AFM273 Chapter Notes - Chapter 8: Cash Flow

Which one of the following statements is correct? assume cash flows are conventional.

a. The profitability index will be greater than 1.0 when the net present value is negative.

b. If the IRR exceeds the required return, the profitability index will be less than 1.0.

c. When the internal rate of return is greater than the required return, the net present value is positive.

d. If two projects are mutually exclusive, you should select the project with the shortest payback period.

e. Projects with conventional cash flows have multiple internal rates of return.

Which one of the following statements is correct? Assume cashflows are conventional. Explain how you got your answer A. If twoprojects are mutually exclusive, you should select the project withthe shortest payback period. B. The profitability index will begreater than 1.0 when the net present value is negative. C.Projects with conventional cash flows may sometimes have multipleinternal rates of return. D. If the required return exceeds IRR,the profitability index will be less than 1.0. E. When the internalrate of return is above than the required return, the net presentvalue is negative.

1. Net Present Value is considered a better method than Internal Rate of Return for all of the following reasons except __________.

a) IRR may misrank mutually exclusive projects of different size

b) IRR can not be used when capital rationing exists

c) IRR may have multiple IRR's if the project is nonnormal

d) IRR assumes cash flows can be reinvested at the project's IRR

2. Which of the following is true for normal projects if the cost of capital is positive?

a. If a project's IRR is positive, then its Profitability Index will greater than 1

b. If a project's NPV is negative, then its Payback period will not exist

c. If a project's NPV is positive, then its Profitability Index will be positive

d. If a project's IRR is positive, then its Discounted Payback period will exist

3. __________ is a method used to compare two repeatable projects with different lives.

1. Crossover Rate
2. Equivalent Annual Annuity
3. Scenario Analysis
4. Risk Adjusted Discount Rate

4. The __________ is the rate at which two projects have the same NPV is found by calculating the IRR of the difference in the cash flows of two projects.

1. Risk Adjusted Discount Rate
2. Marginal Cost of Capital
3. Crossover Rate
4. Optimal Capital Budget

5. Which of the following is NOT considered a relevant concern in determining incremental cash flows for a new product?

1. The use of high quality factory floor space that is currently unused but is available for production of other products.
2. Revenues from an existing product that would be lost as a result of customers switching to the new product.
3. Shipping and installation costs associated with preparing the machine to be used to produce the new product.
4. The cost of a marketing study completed last year related to the new product.