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12. Because of deficiencies associated with the payback method, it is seldom used in
corporate financial analysis today.
FALSE
13. A risky dollar is worth more than a safe one.
FALSE
14. When choosing among mutually exclusive projects, the choice is easy using the NPV
rule. As long as at least one project has positive NPV, simply choose the project with the
highest NPV.
TRUE
15. When we compare assets with different lives, we should select the machine that has the
lowest equivalent annual annuity.
TRUE
16. For many firms the limits on capital funds are "soft." By this we mean that the capital
rationing is not imposed by investors.
TRUE
17. Soft rationing should never cost the firm anything.
TRUE
18. For most managers, discounted cash flow analysis is in fact the dominant tool for project
evaluation.
TRUE
19. The payback rule states that a project is acceptable if you get your money back within a
specified period.
TRUE
20. The payback rule always makes shareholders better off.
FALSE
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31. When a manager does not accept a positive-NPV project, shareholders face an
opportunity cost in the amount of the:
A. project's initial cost.
B. project's NPV.
C. project's discounted cash flows.
D. soft capital rationing budget.
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33. Which of the following projects would you feel safest in accepting? Assume the
opportunity cost of capital to be 12% for each project.
A. "A" has a small, but negative, NPV.
B. "B" has a positive NPV when discounted at 10%.
C. "C's" cost of capital exceeds its rate of return.
D. "D" has a zero NPV when discounted at 14%.
34. As the discount rate is increased, the NPV of a specific project will:
A. increase.
B. decrease.
C. remain constant.
D. decrease to zero, then remain constant.
35. If the opportunity cost of capital for a project exceeds the project's IRR, then the project
has a(n):
A. positive NPV.
B. negative NPV.
C. acceptable payback period.
D. positive profitability index.
36. When the NPV of an investment is positive, then the IRR will be:
A. equal to the opportunity cost of capital.
B. greater than the opportunity cost of capital.
C. less than the opportunity cost of capital.
D. less than or equal to the opportunity cost of capital.
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42. What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000
annually for six years?
A. 0.57%
B. 2.00%
C. 5.69%
D. 56.87%
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43. What is the minimum number of years that an investment costing $500,000 must return
$65,000 per year at a discount rate of 13% in order to be an acceptable investment?
A. 8.69 years
B. 14.00 years
C. 27.51 years
D. An infinite number of years.
NPV = (65,000/.13) - $500,000
NPV = 500,000 - 500,000
NPV = 0
44. Which of the following statements is most likely correct for a project costing $50,000 and
returning $14,000 per year for five years?
A. NPV = $3,071.01.
B. NPV = $20,000.
C. IRR = 2.8%.
D. IRR is greater than 10%.
45. If the IRR for a project is 15%, then the project's NPV would be:
A. negative at a discount rate of 10%.
B. positive at a discount rate of 20%.
C. negative at a discount rate of 20%.
D. positive at a discount rate of 15%.
46. As long as the NPV of a project declines smoothly with increases in the discount rate, the
project is acceptable if its:
A. internal rate of return is positive.
B. net present value does not equal zero.
C. rate of return exceeds the cost of capital.
D. cash inflows exceed the initial cost.
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