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Principles of Finance

Multiple Choice

Principles of FinanceMultiple Choice
1 .
Which of the following is a disadvantage of using the payback method?
  1. It only considers cash flows that occur after the project breaks even.
  2. It ignores the time value of money.
  3. It is difficult to calculate.
  4. You must know the company’s cost of raising funds to be able to use it.
2 .
A company should accept a project if ________.
  1. the NPV of the project is positive
  2. the NPV of the project is negative
  3. the IRR of the project is positive
  4. the IRR of the project is negative
3 .
The net present value of a project equals ________.
  1. the future value of the cash inflows minus the future value of the cash outflows
  2. the present value of the cash inflows minus the future value of the cash outflows
  3. the present value of the cash inflows minus the present value of the cash outflows
  4. the future value of the cash inflows minus the present value of the cash outflows
4 .
The IRR of a project is the discount rate that ________.
  1. makes the NPV equal to zero
  2. equates the present value of the cash inflows to the future value of the cash outflows
  3. makes the NPV positive
  4. equates the present value of cash outflows to the future value of the cash inflows
5 .
The IRR method assumes that ________.
  1. cash flows are reinvested at the firm’s cost of attracting funds when they are received
  2. cash flows of a project are never reinvested
  3. cash flows are reinvested at the internal rate of return when they are received
  4. the NPV of a project is negative
6 .
When cash outflows occur during more than one time period, ________.
  1. the project’s NPV will definitely be negative
  2. the project can have multiple IRRs
  3. the project should not be done
  4. the time value of money is not important
7 .
The discounted payback period method ________.
  1. is used to compare two projects that have different lives
  2. fails to consider the time value of money
  3. provides an objective criterion for an accept-or-reject decision grounded in financial theory
  4. discounts cash flows using the company’s cost of funds to overcome a flaw of the payback period method
8 .
Which of the following is a method of adjustment for comparing projects of different lives?
  1. IRR
  2. Modified IRR
  3. Payback period
  4. Equal annuity
9 .
When a company can only fund some of its good projects, it should rank the projects by ________.
  1. PI
  2. IRR
  3. NPV
  4. payback period
10 .
If a company is considering two mutually exclusive projects, which of the following statements is true?
  1. The company must do both projects if it chooses to do one of the projects.
  2. The IRR method should be used to compare the projects.
  3. Doing one of the projects means the other project cannot be done.
  4. The company does not need to compare the projects because it can choose to do both.
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