1. Which of the following is NOT a limitation of the payback period rule? a. It
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Question
1. Which of the following is NOT a limitation of the payback period rule? a. It is difficult to calculate. b. It does not account for changes in the discount rate. c. It ignores cash flows after payback. d. It does not account for the time value of money.
2.
Which of the following best describes the Net Present Value rule?
If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.
When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).
Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV)
Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.
3. A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 6%, decides to take the money at the end of each year. Was her decision correct?
Yes, because it agrees with both the Net Present Value rule and the payback rule.
Yes, because it agrees with the Net Present Value rule.
No, because it disagrees with the Net Present Value rule.
Yes, because it agrees with the payback rule.
a.If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.
b.When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).
c.Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV)
d.Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative.
3. A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 6%, decides to take the money at the end of each year. Was her decision correct?
a.Yes, because it agrees with both the Net Present Value rule and the payback rule.
b.Yes, because it agrees with the Net Present Value rule.
c.No, because it disagrees with the Net Present Value rule.
d.Yes, because it agrees with the payback rule.
Explanation / Answer
1. a. It is difficult to calculate
2.
When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).
3.
Yes, because it agrees with both the Net Present Value rule and the payback rule.
b.When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV).
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