Net Present Value and Other Investment Rules

What is the primary investment rule for the Net Present Value (NPV) method?

A project costs $100 and is expected to generate a single cash flow of $107 in one year. If the riskless discount rate is 6 percent, what is the Net Present Value (NPV) of this project?

Which of the following is NOT one of the three key attributes of the NPV method that make it a sensible approach?

What is the definition of a project's payback period?

What is a primary flaw of the payback period method regarding a project's cash flows?

A project requires an initial investment of $200. The cash inflows are $100 in Year 1, $60 in Year 2, and $80 in Year 3. What is the payback period for this project?

What is the primary difference between the discounted payback period method and the standard payback period method?

What is the definition of the Internal Rate of Return (IRR)?

What is the basic investment rule for the Internal Rate of Return (IRR) method for a normal, investing-type project?

A project has an initial investment of $200 and provides cash inflows of $100 in years 1, 2, and 3. At a discount rate of 20 percent, the NPV is $10.65. At a discount rate of 30 percent, the NPV is -$18.39. What does this imply about the project's IRR?

Under what circumstances can a project have multiple Internal Rates of Return (IRRs)?

For a 'financing-type' project, where the initial cash flow is positive and subsequent cash flows are negative, what is the correct IRR decision rule?

What is the 'scale problem' when using IRR to compare mutually exclusive projects?

A firm is choosing between two mutually exclusive projects. Project A costs $10 million and has an IRR of 300 percent and an NPV of $22 million. Project B costs $25 million and has an IRR of 160 percent and an NPV of $27 million. Which project should the firm choose and why?

What is the correct way to use the IRR method to compare two mutually exclusive projects, such as Project A and Project B, that have different scales or timing?

What does a Profitability Index (PI) of 1.25 signify for an independent project?

A project costs $20 million and the present value of its future cash flows (subsequent to the initial investment) is $70.5 million. What is the project's Profitability Index (PI)?

In which specific capital budgeting situation is the Profitability Index (PI) rule most useful?

According to the 2001 survey by Graham and Harvey on the practice of capital budgeting, which two methods are the most frequently used by CFOs?

How does the 'timing problem' affect the IRR rule when comparing mutually exclusive projects?

A project costs $100 and has a single cash inflow of $121 in two years. What is its Internal Rate of Return (IRR)?

Why might a large, sophisticated company use the conceptually flawed payback period method for small, routine decisions?

The crossover rate is the discount rate at which the NPV profiles of two mutually exclusive projects intersect. This rate is also equal to what other metric?

The principle of 'value additivity' implies that the value of a firm is:

An independent project is defined as one whose:

A project costs $100 and has cash flows of $50 in Year 1, $50 in Year 2, and $20 in Year 3. The discount rate is 10 percent. What is the discounted payback period?

What does the term 'crossover rate' refer to in the context of comparing two mutually exclusive projects?

A firm has two mutually exclusive projects. Project A has an NPV of $50,000 and a PI of 1.5. Project B has an NPV of $40,000 and a PI of 1.8. Which project should the firm choose?

Which capital budgeting method is defined as the ratio of the present value of the future expected cash flows (after initial investment) to the amount of the initial investment?

If a project has an initial outflow, and all subsequent cash flows are positive, how many IRRs can the project have?

Consider a project with an initial cost of $500, and cash inflows of $100, $200, $300, and $400 over the next four years. A spreadsheet calculation using the IRR function on these cash flows yields a result of 27.3 percent. What is the correct interpretation?

What is the 'timing problem' when evaluating mutually exclusive projects?

Project A costs $100 and yields $120 next year. Project B costs $1,000 and yields $1,150 next year. Which of the following statements is true?

The Modified Internal Rate of Return (MIRR) was developed to address which specific problem with the standard IRR?

If a firm faces capital rationing, meaning it has a fixed budget for capital projects, how should it rank and select from a set of independent, positive-NPV projects?

A project costs $100 and has a cash flow of $110 next year. The firm's discount rate is 8 percent. What is the Profitability Index (PI)?

Why is the discounted payback period for a project with positive cash flows always longer than its standard payback period?

Which of the following describes a pair of mutually exclusive projects?

What does a negative Net Present Value (NPV) imply about a project?

Project A and Project B are mutually exclusive. Project A has an NPV of $10,000. Project B has an NPV of $12,000. The incremental NPV of choosing B over A is $2,000. What can be said about the incremental IRR?

A project has an initial cost of $2,000 and provides cash flows of $840 per year for eight years. What is the project's payback period?

Which capital budgeting technique is described as a 'poor compromise' between the payback method and the NPV method?

A project costs $15,000 and has annual cash flows of $3,800 for six years. If the discount rate is 10 percent, what is the discounted payback period?

The warning in the 'Calculating NPVs with a Spreadsheet' application box in Section 5.1 cautions users about what common issue?

For an investment project with conventional cash flows, if the Profitability Index (PI) is 0.95, what can be concluded about its NPV and IRR?

What is the primary reason that IRR continues to be widely used in practice despite its known theoretical flaws?

An investment has a payback period of 3.5 years. The project's life is 5 years, and it has conventional cash flows. What can be definitively stated about its NPV?

If a project has conventional cash flows and a positive NPV, what do you know about its discounted payback period?

A project costs $2,900 and has cash flows of $1,100 in year 1, $1,800 in year 2, and $1,200 in year 3. What is its IRR?

What is the Profitability Index for a project that costs $385,000 and generates aftertax cash inflows of $84,000 annually for seven years, with a required return of 13 percent?