Question

1....Putters and Drivers, Inc. is considering making an investment in Project A, which will require an initial cash outlay of $20,000. Project A is expected to generate cash inflows of $6,000 for year 1, $8,000 for year 2, $10,000 for year 3, and $7,000 for year 4. The firm's hurdle rate is 11%. What is the net present value for Project A?

Select one: A. $3,301 B. $4,529 C. $3,821 D. None of the above

2.....Unlike the internal rate of return (IRR) method, the net present value (NPV) method

Select one:

A. assumes cash flows are reinvested at the project's internal rate of return.

B. is a discounted cash flow method.

C. assumes cash flows are reinvested at the firm's cost of capital.

D. accounts for the time value of money.

3..... When investment projects are not mutually exclusive and there is no capital rationing constraint, the firm should accept all investment proposals

Select one:

A. for which it can obtain financing.

B. that have large cash inflows.

C. that have a short time span.

D. that have a positive net present value.

4.....

You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 11 years. What is the internal rate of return?

Select one:

a. 5%

b. 6%

c. 7%

d. More than 7%

5.....

In the event that the internal rate of return (IRR) for an investment project is positive, the project's net present value (NPV)

Select one:

A. will be negative.

B. will be positive.

C. will equal the internal rate of return.

D. cannot be determined without additional information.

Answer 1

Solution:

1.Calculation of Net Present Value(NPV)

We should first calculate the sum of present value of all cash inflows using discounting rate of 11% as follow;

=Cash inflow/(1+discounting rate)^no. of year

=$6,000/(1+0.11)^1+$8,000/(1+0.11)^2+$10,000/(1+0.11)^3+$7,000/(1+0.11)^4

=$23,821.42

NPV=Sum of present value of all cash inflows-initial cash outlay

=$23,821.42-$20,000

=$3,821.42

Therefore correct answer is option C i.e $3821.

2.Since IRR and NPV both are discounted cash flow method,thus option B is incorrect.

IRR and NPV both accounts for the time value of money,thus option D is incorrect.

IRR assumes cash flows are reinvested at the project's internal rate of return,thus option A is incorrect.

Therefore correct answer is option C.Since NPV assumes cash flows are reinvested at the firm's cost of capital.

3.Mutually exclusive projects refer to set a projects out of which only one project can be selected for investment.Thus When investment projects are not mutually exclusive and there is no capital rationing constraint, the firm should accept all investment proposals that have a positive net present value.

Thus correct answer is Option D.

All the remaining options are irrelevant.