Multiple choice

1. Given the following cash flows for project A: C0= -1000, C1= +600, C2= +400, and C3= +1500, calculate the payback period.  

a. One year 

b. Two years 

c. Three years 

d. None of the above 

2. The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:  

a. 2 years 

b. 2.5 years 

c. 3 years 

d. Cannot be determined because of insufficient data 

3. Given the following cash flows for project Z: C0= -1,000, C1= 600, C2= 720 and C3= 2000, calculate the discounted payback period for the project at a discount rate of 20%.  

a. 1 year 

b. 2 years 

c. 3 years 

d. None of the above 

4. Internal rate of return (IRR) method is also called:  

a. Discounted payback period method 

b. Discounted cash-flow (DCF) rate of return method 

c. Modified internal rate of return (MIRR) method 

d. None of the above 

5. The quickest way to calculate the internal rate of return (IRR) of a project is by:  

a. Trial and error method 

b. Using the graphical method 

c. Using a financial calculator 

d. Guessing the IRR 

6. If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is:  

a. Positive 

b. Negative 

c. Zero 

d. Unable to determine 

7. Given the following cash flows for Project M: C0= -1,000, C1= +200, C2= +700, C3= +698, calculate the IRR for the project.  

a. 23% 

b. 21% 

c. 19% 

d. None of the above 

8. The IRR is defined as:  

a. The discount rate that makes the NPV equal to zero 

b. The difference between the cost of capital and the present value of the cash flows 

c. The discount rate used in the NPV method 

d. The discount rate used in the discounted payback period method 

9. Which of the following methods of evaluating capital investment projects incorporates the time value of money concept? I) Payback Period, II) Discounted Payback Period, III) Net Present Value (NPV), IV) Internal Rate of Return  

a. I, II, and III only 

b. II, III, and IV only 

c. III and IV only 

d. I, II, III, and IV 

10. Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project.  

a. 14.5% 

b. 18.6% 

c. 20.2% 

d. 23.4%