FIN600 – MODULE 3 QUIZ 1

 

MODULE 3 QUIZ 1

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Question 1

Which one of the following statements concerning net present value (NPV) is correct?

 

 

Select one:a. An investment should be accepted if, and only if, the NPV is exactly equal to zero.b. An investment should be accepted only if the NPV is equal to the initial cash flow.c. An investment should be accepted if the NPV is positive and rejected if it is negative. Correctd. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.e. Any project that has positive cash flows for every time period after the initial investment should be accepted.

 

Question 2

             You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?

 Year Project A Project B

 0 -$48,000 -$126,900

 1 $18,400 $ 69,700

 2 $31,300 $ 80,900

 3 $11,700 $ 0

Select one:a. Project A, because its NPV is about $335 more than the NPV of project B Correctb. Project A, because it has the higher required rate of returnc. Project B, because it has the largest total cash inflowd. Project B, because it returns all its cash flows within two yearse. Project B, because it is the largest sized project

 

Question 3

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the incremental IRR?

 

 

 

 

 Project A Project B

 

 

 Year Cash Flow Cash Flow

 

 

 0 -$84,500 -$76,900

 

 

 1 $29,000 $25,000

 

 

 2 $40,000 $35,000

 

 

 3 $27,000 $26,000

 

 

Select one:a. 11.11%b. 13.01%c. 14.91%d. 16.75%e. 17.90% Correct

 

Question 4

       If a project has a net present value equal to zero, then:

 I.  The present value of the cash inflows exceeds the initial cost of the project.

 II.  The project produces a rate of return that just equals the rate required to accept the project.

 III.  The project is expected to produce only the minimally required cash inflows.

 IV.  Any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Select one:a. II and IIIb. II and IVc. I, II, and IVd. II, III, and IV Correcte. I, II, and III

 

Question 5

       The internal rate of return (IRR):

 I.  Rule states that a typical investment project with an IRR that is less than the required rate should be accepted.

 II.  Is the rate generated solely by the cash flows of an investment.

 III.  Is the rate that causes the net present value of a project to exactly equal zero.

 IV.  Can effectively be used to analyze all investment scenarios.

Select one:a. I and IVb. II and III Correctc. I, II, and IIId. II, III, and IVe. I, II, III, and IV Comments Comments:

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