Net Present Value and other investment rules

Question 1

Projects with negative net present values should be undertaken

Answer 1

False

Question 2

NPV focuses on cashflows

Answer 2

True

Question 3

Payback period does not take into account the timing of cashflows

Answer 3

True

Question 4

The payback period does take into account payments that are made after the project has made back the invested money

Answer 4

False

Question 5

The payback period has the ability to take risk into account

Answer 5

False

Question 6

Payback period method is most often used… when

Answer 6

In small financial decisions with normal cashflows as Payback method is esyer to calculate than the NPV with its uncertain cost of capital

Question 7

What is the discounted payback method

Answer 7

Just the payback method with time discounted values, the worst of both NPV and Payback worlds

Question 8

What is the main flaw of Average accounting method AAR

Answer 8

It looks at the accounting values averages and depreciation which may be fairly arbitrary deducted and does not take time into account

Question 9

What is IRR

Answer 9

Internal rate of return, the cost of capital when the NPV of a project would be zero.

Question 10

If the IRR is higher than the cost of capital aka discount rate in a company should the project be persued

Answer 10

Yes

Question 11

Are there some types of project when the IRR rule is reversed

Answer 11

yes, financing type projects where the cashflows are gained early but costs come later.

Question 12

Can IRR be used to evalueate projects where moutflows and inflows switch sign f.ex an expense followed by a profit followed by another expense

Answer 12

No, In theese cases it is possible there are multiple IRRs

Question 13

IRR ignores scale

Answer 13

Yes, a prject where you give 10 to recieve 20 will have the same IRR as a project where you give 100 to gain 200 even though you earn ten times as much in the latter project. This is why NPV is the best.

Question 14

Do you need to know the discount rate to calculate the IRR

Answer 14

No, but you need to know it if you want tk see if a project is worth taking.

Question 15

What is the profitability index

Answer 15

(PV of project - initial investment) / initial investment

Question 15

When should a project be accepted if you know the Profitability Index

Answer 15

when PI > 1

Question 16

Does the PI aproach have the same scalability problem as IRR

Answer 16

Yes

Question 17

When is the Profitability Index used for

Answer 17

Capital rationing, although it cannot do it in a long time frame

Question 18

in what industries are NPV and IRR more used in real life

Answer 18

In indiustries where cashflows are fairly easy to predict, when it is uncertain payback period seeem to be more favored