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Net Present Value and Investment Analysis

The document discusses various methods for evaluating capital investment projects, including Net Present Value (NPV) and Internal Rate of Return (IRR). It presents scenarios for calculating NPV, IRR, and discounted payback periods, while highlighting the shortcomings of the IRR method and the importance of considering the time value of money. Additionally, it poses questions regarding project acceptance criteria based on NPV and IRR calculations.

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chiukhang2000
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7 views3 pages

Net Present Value and Investment Analysis

The document discusses various methods for evaluating capital investment projects, including Net Present Value (NPV) and Internal Rate of Return (IRR). It presents scenarios for calculating NPV, IRR, and discounted payback periods, while highlighting the shortcomings of the IRR method and the importance of considering the time value of money. Additionally, it poses questions regarding project acceptance criteria based on NPV and IRR calculations.

Uploaded by

chiukhang2000
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

TOPIC3:Net Present Value

1. Music Company is considering investing in a new project. The project will need
an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash
flows for three years. Calculate the NPV for the project if the cost of capital is
15%.

A. $169, 935
B. $1,200,000
C. $339,870
D. $125,846

2. Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150.
If the IRR of the project is 9.85% and if the cost of capital is 12%, you would:

A. accept the project.


B. reject the project.

3. The following are some of the shortcomings of the IRR method except:

A. IRR is conceptually easy to communicate.


B. Projects can have multiple IRRs.
C. IRR cannot distinguish between a borrowing project and a lending project.
D. It is very cumbersome to evaluate mutually exclusive projects using the IRR
method.

4. Which of the following methods of evaluating capital investment projects


incorporates the time value of money concept?

I) payback period; II) discounted payback period; III) net present value (NPV);
IV) internal rate of return
A. I, II, and III only
B. II, III, and IV only
C. III and IV only
D. I, II, III, and IV

5. Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720, and
C3 = 2,000, calculate the discounted payback period for the project at a discount
rate of 20%.

A. 1 year
B. 2 years
C. 3 years
D. >3 years

6. Which of the following is true for a project with a zero-NPV?

A. It has a zero return.


B. It has a return equal to the return of the best alternative investment with the same
level of risk.
C. The present value of its future cash-flows is lower than its initial cost. d. It has a
zero present value.

7. The internal rate of return of a project is:

A. The required discount rate for this project.


B. The discount rate that makes the NPV equal to zero.
C. The rate of return of alternative investments with the same level of risk.

D. All of the above are correct.

8. What happens when the IRR of a project is equal to the opportunity cost of
capital?

A. The NPV is positive.


B. The project does not generate cash-inflows.
C. The NPV is zero.
D. The firm should not undertake the project.

9. Which of the following criteria does not have into account the time value of
money?

A. The payback period.


B. The discounted payback period.
C. The internal rate of return
D. The net present value.

10. Using the payback period as a criteria to select investment projects is wrong
because:

A. The payback period does not take into account the time value of money of the
cash-flows that are generated before the cutoff date.
B. The payback period ignores the cash-flows that are generated after the cutoff date
and consequently it penalizes long-term projects.
C. Both are correct.
D. Both are false.

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