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Chapter 05

Net Present Value and Other Investment Criteria

Multiple Choice Questions

1. Which of the following investment rules does NOT use the time value of money concept?

A. Net present value

B. Internal rate of return
C. The payback period
D. Profitability index

2. Suppose a firm has $100 million in excess cash. It could:

A. invest the funds in projects with positive NPVs.

B. pay high dividends to the shareholders.
C. buy another firm.
D. all of the options

3. The following are measures used by firms when making capital budgeting decisions EXCEPT:

A. payback period.
B. internal rate of return.
C. P/E ratio.
D. net present value.

5-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. The survey of CFOs indicates that the NPV method is always, or almost always, used for
evaluating investment projects by approximately:

A. 12% of firms.
B. 20% of firms.
C. 57% of firms.
D. 75% of firms.

5. The survey of CFOs indicates that the IRR method is used for evaluating investment projects by
approximately:

A. 12% of firms.
B. 20% of firms.
C. 75% of firms.
D. 57% of firms.

6. Which of the following investment rules has the value additivity property?

A. the payback period method

B. the net present value method
C. the book rate of return method
D. the internal rate of return method

7. 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 projects is:

A. +$100
B. +$60
C. +$160
D. +$6,000

8. If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined
projects is:

A. +$30
B. -$60
C. -$30
D. -$1,800

5-2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9. You are given a job to make a decision on project X, which is composed of three independent
projects A, B, and C that have NPVs of + $70, -$40 and + $100, respectively. How would you go
about making the decision about whether to accept or reject the project?

A. Accept project X as it has a positive NPV.

B. Reject project X.
C. Break up the project into its components: accept A and C, but reject B.
D. Break up the project into its components: accept C.

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

A. +$100
B. -$40
C. +$70
D. +$120

11. The net present value of a project depends upon the:

A. company's choice of accounting method.

B. manager's tastes and preferences.
C. project's cash flows and opportunity cost of capital.
D. company's profitability index.

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

A. NPV
B. payback period
C. IRR
D. profitability index

13. The payback period rule:

A. varies the cut-off point with the interest rate.

B. determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the
payback period rule.
C. requires an arbitrary choice of a cut-off point.
D. both A and C.

5-3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
14. The payback period rule accepts all projects for which the payback period is:

A. greater than the cut-off value.

B. less than the cut-off value.
C. positive.
D. an integer.

15. The main advantage of the payback rule is:

A. adjusts for uncertainty of early cash flows.

B. simple to use.
C. does not discount cash flows.
D. better accounts for salvage costs at the end of a project.

16. The following are disadvantages of using the payback rule EXCEPT the rule:

A. ignores all cash flow after the cutoff date.

B. does not use the time value of money.
C. is easy to calculate and use.
D. does not have the value additivity property.

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

A. The discounted payback rule uses the time value of money concept.
B. The discounted payback rule is better than the NPV rule.
C. The discounted payback rule considers all cash flows.
D. The discounted payback rule exhibits the value additivity property.

18. Given the following cash flows for project A: C0 = -1,000, C1 = +600, C2 = +400, and C3 = +1,500,
calculate the payback period.

A. one year
B. two years
C. three years
D. cannot be determined

5-4
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
19. The cost of a new machine is $250,000. The machine has a five-year life and no salvage value. If
the cash flow each year is equal to 25% of the cost of the machine, calculate the payback period
for the project:

A. 2.0 years
B. 2.5 years
C. 3.0 years
D. 4.0 years

20. Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720, and C3 = 2,000,
calculate the discounted payback period for the project at a discount rate of 20%.

A. 1 year
B. 2 years
C. 3 years
D. >3 years

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

A. discounted payback period method.

B. discounted cash-flow (DCF) rate of return method.
C. modified internal rate of return (MIRR) method.
D. book rate of return method.

