Multiple Choice Answers

Question 1
Which of the following is NOT TRUE about the Internal Rate of Return decision methodology?
a.May result in multiple rate if cash flows are unconventional
b.Closely related to NPV, often leading to identical decisions
c.Easy to understand and communicate
d.When in conflict with NPV, usually leads to better decision
Question 2
Which of the following IS NOT a method (technique or resource) used to calculate a capital budgeting project’s Internal Rate of Return (IRR)?
a.Rule of Thumb
b.Microsoft Excel software
c.Financial Calculator
d.Trial and Error
Question 3
The Descartes Rule of Sign:
a.ALLOWS for determining the ONE TRUE Internal Rate of Return (IRR) when sign changes in Cash Flows are properly considered
b.PROJECTS the number of NPVs a project has when sign changes in Cash Flows are considered.
c.Determines the MINIMUM number of IRRs a project can have when there are MORE THAN ONE sign change in a stream of capital budgeting project Cash Flows
d.Determines the MAXIMUM number of IRRs a project can have when there are MORE THAN ONE sign change in a stream of capital budgeting project Cash Flows
Question 4
Which of the following statements is TRUE?
a.The NPV of a project INCREASES when the required rate of return increases
b.The NPV of a project DECREASES when the required rate of return decreases
c.The NPV of a project DECREASES when the required rate of return increases
d.The NPV of a project INCREASES as the riskiness of the project increases
Question 5
The proper Cash Flow input when evaluating a capital budgeting project is called:
a.Net Profit
b.Net Profit + Depreciation
c.Operating Cash Flow (OCF)
d.None of the above
Question 6
The financial management function which involves determining what PROJECTS a company WILL UNDERTAKE is:
a.Determining Capital Structure
b.Developing a Capital Budget
c.Managing Working Capital as it flows through the firm
d.None of the Above
Question 7
The term “crossover rate” means:
a.The rate of returns on two mutually exclusive projects
b.The reinvestment rate assumption in IRR calculations
c.The discount rate which makes the NPVs of two projects equal to 0.
d.The discount rate which makes the NPVs of two projects equal to each other.
Question 8
Which of the following statements is TRUE?
a.A Project will ALWAYS have a Discounted Payback Period less than the life of the project.
b.The MODIFIED RATE OF RETURN (MIRR) of a project is ALWAYS greater than a firm’s cost of capital
c.MOST COMPANIES use 1.5 YEARS as the STANDARD minimum Payback Period when making capital budgeting decisions on INTERNATIONAL PROJECTS.
d.The Discounted Payback Period of a Project is ALWAYS LONGER than its Payback Period
Question 9
Which of the following is NOT TRUE about the PAYBACK decision methodology?
a.It IGNORES the Time Value of Money
b.It IGNORES Cash Flow AFTER the calculated payback period
c.It is biased in favor of projects with BACK LOADED cash flows
d.It is simple and easy to understand
Question 10
An Independent Project is one the acceptance or rejection of which is independent of the acceptance or rejection of other projects.
True  False
Question 11
Project B requires an Initial (Year 0) Investment of $5,000,000; and will return $1,155,000 for each year of its five year useful life. If the projects required rate of return is 14%, what is the Net Present Value (NPV) of the Project B?
a.-$1,034,791.00
b.$ 1,842,777.21
c.-$1,232,100.41
d.-$884,500.56
Question 12
What is the NET PRESENT VALUE of a project with the following estimated Cash Flows (CFs), if the associated risk requires a 12% rate of return? Year        Cash Flow0             -$ 1,000,0001            450,0002            500,0003            400,0004            900,000
a.-$578,556
b.$578,556
c.$657,061
d.$575,680
Question 13
You are considering a $70,000 project that is expected to generate a 15% return which is reasonable given the nature of the risk involved. The project will generate Cash Flows of $18,000 in Year 1, $22,800 in Year 2, $51,500 in Year 3, and $11000 in Year 4. What is the Net Present Value (NPV) of the project?
a.$3,043.63
b.$7,982.47
c.$620.11
d.$2,284.60
Question 14
A firm IS CONSIDERING the following project:Year        CASH FLOW (Project X) 0                -$60,000 1                $34,000 2                $26,000 3                $25,600 4                $19,000 What is the IRR for Project X?
a.48.55%
b.34.66%
c.29.83%
d.19.50%
Question 15
Project A requires an Initial (Year 0) Investment of $500,000 and will generates positive Net Cash Flows of $120,000 for the first 6 years of its life, and $140,000 in its last year (Year 7). What is the Internal Rate of Return (IRR) of Project A?
a.22.55%
b.31.74%
c.15.44%
d.13.33%
Question 16
What is the PAYBACK PERIOD for a project with the following estimated Cash Flows (CFs), if the associated risk is 12%?
Year        Cash Flow
0            -$ 1,000,000
1             450,000
2            500,000
3             400,000
4             900,000
a.2.500 PERIODS
b.3.125 PERIODS
c.2.125 PERIODS
d.CANNOT CALCULATE FROM THE INFORMATION GIVEN