Choosing Investments Flashcards
Which of the following statements regarding NPV is true?
A. The NPV rule depends on the manager’s tastes.
B. The NPV rule does not recognize the time value of money.
C. Because of the adding-up property one might be mislead into accepting a poor project that is packaged with a good project.
D. NPV depends only on the forecasted cash flows from a project and the opportunity cost of capital.
D
You are offered a project that costs $1,000 and has an expected cash flow in one year of $1,150. Calculate the net present value of the project if the interest rate is 5.5%.
90.05
A manager is contemplating the purchase of a new machine that will cost $150,000 and has a useful life of three years. The machine would yield (year-end) cost reductions of $45,000 in year 1, $55,000 in year 2, $65,000 in year 3. If the interest rate is 9%, should the manager buy the machine?
-12,231.27, no the NPV is negative so the manager should not buy the machine
Which of the following statements regarding the internal rate of return (IRR) is true?
A. The IRR is the opportunity cost of capital.
B. The IRR is the interest rate that causes the NPV of the project to be equal to 1.
C. The general investment rule is to accept the project if the IRR is less than the discount rate.
D. The IRR is a profitability measure that depends on the amount and the timing of the project’s cash flows.
D
Which of the following statements regarding the payback period rule is true?
A. The payback rule is to accept only those projects that recover their investment within some specified period.
B. If the payback period rule is chosen for making investment decisions with a cutoff date of two years, then a project that recovers its investment in 2.5 years can be selected.
C. The payback rule correctly accounts for the opportunity cost of capital.
D. When deciding between possible investment projects the NPV rule and the payback period give the same answers.
A
Which of the following statements regarding the capital budgeting decisions is false?
A. As long as the proposed capital budgeting projects are independent, both NPV and IRR methods will produce the same accept/reject indication.
B. A deficiency of the internal rate of return is that it does not consider the time value of money.
C. A deficiency of the payback method is that it does not consider the time value of money.
D. If a project has a NPV of zero, it means that the firm’s overall value will not change if the project is adopted.
B