22. The quickest way to calculate the internal rate of return (IRR) of a project is by:

A. trial and error method.

B. using the graphical method.
C. using a financial calculator.
D. doubling the opportunity cost of capital.

23. If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that
project is:

A. positive.
B. negative.
C. zero.
D. unable to determine.

5-5
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Another document from Scribd.com that is
random and unrelated content:
 “Just as much right as you, darling. I drove the car here in case any
one was . . . hurt. It’s in that street by the Church House.”
“Then will you shew me the way and take these infants to Seymour
Street? Raney will follow as soon as he can bring Sonia down.”
“And you?”
“I’m going back to give him a hand.”
“Must you?”
“There may be other people in the house. Servants.”
Barbara lifted the child off my shoulders into her arms and hurried
down a side street. The fog was lifting rapidly, too rapidly; I could see
across the street and I wondered how much could be seen on the
battlefield outside The Sanctuary.
“If you must . . .” Barbara murmured. “George, I told Robson I was
coming to see if I could help you; but . . . I brought the car to take back
your dead body.”
“I’ve no intention of being killed,” I said, “but we can’t leave people
to be burnt alive.”
“Well, . . . take the revolver,” said Barbara helplessly.
When we had put the children inside the car, I went back at a run
down Great College Street to Smith Square. The fog lay in pockets so
that I could see thirty yards at one moment and less than three at another.
I fancied, as I neared The Sanctuary, that the noise had diminished; I
could see neither fire nor smoke; and, though my own road was deserted,
I thought I could hear the patter of running feet. It was more than time
for the reinforcements to have arrived; it was more than a likelihood that,
with the increasing light, experience and discipline were favouring the
police. I was halfway through Smith Square when I heard a sound of
crying and saw a woman’s figure cowering against the railings. As I
went forward, I was greeted with a scream of terror; the figure turned to
run, and I recognized Sonia.
Calling her by name, I started in pursuit and brought her back from
the scene of riot for which she was blindly heading. Her nerve was gone;
and I had dragged and carried her halfway to the car before she could
speak coherently. Then I learned that the battle was over, the fire out and
Griffiths’ army in full flight; but all this was nothing to the unforgettable
agony of the bombardment, and she sobbed hysterically as she tried to
describe her own sufferings from the moment when she received my
message from Hampstead to the moment when her husband climbed
through the nursery-window.
“Where is Raney?,” I asked.
“He’s following. He said it was dangerous for us to go together; and I
should get along quicker without him. Oh, George, it was so awful! I
believe I’m going to faint.” . . .
Though I tried to comfort her, I should have had an easier task if she
had composed herself wholly or wholly collapsed. Though I had not
shared her ordeal, I felt that Sonia was making rather a pitiful exhibition
of herself. She was frightened, but so was I; so—under his Gasconnade
—was O’Rane; so—without disguise—had Barbara been. When,
however, an emergency wrested the direction of her daily life from her
own hands, Barbara behaved as tradition and inherited instinct taught
her. Though her body might play her false, the dauntless strength of
breeding came out in her spirit; she might break down in private; but,
once on the public scaffold, she shewed an Elizabethan daring and feared
death less than the ague which might make her enemies think she feared
death. Alone of us four, Sonia was more concerned for her personal
alarms than for the dignity of the order in which we had been brought up.
“It’s only a few yards to the car,” I told her. “Barbara will look after
you. And you’ll find the children quite safe. . . . D’you know which way
David was coming?”
“No. . . . I just ran for my life. He said he’d follow.” . . .
I handed her over to my wife’s keeping with no more comment than
that she was badly shaken in nerve. There might have been a noticeable
contraction of sympathy if Barbara, who had superfluously ventured into
this maelstrom through loyalty to me, heard that Sonia had run for her
life and left her blind husband to extricate herself from the danger in
which she had involved him.
“I’m just going to meet Raney,” I said. “He’s expecting us either in
Dean’s Yard or Seymour Street.”
“If we’ve gone before you come back, it’ll mean that he’s found us
first,” said Barbara. “Then you’ll come home independently. Take care of
yourself.”
 “It’s all over now. Even the fog’s almost gone.”

