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If capital is to be rationed for only the current period, a firm should probably first consider selecting projects by descending order of

• Net present value

• Payback period

• Internal rate of return

• Profitability index

You must decide between two mutually exclusive projects. Project A has cash flows of- $10,000; $5.000; $5,000; and $5,000; for years 0 through 3, respectively. Project B has cash flows of -$20,000: $10,000; $10,000; and $10,000; for years 0 through 3, respectively. The firm has decided to assume that the appropriate cost of capital is 10% for both projects. Which project should be chosen? Why?

• B; Project B's NPV > Project A's NPV. 

• A; Project A’s NPV > Project B’s NPV

• Neither A nor B; The NPVs of both projects are negative.

• A or B; makes no difference which you choose because the IRR for A is identical to the IRR for B and both IRRs are greater than 10 percent, the cost of capital

. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods ………………………give contradictory results. 

•  will never, 

• may

•  will always, 

• will generally

Which of the following is NOT a cash outflow for the firm? 

• depreciation 

• dividends.

• interest payments. 

• taxes

. Which of the following statements is correct?

• If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.

• If the NPV of a project is greater than 0, its PI will equal 0. 

• If the PI of a project is less than 1, its NPV should be less than 0. 

• If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.

 Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property Sins for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to:

• $380,000.

• $480,000. 

• $280,000.

• $580,000.

Assume that the interest rate is greater than zero. Which of the following cash-inflow teams should you prefer? 

Year 1  Year 2  Year 3    Year 4 

• $250    $250     $250      $250

• $100    $200     $300      $400

• $400    $300     $200     $100 

• Any of the above, since they each sum to %1,000

To  increase a given present value, the discount rate should be adjusted

• all correct. 

• upward

• downward. 

• unchanged

A project has the following cash inflows $34,444; $39,877; $25,000; and $52,800 for years through 4, respectively. The initial cash outflow is $104,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?

• The IRR is greater than or equal to 14%, but less than 18%.

• The IRR is greater than or equal to 18%

• The IRR is greater than or equal to 10%, but less than 14%

• The IRR is less than 10%.

In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would

• Remain unchanged

• Fall

• Rise

• Cannot be determined without more information