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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 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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