Quiz 2

Advance Corporate Finance

Syed Sadir Zaidi
Time: 40 min

Name: Yasir Rahim

1. If the project’s payback period is greater than or equal to zero, the project should be accepted.
ANSWER: False

2. The NPV of a project will equal zero whenever the payback period of a project equals the required
rate of return.
ANSWER: FALSE

3. The NPV of a project will equal zero whenever the average rate of return equals the required rate
of return.
ANSWER: FALSE

4. The IRR is the discount rate that equates the present value of the project’s future net cash flows
with the project’s initial outlay.
ANSWER: TRUE

5. If a project’s profitability index is less than 0.0, then the project should be rejected.
ANSWER: FALSE

6. Competitive market forces make it imperative for a firm to have a systematic strategy for
generating capital-budgeting projects.
ANSWER: TRUE

7. The size of capital investments and the difficulty in reversing them once they are made make
capital-budgeting decisions very important to the firm.
ANSWER: TRUE

8. Payback period is the least sophisticated capital-budgeting technique.

ANSWER:
True

9. The discounted payback period is superior to the traditional payback period; however, its use as a
capital-budgeting tool is still limited.
ANSWER: TRUE
10. An NPV of zero indicates that a project is expected to provide the required rate of return.
ANSWER:
True

11. NPV is the most theoretically correct capital-budgeting method.

ANSWER: True

12. There are no disadvantages to the Net Present Value method.

ANSWER:
False

13. Capital budgeting is the decision-making process with respect to investment in working capital.
ANSWER:
False

14. NPV is a better capital-budgeting technique than IRR.

ANSWER: TRUE

15. If NPV equals zero, then the discount rate used to calculate NPV must equal the project’s IRR.
ANSWER: TRUE

16. If NPV is negative, then the project’s cost is less than the project’s expected benefit.
ANSWER: False

17. If NPV is positive, then the project is expected to return more than the required rate of return.
ANSWER: TRUE

18. Which of the following methods assumes that cash flows are reinvested at the IRR?
a. MIRR
b. NPV
c. IRR
d. Both a and b
e. All of the above

ANSWER: C

19. The firm should accept independent projects if:

a. the payback is less than the IRR.
b. the profitability index is greater than 1.0.
c. the IRR is positive.
d. the NPV is greater than the discounted payback.
 ANSWER: b

20. The NPV method:

a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.

ANSWER: d

21. If the IRR is greater than the required rate of return, the:
a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both a and b.

ANSWER: d

22. The NPV assumes cash flows are reinvested at the:

a. IRR.
b. NPV.
c. real rate of return.
d. cost of capital.

ANSWER: a

23. If the cash flow pattern for a project has two sign reversals, then there can be as many as
____________ positive IRR(s).
a. one
b. two
c. three
d. four

ANSWER: b

24. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46.
What is the IRR for the project (round to the nearest percent)?
a. 16%
b. 13%
c. 21%
d. 15%

ANSWER: d
25. ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow
of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return
is 12%. (Round your answer to the nearest $1.)
a. $1,056
b. $4,568
c. $7,621
d. $6,577

ANSWER: d

26. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a
project with an initial outlay of $1,520.
Year Net Cash Flow
1 $1,000
2 $1,500
3 $ 500
a. 48%
b. 40%
c. 32%
d. 28%

ANSWER: a

27. A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will
generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate
of return for the project is 10%, what is the NPV of this investment? (Round your answerwer to the
nearest $10.)
a. $490
b. $570
c. $900
d. -$150

ANSWER: B

28. Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
a. In all cases, investing in this project would be better than investing in a project that has an NPV
of $850,000.
b. The project would add value to the firm.
c. Under all conditions, the project’s payback would be less than the profitability index.
d. The project’s IRR would have to be less that the firm’s discount rate.

ANSWER: B

29. We compute the profitability index of a capital-budgeting proposal by:

 a. multiplying the IRR by the cost of capital.
b. dividing the present value of the annual after-tax cash flows by the cost of capital.
c. dividing the present value of the annual after-tax cash flows by the cost of the project.
d. multiplying the cash inflow by the IRR.

ANSWER: C

30. What is the payback period for a $20,000 project that is expected to return $6,000 for the first two
years and $3,000 for Years 3 through 5?
a. 3 1/2
b. 4 1/2
c. 4 2/3
d. 5

ANSWER: C

31. Which of the following is NOT an advantage of NPV?

a. It can be used as a rough screening device to eliminate those projects whose returns do not
materialize until later years.
b. All positive NPVs will increase the value of the firm.
c. It allows the comparison of benefits and costs in a logical manner.
d. It recognizes the timing of the benefits resulting from the project.

ANSWER: A

32. Which of the following techniques may ignore the terminal cash flow of a project?
a. NPV
b. IRR
c. Payback
d. Both b and c

ANSWER: c

33. The IRR is:

a. the discount rate that makes the NPV positive.
b. the discount rate that equates the present value of the cash inflows with the cost of the project.
c. the discount rate that makes the NPV negative and the profitability index greater than one.
d. the rate of return that makes the NPV positive.

ANSWER: b

34. All of the following criteria for capital-budgeting decisions adjust for the time value of money
EXCEPT:
 a. IRR.
b. NPV.
c. payback period.
d. profitability index.

ANSWER: c

35. Artie’s Soccer Ball Company is considering a project with the following cash flows:
Initial outlay = $750,000
Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year
Compute the NPV of this project if the company’s discount rate is 12%.
a. $9,337
b. $7,758
c. $4,337
d. $2,534

ANSWER: A

36. Dieyard Battery Recyclers is considering a project with the following cash flows:
Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
a. $4,000
b. -$466
c. $27,534
d. $8,891

ANSWER:B

37. Your company is considering a project with the following cash flows:
Initial outlay = $1,748.80
Cash flows Years 1-6 = $500
Compute the IRR on the project.
a. 9%
b. 11%
c. 18%
d. 24%

ANSWER: C

38. For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability
index, a project is acceptable if the profitability index is __________.
a. less than zero, greater than the required return
 b. greater than zero, greater than one
c. greater than one, greater than zero
d. greater than zero, less than one

ANSWER: b

39. Compute the payback period for a project with the following cash flows, if the company’s discount
rate is 12%.
Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $ 65
Year 3 = $100

a. 3.43 years
b. 3.17 years
c. 2.88 years
d. 2.6 years

ANSWER: D

40. If the NPV of a project is positive, then the project’s IRR ____________ the required rate of return.
a. must be less than
b. must be greater than
c. could be greater or less than
d. cannot be determined without actual cash flows

ANSWER: B