37 MULTIPLE CHOICE 13-10 If net present value is negative, it means that the ret

Question

37 MULTIPLE CHOICE 13-10 If net present value is negative, it means that the return on the investment is a. It doesn't mean anything since the return on the investment bears no relationship to the discount rate. b. equal to the discount rate Oc. less than the discount rate Od. acceptable e. more than the discount rate 38. MULTIPLE CHOICE 13-12 Which of the following is true regarding the internal rate of return for a project? Oa. If the internal rate of return is less than the required rate of return, the project will be rejected. b. Many managers may believe that the internal rate of return is the compounded rate of return eamed by the initial investment. c. If the internal rate of return is equal to the required rate of return, the net present value of the project is zero. Od. All of these choices are correct. e. If the internal rate of return is more than the required rate of return, the project will be accepted. 39. MULTIPLE CHOICE 13-30 The reason that the discount factor in year 3 is less than the discount factor in year 2 is that a. cash flows are uneven Ob. compounding does not occur c. cash flows are even Od. a dollar received in three years is worth less than a dollar received in two years e. present value is positive 40 MULTIPLE CHOICE 13-31 A company is considering two projects Initial investment Cash inflow Year 1 Cash inflow Year 2 Cash inflow Year 3 Cash inflow Year 4 Project I $60,000 $30,000 $30,000 30,000 $30,000 $30.000 Project II $60,000 $15,000 $15,000 $30,000 $70,000 $70,000 Figure 13- Cash inflow Year 5 Refer to Figure 13-1. What is the payback period for Project 1? 3 years 1 year //east.instructor.cengagenow.com/ilrn/bca/instr/test-printing/376965427/html sel... 4/19/2010 Quick View Page 15 of 19 Oc. 2 years Od. 5 years Oe. 2.5 yeans

Explanation / Answer

37. Net Present Value is the present value of the future cash flows from an investment. As the discount rate increases the present value of the cash flows reduce. When the discount rate is higher than the rate of return from an investment, it produces a negative NPV. Hence the answer is c. Rate of Return is less than the discount rate.

38. Internal rate of return is the rate of return where NPV is 0. Hence if a projects internal rate of return is less than the required rate of return it is not viable for a company to pick a project since the company may be unable to recover the cost of investment. Conversly, if the IRR is more than the required rate of return, a project may be accepted, Hence the answer is d. All of the answers are correct.

39. Discount factors are a representation of the present value of 1 dollar (i.e) the current value of $1 received at a future date. As time passes by the value of a dollar becomes implicitly less. Hence the answer is d. A dollar received in 3 years is less than a dollar received in 2 years.

40. Payback period is the time taken to generate cash flows that repay the initial investment made.

In case of project 1 -

The initial investment of the project is $60,000 which is repaid by year 2 ($30,000 in year 1 and $30,000 in year 2). Hence the payback period for project 1 is 2 years

In case of project 2 -

The initial investment of the project is $60,000 which is repaid by year 3 ($15,000 in year 1, $15,000 in year 2 and $30,000 in year 3). Hence the payback period for project 2 is 3 years

The answer is hence c. 2 years.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.