1 a. Net Present Value Technique none of the above. uses all the cash flows of a
ID: 2801098 • Letter: 1
Question
1
a. Net Present Value Technique
none of the above.
uses all the cash flows of a project when computing the net present value
is consistent with the goal of shareholder wealth maximization
all of the above
V.consider time value of money in evaluating projects
b. We compute the profitability index of a capital budgeting proposal by
I. multiplying the internal rate of return by the cost of capital
dividing the present value of the annual after tax cash flows by the cost of capital
dividing the present value of the the annual after tax cash flows by the initial investment
multiplying the cash inflow by the internal rate of return
V. None of the above
c.
The internal rate of return is:
The discount rate that makes NPV negative and the PI greater than one
The discount rate that makes the NPV positive.
.
none of the above
The discount rate that equates the present value of the cash inflows with the initial investment
The rate of return that makes the NPV positive.
I.
none of the above.
II.uses all the cash flows of a project when computing the net present value
III.is consistent with the goal of shareholder wealth maximization
IV.all of the above
V.consider time value of money in evaluating projects
b. We compute the profitability index of a capital budgeting proposal by
I. multiplying the internal rate of return by the cost of capital
dividing the present value of the annual after tax cash flows by the cost of capital
III.dividing the present value of the the annual after tax cash flows by the initial investment
IV.multiplying the cash inflow by the internal rate of return
V. None of the above
c.
The internal rate of return is:
I.The discount rate that makes NPV negative and the PI greater than one
II.The discount rate that makes the NPV positive.
.
none of the above
IV.The discount rate that equates the present value of the cash inflows with the initial investment
V.The rate of return that makes the NPV positive.
Explanation / Answer
a.
Option V.
NPV technique uses the time value of money. It is the sum of present value of future cashflows.
b.
Option iii.
PI = (NPV + Initial investment)/Initial investment
c.
Option iv.
The discount rate that equates the present value of the cash inflows with the initial investment
IRR is the rate at which NPV = 0
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