Corporate
Finance: The Core
(Berk/DeMarzo)
Chapter 6 Investment
Decision Rules
Use the information for the question(s)
below.
Boulderado has come up with a new
composite snowboard. Development will
take Boulderado four years and cost $250,000 per year, with the first of the
four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected
to produce annual cash flows of $200,000 each year for 10 years. Boulderado's discount rate is 10%.
1)
The NPV for Boulderado's snowboard project
is closest to:
A)
$228,900
B)
$46,900
C)
$51,600
D)
$23,800
:
A
6.2 Alternative Decision Rules
2)
Which of the following statements is
false?
A)
It is possible that an IRR does not exist
for an investment opportunity.
B)
If the payback period is less than a prespecified length of time you accept the project
C)
The internal rate of return (IRR)
investment rule is based upon the notion that if the return on other
alternatives is greater than the return
on the investment opportunity you should undertake the investment opportunity.
D)
It is possible that there is no discount
rate that will set the NPV equal to zero.
3)
Which of the following statements is
false?
A)
The payback investment rule is based on
the notion that an opportunity that pays back its initial investments quickly
is a good idea.
B)
An IRR will always exist for an investment
opportunity.
C)
A NPV will always exist for an investment
opportunity.
D)
In general, there can be as many IRRs as
the number of times the project's cash flows change sign over time.
4)
Which of the following statements is
false?
A)
The IRR investment rule states you should
turn down any investment opportunity where the IRR is less than the opportunity
cost of capital.
B)
The IRR investment rule states that you
should take any investment opportunity where the IRR exceeds the opportunity
cost of capital.
C)
Since the IRR rule is based upon the rate
at which the NPV equals zero, like the NPV decision rule, the IRR decision rule
will always identify the correct investment decisions.
D)
There are situations in which multiple
IRRs exist.
:
5)
Which of the following statements is
false?
A)
In general, the IRR rule works for a standalone project if all of the project's positive cash flows precede
its negative cash flows.
B)
There is no easy fix for the IRR rule when
there are multiple IRRs.
C)
The payback rule is primarily used because
of its simplicity.
D)
No investment rule that ignores the set of
alternative investment alternatives can be optimal.
6)
Which of the following statements is
false?
A)
The payback rule is useful in cases where
the cost of making an incorrect decision might not be large enough to justify
the time required for calculating the NPV.
B)
The payback rule is reliable because it
considers the time value of money and depends on the cost of capital.
C)
For most investment opportunities expenses
occur initially and cash is received later.
D)
Fifty percent of firms surveyed reported
using the payback rule for making decisions.
Use the table for the question(s)
below.
Consider the following two projects:
Project

Year 0
Cash Flow

Year 1
Cash Flow

Year 2
Cash Flow

Year 3
Cash Flow

Year 4
Cash Flow

Discount Rate

A

100

40

50

60

N/A

.15

B

73

30

30

30

30

.15

7)
The payback period for project A is
closest to:
A)
2.0 years
B)
2.4 years
C)
2.5 years
D)
2.2 years
:
8)
The payback period for project B is
closest to:
A)
2.5 years
B)
2.0 years
C)
2.2 years
D)
2.4 years
:
9)
Which of the following statements is
correct?
A)
You should accept project A since its IRR> 15%
B)
You should reject project B since its NPV> 0
C)
Your should accept project A since its NPV
< 0
D)
You should accept project B since its IRR< 15%