1. The difference between the present value of an investment?s future cash ﬂows and its initial cost is the:
• net present value.
• internal rate of return.
• payback period.
• proﬁtability index.
• discounted payback period.
2. Which statement concerning the net present value (NPV) of an investment or a ﬁnancing project is correct?
• A ﬁnancing project should be accepted if, and only if, the NPV is exactly equal to zero.
• An investment project should be accepted only if the NPV is equal to the initial cash ﬂow.
• Any type of project should be accepted if the NPV is positive and rejected if it is negative.
• Any type of project with greater total cash inﬂows than total cash outﬂows, should always be accepted.
• An investment project that has positive cash ﬂows for every time period after the initial investment should be accepted.
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3. The primary reason that company projects with positive net present values are considered acceptable is that:
• they create value for the owners of the ﬁrm.
• the project's rate of return exceeds the rate of inﬂation.
• they return the initial cash outlay within three years or less.
• the required cash inﬂows exceed the actual cash inﬂows.
• the investment's cost exceeds the present value of the cash inﬂows.
4. Accepting a positive net present value (NPV) project:
• indicates the project will pay back within the required period of time.
• means the present value of the expected cash ﬂows is equal to the project’s cost.
• ignores the inherent risks within the project.
• guarantees all cash ﬂow assumptions will be realized.
• is expected to increase the stockholders’ value by the amount of the NPV.
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5. The net present value method of capital budgeting analysis does all of the following except:
• incorporate risk into the analysis.