If the internal rate of return exceeds the required rate of return for a project, then the net present value of
that project is positive.
In comparing two investment alternatives, the difference between the net present values of the two
alternatives obtained using the total cost approach will be the same as the net present value obtained using
the incremental cost approach.
The simple rate of return is the same as the internal rate of return.
The internal rate of return for a project is the discount rate that makes the net present value of the project
equal to zero.
If two projects require the same amount of investment, then the preference ranking computed using either
the project profitability index or the net present value will be the same.
In preference decisions, the profitability index and internal rate of return methods may produce
conflicting rankings of projects.
The project profitability index is used to compare the internal rates of return of two companies with
different investment amounts.
Preference decisions attempt to determine which of many alternative investment projects would be the
best for the company to accept.
Projects with shorter payback periods are always more profitable than projects with longer payback
10. One criticism of the payback method is that it ignores cash flows that occur after the payback point has
11. A very useful guide for making investment decisions is: The shorter the payback period, the more
profitable the project.
12. If new equipment is replacing old equipment, any salvage received from sale of the old equipment should
not be considered in computing the payback period of the new equipment.
13. The simple rate of return focuses on accounting net operating income rather than on cash flows.
14. The simple rate of return method places its focus on cash flows instead of on accounting net operating
15. If a company has computed the project profitability index of an investment project as 0.15, then:
A. the project's internal rate of return is less than the discount rate.
B. the project's internal rate of return is greater than the discount rate.
C. the project's internal rate of return is equal to the discount rate.
the relation between the rate of return and the discount rate is impossible to determine from the given
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project
profitability index on the project is zero. Which of the following statements would be true?
I. The net present value of the project is $20,000.
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