Which of the following statements is normally correct for a project with a positive NPV?
a. IRR exceeds the cost of capital.
b. Accepting the project has an indeterminate effect on shareholders.
c. The traditional payback period exceeds the life of the project.
d. The present value index equals one.
18. Capital budgeting proposals for investment projects should be evaluated as if the project were financed:
a. entirely by debt.
b. entirely by debt, adjusting for taxes.
c. half by debt and half by equity.
d. with the highest cost source of funds, to be safe.
e. the financing and investment decisions should be viewed separately.
19. When projects are mutually exclusive, can be undertaken only once, and capital is unconstrained, selection should be made according to the project with the:
a. longer life.
b. larger initial size.
c. highest IRR.
d. highest NPV.
e. highest PVI (present value index).
20. Which of the following can be deduced about a three-year investment project that has a two year traditional payback period?
a. The NPV is positive.
b. The IRR is greater than the cost of capital.
c. Both ‘a’ and ‘b’ can be deduced.
d. Neither ‘a’ nor ‘b’ can be deduced.
21. If a project has a cost of $50,000 and a present value index of 1.4, then:
a. its cash inflows are $70,000.
b. the present value of its cash inflows is $30,000.
c. its IRR is 20%.
d. its NPV is $20,000.
22. If two projects offer the same, positive NPV, then:
a. they also have the same IRR.
b. they have the same traditional payback period.
c. they are mutually exclusive projects.
d. they add the same amount to the value of the firm.
e. all the above
23. The likely effect of discounting nominal cash flows with real interest rates (assuming positive NPV) will be to:
a. make an investment’s NPV appear more attractive.
b. make an investment’s NPV appear less attractive.
c. correctly calculate an investment’s NPV if inflation is expected.
d. correctly calculate an investment’s NPV, regardless of expected inflation.
24. Which of the following is representative of how depreciation expense is handled in the face of inflation?
a. It increases annually with the rate of inflation.
b. It decreases annually in nominal terms.
c. The depreciable base is not altered by inflation.
d. The real value of the depreciation is fixed.
25. When analyzing a capital project, an increase in net working capital associated with the project:
a. is not a relevant cash flow.
b. is a relevant cash outflow.
c. is a relevant cash inflow.
d. is a relevant cash outflow that must be adjusted for taxes.
e. is a relevant cash inflow that must be adjusted for taxes.