when used for choosing between different projects.

C. Attention must be taken when using it to make sure that all of the constrained resource is

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment? A) internal rate of return (IRR) B) profitability index C) net present value (NPV) D) payback period

D

Which of the following decision rules might best be used as a supplement to net present value (NPV) by a firm that favors liquidity? profitability index MIRR equivalent annual annuity payback period

D. payback period

Which of the following is a disadvantage of the Net Present Value rule? can be misleading if inflows come before outflows not necessarily consistent with maximizing shareholder wealth ignores cash flows after the cutoff point relies on accurate estimate of the discount rate

D. relies on accurate estimate of the discount rate

Net present value (NPV) is usefully supplemented by internal rate of return (IRR), since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

T.

When an alternative decision rule disagrees with the net present value (NPV), the NPV should be followed.

T.