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Chapter 11 Test Questions
Question 1
All else constant, the net present value of a project increases when:
a. the discount rate increases.
b. each cash inflow is delayed by one year.
c. the initial cost of a project increases.
d. the required rate of return decreases.
e. all cash inflows occur during the last year of a project’s life instead of periodically
throughout the life of the project.
Answer Question 1
NPV is the sum of the PV of all future cash flows (aka CF
t
/ (1+ int)
t
) minus the initial
outlay.
Thus NPV will increase with a decrease in the discount rate, an increase in
cash flows, a decrease in the initial outlay, and a speeding up of receiving the cash
flows.
Answer : D
Question 2
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
required rate of return.
III. the project will not increase the value of the company.
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
Answer Question 2
NPV is the sum of the PV of all future cash flows (aka CF
t
/ (1+ int)
t
) minus the initial
outlay.
Thus NPV will be zero when the initial outlay equals the PV of all future
cash flows.
This means that the return actually earned is just equal to the cost of
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This note was uploaded on 03/24/2012 for the course BUS M 301 taught by Professor Jimbrau during the Winter '11 term at BYU.
 Winter '11
 JimBrau
 Management, Net Present Value

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