Diagnostic Test: How much do you know of NPV and IRR?

( Module 3)
How much do you know of NPV and IRR?

1. The efficient way to calculate NPV and IRR is to use:

a) Total revenues and expenses
b) Total cash flows
c) Incremental revenues and expenses
d) Incremental cash flows

2. In calculating NPV and IRR, one should:

a) Ignore depreciation but include finance charges and loan repayments
b) Ignore both depreciation and finance charges and loan repayments
c) Include depreciation but ignore finance charges and loan repayments
d) Include both depreciation and finance charges and loan repayments

3. In calculating NPV and IRR, which of the following costs should be ignored?
a) Opportunity costs
b) Sunk costs
c) Costs of cannibalization
d) Allocated costs

4. Your “first pass” filter when you consider projects is that the projects must:
a) Have IRRs greater than the required rate of return
b) Have positive NPV
c) Have positive NPV and also IRR > required rate of return
d) Fit the strategy of the firm
e) Fit the budget of the firm for capital outlays
 5. Suppose you are considering many projects but have a limited budget. You should invest in
all projects that are:
a) Have IRRs greater than the required rate of return
b) Have positive NPV
c) Have positive NPV and also IRR > required rate of return
d) Fit the strategy of the firm
e) Fit the budget of the firm for capital outlays

6. The rate at which the cash flows of a project are discounted (otherwise known as the required
rate of return or the discount rate) is based mainly on:
a) Costs of funds for the project
b) Inflation
c) Market rate
d) Risk of the project
e) The return of an alternative investment (opportunity cost)

7. Suppose you are considering many projects but have a really limited budget (talaga, serious
na). You should:
a) Rank the projects by IRR and accept the projects that have the highest IRR that fit the budget
b) Rank the projects by NPV and accept the projects that have the highest NPV that fit the
budget
c) Rank the projects by profitability index (PI = NPV/ Investment of the project) and accept the
projects that have the highest PIs that fit the budget.

8. The period of cash flows covered by NPV calculations should be:

a) The period being reviewed (e.g., for strategy, 5 years)
b) The life of the project
c) A set standard period so that all projects are comparable
9. You are considering two projects. Project A has a positive NPV and Project B’s IRR is higher
than the required rate of return. If this is all you know and you can invest in only one project, you
should invest in:
a) Project A
b) Project B
c) Both Project A and Project B
d) Neither Project A nor Project B