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Exam 5: Net Present Value and Other Investment Criteria

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Question 1

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In what way is the modified internal rate of return (MIRR) method better than the IRR method?

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With the modified internal rate of return method, cash flows from the project are explicitly reinvested at the cost of capital, thus eliminating the reinvestment rate assumption problem. This eliminates the multiple IRR problems inherent in complex projects. Also reinvesting the cash flows from the project at the cost of capital is more realistic. But using NPV method is much better.

Question 2

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If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:

A) +$100
B) +$60
C) +$160
D) None of the above

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Question 3

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Which of the following investment rules may not use all possible cash flows in its calculations?

The benefit-cost ratio is equal to profitability index plus one.

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

A project will have only one internal rate of return if:

Benefit-cost ratio is defined as the ratio of:

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Internal rate of return (IRR) method is also called:

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately) .

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project?

Given the following cash flows for project A: C0 = -1000, C1 = +600 ,C2 = +400, and C3 = +1500, calculate the payback period.

The payback period rule accepts all projects for which the payback period is:

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

What would be the weighted average profitability index of the following two investments, given the firm only has $250 to invest? Project A: Cost = $120, NPV = 80 Project B: Cost = $100, NPV = 75

Which of the following statements regarding the discounted payback period rule is true?

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.