Chapter 6 - Net present value and internal rate of return

When comparing 2 mutually exclusive projects using NPV the general rule is:
1. Accept the project with the greater NPV
2. Divide the NPV by the amount of the investments and choose the higher
3. Divide NPV by the duration of the projects and choose the higher
4. Choose all projects with a positive NPV
The answer to question 1 is dependent on:
1. There being a limited number of alternatives
2. The existence of a perfect capital market
3. There being restricted investment funds
4. There being no uncertainty about the outcomes
If projects are interdependent, the appropriate NPV rule is:
1. Accept the project with the highest NPV
2. Accept all projects with a positive NPV
3. Divide the NPV by the amount of the investments and choose the highest
4. Combine the projects and choose the combinations with the highest NPVs (subject to mutually exclusive combinations)
It is appropriate to select the project with the smallest IRR when the differential cash flow IRR:
1. is greater than the cut off rate and less than both project IRRs
2. is greater than the cut off rate and greater than both project IRRs
3. is less than the cut off rate and the IRRs of one or both projects are higher than the cut off rate
4. is less than the cut off rate and neither project's IRR is greater than the cut off rate
It is unlikely that the incremental cash flow modification of IRR is used in practice because:
1. It is unreliable
2. It produces the same answer as NPV but is far more complicated
3. It needs a cut off point to be defined
4. It relies on judgement too much
The reinvestment assumption of IRR is that
1. All project generated cash flows can be reinvested at the same rate as the IRR of the project
2. Not all project generated cash flows need to be reinvested
3. Project generated cash flows are reinvested at the market rate
4. Reinvestment opportunities are an irrelevance
If a project has non-conventional cash flows as follows: Year 0 negative Years 1-3 positive Year 4 negative Year 5 positive
1. There are potentially two possible IRRs
2. There is unlikely to be an IRR
3. There are potentially three possible IRRs
4. There will only be one possible IRR
Which of the following statements is true
1. IRR is easier to use than NPV because we don’t need to know a discount rate to use
2. Maximising the NPV of the investments of a company will also maximise the value of the company
3. Payback will generally provide decision rules that are just as good as NPV
4. It is not possible to use NPV unless outcomes are certain
Which the following statements is true
1. Because IRR does not recognise the size of the investment it is potentially unreliable
2. If we know the market rate of return, we can always make the best decision using IRR
3. Just because one set of opportunities has a higher NPV than another one does not make it a better choice
4. IRR assumes that project related cash flows are reinvested at the market rate of return
Which of the following statements is not true
1. In the event of forecast changes in discount rates in the future, NPV is likely to provide more reliable decisions than IRR
2. There is little point in using the modified IRR rule as it produces the same results as NPV and is more complicated
3. It is possible to derive an IRR that is higher than a company’s cost of capital for a project even though it fails to produce a positive NPV
4. The extended yield method solves the problem of multiple IRRs

Chapter 6 - Net present value and internal rate of return

Quiz