Test Bank For Principles of Corporate Finance, 10th Edition

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Test Bank For Principles of Corporate Finance, 10th Edition

Chapter 05

Net Present Value and Other Investment Criteria

Multiple Choice Questions

1. Which of the following investment rules does not use the time value of the money concept?
A. Net present value
B. Internal rate of return
C. The payback period
D. All of the above use the time value concept

2. Suppose a firm has a $100 million in excess cash. It could:
A. Invest the funds in projects with positive NPVs
B. Pay high dividends to the shareholders
C. Buy another firm
D. All of the above

3. The following are measures used by firms when making capital budgeting decisions except:
A. Payback period
B. Internal rate of return
C. P/E ratio
D. Net present value

4. The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:
A. 12% of firms
B. 20% of firms
C. 57% of firms
D. 75% of firms

5. The survey of CFOs indicates that IRR method is used for evaluating investment projects by:
A. 12% of firms
B. 20% of firms
C. 76% of firms
D. 57% of firms

6. Which of the following investment rules has value adding-up property?
A. The payback period method
B. Net present value method
C. The book rate of return method
D. The internal rate of return method

7. If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is:
A. +$100
B. +$60
C. +$160
D. None of the above

8. If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:
A. +$30
B. -$60
C. -$30
D. None of the above.

9. You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?
A. Accept the firm’s joint project as it has a positive NPV
B. Reject the joint project
C. Break up the project into its components: accept A and C and reject B
D. None of the above

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