7
As I returned to The Sanctuary for the last time, I could see—even
without my glasses—from one lamp-post to the next. The narrow streets
north of Smith Square were almost empty; and I could hardly blame a
routed enemy for shying from such sinister avenues of escape. There
were more and more people as I drew nearer to the Embankment, all of
them rather dazed and many wounded. I saw no dead, though stretchers
were being hurried up as I came in sight of The Sanctuary; and of the
battle there was no other sound than a rapid scurry of feet towards
Westminster Bridge and Vauxhall.
At the corner of Sanctuary Road I was challenged and stopped by a
policeman.
“I’m looking for the gentleman whose house has been attacked,” I
explained. “I’ve got his family in a car near by; but he’s unfortunately
blind, and I don’t want him to miss them.”
I was allowed through; and, a moment later, I stood in the midst of
one of the strangest scenes that I have witnessed. To see, to smell and to
touch, it was a blend of shambles and distillery under the combined
influence of earthquake and fire. The ground was in places waist-deep
with stones; for twenty feet round the house I heard the glass crackling
as I walked. More than once I slipped in an ominous pool of blood; and
the air was sickly with the smell of whisky and singed clothing.
I whistled and called O’Rane’s name, but there was no answer. Every
approach was now guarded by police; and on either side of the cordon I
heard scuffling as the last unyielding attackers were put under arrest. In
the middle of the open square, the wounded were laid out to await the
ambulances. I borrowed a lantern and flashed it down the lines, but there
was no one remotely resembling Raney.
“I’m going to try the house now,” I told the policeman nearest the
stables. “If you’ll give me a leg up, I can get over the wall and up the fire
escape.”
There was no one in the yard, no one in the house. As a last hope, I
interrogated two or three of the constables; but, if any of them had found
time to notice anything my description did not help to identify one half-
seen figure in a surging crowd of many thousands.
 “Well, if he turns up,” I said to the inspector, “will you tell him that
all’s well and that his family has gone to Mr. Oakleigh’s house?”
Then, handing him a card, I bent my steps in the direction of the
Church House.
The fog had lifted; and only a faint haze remained. For the first time
in many hours I looked at my watch to explain what seemed to be stars.
It was nine o’clock; and I became suddenly conscious of great hunger,
great fatigue and almost unbearable pain in my head and hand. At the
same moment I began to see the events of the afternoon in their
perspective.
Nothing quite of this kind had happened for a hundred years. Barbara
had confirmed what the policeman told me: this outbreak was isolated
and unique. Within the next day or two I was to meet men who had
driven unsuspectingly across the battlefield from luncheon-parties an
hour before the battle; I was to meet others who drove across the same
ground an hour after the surrender and only imagined that the road was
under repair. It was local, it was brief; but it was new. Had I seen the
beginning or the end? Sardou, I remember, makes one of his characters
say: “An émeute is when the mob is conquered; then they are all canaille;
a revolution is when they are victorious; then they are all heroes.” The
émeute of to-day, however, becomes not infrequently the revolution of
to-morrow. I felt that, in history, this outbreak might mark a turning-
point: it would be the first active step towards a social revolution, or it
would be the last demonstration of turbulence before a great and orderly
people, with a genius for self-government, adjusted itself slowly,
pragmatically and irrationally to the new conditions.
I know now, I knew next day, that the collision which loomed so
large to me would escape the notice of the most vigilant historian. The
average headline in the average paper said no more than: D
.F . Then and now I felt and
feel that what I witnessed was more than a “disorderly scene”. Little
more than eight years had passed since the threat of a European war
shook us to the foundations of our being. The ardent among us had
vowed that, if we won, we would have an order of civilization for which
any man would be proud to die. After eight years, the danger of a new
war lowered more menacingly than in the summer months of 1914. And
the civilization which we had set up to commemorate the war was to be
judged on that afternoon’s encounter. Had the association of one human
being with another, in his national and international grouping, grown so
complex that no one could control it? Had the world become like the
Roman Empire in its last days, when—for no reason that a statesman of
the day or an historian of later days could enunciate—the mighty
machine ceased to revolve? If the aim of government was to secure the
life and liberty of the governed and to lead them towards prosperity and
happiness, government had palpably failed in victorious England and
France, in defeated Germany, in revolutionary Russia. My uncle warned
me on his death-bed that we were back in 1914; had he been with me
now, I must have told him that we were sunk to something incredibly
lower than 1914. After the events of this afternoon I did not believe that
even O’Rane would dispute that.
Of all the ironies that had chequered his life, I knew of none greater
than that his should be the house to be attacked by the most downtrodden
and hopeless section of the community. If their salvation could have been
helped by his death, he would have given his life for them as lightly as
another man might toss a coin to a beggar. Now, if any one had indeed
been killed, he would be held indirectly responsible.
I had come to a halt till the pain which every step sent shooting
through my head should abate. Looking again at my watch, I saw that I
must hasten. By Great College Street, O’Rane had told me, and then into
Dean’s Yard. As I turned the corner, I had to step aside to avoid an
obstacle. Glancing back, I saw that it was a man. He lay stretched on his
back, with his arms flung out, midway between two lamp-posts; and I
could not be sure whether he was wounded or drunk. I called out to find
if he wanted help; but there was no answer. Then I struck a match.
As it flared, I saw what—in some way that I shall never understand
—I had been expecting to see. It was this that had sent me back to his
side again and again; this, maybe, that had brought Barbara with her car;
this, for all I know, that appeared to her in the semblance of black wings
beating a prophetic message over the house. O’Rane’s hands were cold
as ice; the back of his head was brutally smashed. His black eyes stared
up to heaven in mild perplexity at the insoluble enigma of death and the
eternal paradox of life.
He looked a boy of twenty.
I covered his face and mounted guard over my last and best
friend. . . .
 W S .L ,
Berkshire, 1923.

THE END
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