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Unformatted text preview: ENGR 111, Fall 2011 October 26, 2011 QUIZ 3 ANSWER KEY 1. Which one of the following statements concerning net present value (NPV) is correct? 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 length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. payback period. D. profitability index. E. discounted cash period. 3. The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer. 4. The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem. A. net present value profiling B. operational ambiguity C. mutually exclusive investment decision D. issues of scale E. multiple rates of return 5. The present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period. 6. An investment is acceptable if the profitability index (PI) of the investment is: A. greater than one. B. less than one. C. greater than the internal rate of return (IRR). D. less than the net present value (NPV). E. greater than a pre‐specified rate of return. 7. The internal rate of return for a project will increase if: A. the initial cost of the project can be reduced. B. the total amount of the cash inflows is reduced. C. each cash inflow is moved such that it occurs one year later than originally projected. D. the required rate of return is reduced. E. the salvage value of the project is omitted from the analysis. 8. You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining: A. the internal rate of return for the cash flows of each project. B. the net present value of each project using the internal rate of return as the discount rate. C. the discount rate that equates the discounted payback periods for each project. D. the discount rate that makes the net present value of each project equal to 1. E. the internal rate of return for the differences in the cash flows of the two projects. 9. Modified internal rate of return: A. handles the multiple IRR problem by combining cash flows until only one change in sign change remains. B. requires the use of a discount rate. C. does not require the use of a discount rate. D. Both A and B. E. Both A and C. 10. A project will have more than one IRR if: A. the IRR is positive. B. the IRR is negative. C. the NPV is zero. D. the cash flow pattern exhibits more than one sign change. E. the cash flow pattern exhibits exactly one sign change. ...
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- Fall '11