Question

In: Finance

18. TRUE OF FALSE: Payback is the number of years it takes for the project to...

18. TRUE OF FALSE: Payback is the number of years it takes for the project to pay for itself, without regard to the time value of money.

19. TRUE OF FALSE: The high profitability index means that the company will achieve the highest NPV per dollar of investment.

20. TRUE OR FALSE: NPV is the best method for capital rationing situations.

21. TRUE OR FALSE: In some cases, NPV and IRR will rank projects differently.

22. TRUE OR FALSE: Under capital rationing situations, a firm will not undertake all projects that are viewed as profitable; only those projects that will return the highest NPV for the limited capital available should be undertaken.

23. TRUE OR FALSE: In choosing between 2 mutually exclusive projects where only one can be undertaken because of limited capital, the project with the highest profitability index should be undertaken.

24. In deciding or choosing among capital projects to undertake:

a. Net Present value is the difference between investment cash outflows and cash inflows taking into account the time value of money using a discount rate, hurdle rate, or cost of capital.

b. Internal rate of return is the discount rate computed such that the net present value of the investment is zero.

c. Profitability index facilitates comparison of different sized investments.

d. All of the above is correct.

25. NPV and IRR are the soundest investment rules from a shareholder wealth maximization perspective:

a. Using NPV and IRR as the basis of choosing between mutually exclusive projects, if one accepted, the other must be rejected.

b. Using NPV and IRR as the basis of choosing between mutually exclusive projects, a project with an initial outlay of $1,000, Year end cash flow of $1,000, IRR of 20% and NPV of $91 will prevail over a project with an initial outlay of $50, Year end cash flow of $100, IRR of 100% and NPV of 41.

c. Using IRR, the choice in (b) above will be the opposite, that is, the project with an IRR of 100% will prevail.

d. All of the statements above are correct.

Expert Solution

18. TRUE OF FALSE: Payback is the number of years it takes for the project to pay for itself, without regard to the time value of money.

Answer : True. Payback period does not take time value of money in to consideration. It is in time in years required to earn back the investment.

19. TRUE OF FALSE: The high profitability index means that the company will achieve the highest NPV per dollar of investment.

True. Profitability index is the Present value of furture cashflows/ Initital Investment. If Index is more than 1 that means project has a positive NPV. Higher the Profitability higher will be the NPV value.

20. TRUE OR FALSE: NPV is the best method for capital rationing situations.

True. NPV uses a discounting factor to calculate the present value of the cashflows. it is more realistic than IRR method. It is more useful than IRR when there non normal cashflows involved.

21. TRUE OR FALSE: In some cases, NPV and IRR will rank projects differently.

True. If the project has different cashflows, NPV and IRR will rank projects differently. The conflict may also occur due to size and investments of the projects.

22. TRUE OR FALSE: Under capital rationing situations, a firm will not undertake all projects that are viewed as profitable; only those projects that will return the highest NPV for the limited capital available should be undertaken.

False: When there is limited capital available, a firm has to take a decision which projects to select. Since NPV is considered the best method under capital rationing, the firm should select the projects with highest NPV if the projects have same investments. However, if the projects have different amounts of investments, profitability index is calculated and the projects with highest profitability index are chosen.

23. TRUE OR FALSE: In choosing between 2 mutually exclusive projects where only one can be undertaken because of limited capital, the project with the highest profitability index should be undertaken.

True.

24. In deciding or choosing among capital projects to undertake:

a. Net Present value is the difference between investment cash outflows and cash inflows taking into account the time value of money using a discount rate, hurdle rate, or cost of capital.

b. Internal rate of return is the discount rate computed such that the net present value of the investment is zero.

c. Profitability index facilitates comparison of different sized investments.

d. All of the above is correct.

Answer :All of the above are correct

25. NPV and IRR are the soundest investment rules from a shareholder wealth maximization perspective:

a. Using NPV and IRR as the basis of choosing between mutually exclusive projects, if one accepted, the other must be rejected.

b. Using NPV and IRR as the basis of choosing between mutually exclusive projects, a project with an initial outlay of $1,000, Year end cash flow of $1,000, IRR of 20% and NPV of $91 will prevail over a project with an initial outlay of $50, Year end cash flow of $100, IRR of 100% and NPV of 41.

c. Using IRR, the choice in (b) above will be the opposite, that is, the project with an IRR of 100% will prevail.

d. All of the statements above are correct.

Answer:All of the statements above are correct.

jeff jeffy answered 2 years ago

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