Multiple choice

1. According to the net present value rule, an investment in a project should be made if the:  

a. Net present value is greater than the cost of investment 

b. Net present value is greater than the present value of cash flows 

c. Net present value is positive 

d. Net present value is negative 

2. Which of the following statements regarding the net present value rule and the rate of return rule is not true?  

a. Accept a project if NPV > cost of investment 

b. Accept a project if NPV is positive 

c. Accept a project if return on investment exceeds the rate of return on an equivalent investment in the financial market 

d. Reject a project if NPV is negative 

3. The payoffs of an investment are dependent on the state of the economy. The economy can have two states, recession or growth, with equal probability. If the payoff in the event of growth is $140 and in the event of recession is $60, what is the expected payoff for the 

investment?  

a. $100 

b. $110 

c. $120 

d. None of the above 

4. If the probability of a recession is 0.2, normal growth is 0.5 and a boom is 0.3, and the payoff in the event of a recession is $100, normal growth is $400 and boom is $500, what is the expected payoff?  

a. $200 

b. $330 

c. $400 

d. None of the above