B)An investment is acceptable if its PI is less than one.C)An investment is acceptable if its PI is greater than the internal rate of return (IRR).D)An investment is acceptable if its PI is less than the net present value10.Which of the following statements is true?A)NPV should never be used if the project under consideration has nonconventional cashflows.B)NPV is similar to a cost/benefit ratio.C)If the financial manager relies on NPV in making capital budgeting decisions, she acts in theshareholders' best interests.D)NPV can normally be directly observed in the marketplace.E)IRR is generally preferred to NPV in making correct capital budgeting acceptance decisions.Answer: C

11.Net present value _____________.A)is equal to the initial investment in a projectB)is equal to the present value of the project benefitsC)is equal to zero when the discount rate used is equal to the IRRD)is simplified by the fact that future cash flows are easy to estimateE)requires the firm set an arbitrary cutoff point for determining whether an investment isacceptableAnswer: C12.The _______ decision rule is considered the "best" in principle.A)internal rate of returnB)payback periodC)average accounting returnD)net present valueE)profitability indexAnswer: D13.Which of the following decision rules is best for evaluating projects for which cash flows beyonda specified point in time, and the time value of money, can both be ignored?A)PaybackB)Net present valueC)Average accounting returnD)Profitability indexE)Internal rate of returnAnswer: A14.An investment generates $1.10 in present value benefits for each dollar of invested costs. Thisconclusion was most likely reached by calculating the project's:A)Net present value

B)Profitability indexC)Internal rate of returnD)Payback periodE)Average accounting returnAnswer: B15.The use of which of the following would lead to correct decisions when comparing mutuallyexclusive investments?I.Profitability indexII.Net present valueIII.Average accounting returnA)I onlyB)II onlyC)III onlyD)I and II onlyE)I and III onlyAnswer: B16.You own some manufacturing equipment that must be replaced. Two different suppliers presenta purchase and installation plan for your consideration. This is an example of a business decisioninvolving _____________ projects.A)mutually exclusiveB)independentC)working capitalD)positive NPVE)crossoverAnswer: A

17.If a project with conventional cash flows has an IRR less than the required return, then:A)The profitability index is less than one.B)The IRR must be zero.C)The AAR is greater than the required return.D)The payback period is less than the maximum acceptable period.E)The NPV is positive.Answer: A18.Calculate the NPV of the following project using a discount rate of 10%:Yr 0 = –$800; Yr 1 = –$80; Yr 2 = $100; Yr 3 = $300; Yr 4 = $500; Yr 5 = $500A)$8.04B)$87.28C)$208.04D)$459.17E)$887.28Answer: BResponse: NPV = -$800 - 80 / 1.1 + 100 / 1.12+ 300 / 1.13+ 500 / 1.14+ 500 / 1.15= $87.28Using your cashflow keys? CF0= -800, CO1 = -80, FO1=1, CO2 = 100, FO2=1, CO3 = 300, FO3=1,CO4 = 500, FO4=2. Then hit the NPV key, type in 10 for “I,” hit the down arrow to get you back tothe NPV display, and hit CPT and you get 87.28.

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