16.11: Multiple Choice
- Page ID
- 94768
\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)
1.
Which of the following is a disadvantage of using the payback method?
-
It only considers cash flows that occur after the project breaks even.
-
It ignores the time value of money.
-
It is difficult to calculate.
-
You must know the company’s cost of raising funds to be able to use it.
2.
A company should accept a project if ________.
-
the NPV of the project is positive
-
the NPV of the project is negative
-
the IRR of the project is positive
-
the IRR of the project is negative
3.
The net present value of a project equals ________.
-
the future value of the cash inflows minus the future value of the cash outflows
-
the present value of the cash inflows minus the future value of the cash outflows
-
the present value of the cash inflows minus the present value of the cash outflows
-
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 ________.
-
makes the NPV equal to zero
-
equates the present value of the cash inflows to the future value of the cash outflows
-
makes the NPV positive
-
equates the present value of cash outflows to the future value of the cash inflows
5.
The IRR method assumes that ________.
-
cash flows are reinvested at the firm’s cost of attracting funds when they are received
-
cash flows of a project are never reinvested
-
cash flows are reinvested at the internal rate of return when they are received
-
the NPV of a project is negative
6.
When cash outflows occur during more than one time period, ________.
-
the project’s NPV will definitely be negative
-
the project can have multiple IRRs
-
the project should not be done
-
the time value of money is not important
7.
The discounted payback period method ________.
-
is used to compare two projects that have different lives
-
fails to consider the time value of money
-
provides an objective criterion for an accept-or-reject decision grounded in financial theory
-
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?
-
IRR
-
Modified IRR
-
Payback period
-
Equal annuity
9.
When a company can only fund some of its good projects, it should rank the projects by ________.
-
PI
-
IRR
-
NPV
-
payback period
10.
If a company is considering two mutually exclusive projects, which of the following statements is true?
-
The company must do both projects if it chooses to do one of the projects.
-
The IRR method should be used to compare the projects.
-
Doing one of the projects means the other project cannot be done.
-
The company does not need to compare the projects because it can choose to do both.