Sample Questions – Chapter 5
1.
Which one of the following statements concerning net present value (NPV) is correct?
c
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.
d.
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.
2.
The possibility that more than one discount rate will make the NPV of an investment
equal to zero is called the _____ problem.
e
a.
net present value profiling
b. operational ambiguity
c.
mutually exclusive investment decision
d.
issues of scale
e.
multiple rates of return
3.
If a project has a net present value equal to zero, then:
d
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.
a.
II and III only
b.
II and IV only
c.
I, II, and IV only
d.
II, III, and IV only
e.
I, II, and III only
4.
The advantages of the payback method of project analysis include the:
c
I.
application of a discount rate to each separate cash flow.
II.
bias towards liquidity.
III.
ease of use.
IV. arbitrary cutoff point.
a.
I and II only
b.
I and III only
c.
II and III only
d.
II and IV only
1
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II, III, and IV only
5.
The internal rate of return (IRR):
b
I.
rule states that a typical investment project with an IRR that is less than the
required rate should be accepted.
II.
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 Spring '11
 YAN
 Net Present Value

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