Chapter 5: Net Present Value

How should a profitability index of zero be interpreted? A) The project's cash flows subsequent to the initial cash flow have a present value of zero. B) The project produces a net income of zero for every year of its life. C) The project also has a net present value of zero. D) The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). E) The project has an internal rate of return equal to the discount rate.

A) The project's cash flows subsequent to the initial cash flow have a present value of zero.

Which one of the following is the best example of two mutually exclusive projects? A) renting out a company warehouse or selling it outright B) buying sufficient equipment to manufacture both desks and chairs simultaneously C) buying both inventory and fixed assets using funds from the same bank loan D) planning to build a warehouse and a retail outlet side by side E) using the company sales force to promote sales of both shoes and socks

A) renting out a company warehouse or selling it outright

The primary reason that company projects with positive net present values are considered acceptable is that: A) they create value for the owners of the firm. B) the project's rate of return exceeds the rate of inflation. C) the investment's cost exceeds the present value of the cash inflows. D) they return the initial cash outlay within three years or less. E) the required cash inflows exceed the actual cash inflows.

A) they create value for the owners of the firm.

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

B) any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the: A) net present value. B) discounted payback period. C) discounted profitability index. D) payback period. E) discounted net present value.

B) discounted payback period.

No matter how many forms of investment analysis you employ: A) only the first three years of a project ever affect its final outcome. B) the actual results from a project may vary significantly from the expected results. C) the internal rate of return will always produce the most reliable results. D) a project will never be accepted unless the payback period is met. E) the initial costs will generally vary considerably from the estimated costs.

B) the actual results from a project may vary significantly from the expected results.

A financing project is acceptable if its IRR is: A) exactly equal to zero. B) exactly equal to its net present value (NPV). C) less than the discount rate. D) negative. E) greater than the discount rate.

C) less than the discount rate.

All else constant, the net present value of a typical investment project increases when: A) all cash inflows occur during the last year instead of periodically throughout a project's life. B) the discount rate increases. C) the rate of return decreases. D) the initial cost of a project increases. E) each cash inflow is delayed by one year.

C) the rate of return decreases.

Which one of the following statements is true? A) Financing projects can only ever have one IRR. B) You must have a discount rate to compute, NPV, IRR, PI, and discounted payback. C) Payback uses the same discount rate as that applied in the NPV calculation. D) You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate. E) Discounted payback is a better method than payback and is more frequently used in practice

D) You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate.

Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A) Any type of project with greater total cash inflows than total cash outflows, should always be accepted. B) An investment project that has positive cash flows for every time period after the initial investment should be accepted. C) An investment project should be accepted only if the NPV is equal to the initial cash flow. D) A financing project should be accepted if, and only if, the NPV is exactly equal to zero. E) Any type of project should be accepted if the NPV is positive and rejected if it is negative.

E) Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is: A) negative. B) positive. C) equal to the discount rate. D) less than the discount rate. E) greater than the discount rate

E) greater than the discount rate

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis. A) modified internal rate of return B) profitability index C) net present value D) internal rate of return E) payback

E) payback

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: A) net working capital period. B) cash period. C) discounted payback period. D) profitability index. E) payback period.

E) payback period.