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##### [solution] » 1. A firm has to decide between two projects, A and B. Project A

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1. A firm has to decide between two projects, A and B. Project A**More:**

**1. A firm has to decide between two projects, A and B. Project A has an NPV of $2000 (IRR = 12 per cent) and project B has an NPV of $1600 (IRR = 15 per cent). Given this information and assuming the projects are independent, what should the firm do?**

**a. invest in project A**

**b. invest in project B**

**c. not invest in project A or project B, as NPV and IRR signals are mixed**

**d. invest in both project A and project B**

**2. Calculate the NPV of a project if its initial outlay is $500 and it returns net cash flows of $100 and $200 at the end of years 1 and 2 respectively. Assuming required rate of return is 5% p.a. then the NPV of the investment is negative, hence do not accept the project.**

**True**

**False**

**3. Other things being equal, for projects having identical outlays, the accounting rate of return will favour:**

**the project with the highest discount rate**

**the project with the lowest discount rate**

**the project with the longer life**

**the project with the shorter life**

**4. A firm has to decide between two mutually exclusive projects, Alpha and Beta. Project Alpha has an NPV of $25 000 (IRR = 12 per cent) and project Beta has an NPV of $15 000 (IRR = 16 per cent). Given this information and assuming a required rate of return of 10 per cent, what should the firm do?**

**invest in project A**

**invest in project B**

**not invest in project A or project B, as NPV and IRR signals are mixed**

**invest in both project A and project B**

**5. Two projects, A and B, are said to be mutually exclusive if:**

**acceptance of project A increases the probability of accepting project B**

**acceptance of project A has no effect on the probability of accepting project B**

**acceptance of project A decreases the probability of accepting project B**

**both projects A and B are acceptable**

**6. Consider an investment that costs $120 000. If the investment returns cash flows of $15 000 each year, what is the payback period?**

**a. 4 years**

**b. 5.5 years**

**c. 7.5years**

**d. 8 years**

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This question was answered on: * Feb 21, 2020 *

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