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Question:
NPV:
NPV, or net present value, of a project is estimated by subtracting initial investment from the present value of future earnings. Note that, the output will change when selected discount rate is modified.
Answer and Explanation:1
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The statement is TRUE..
- When the NPV is positive, it means that initial investment is less than the present value of future cash flows.
- At a discount...
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Net Present Value | NPV Calculations, Formula & Examples
from
Chapter 5/ Lesson 20
23K
Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.
Related to this Question
- If a project has a positive NPV, the project IRR will exceed the firm's WACC. a) True b) False
- True or False: If the NPV is greater than the cost of capital, a project should be accepted.
- Even if a capital budgeting analysis indicates a project will have a positive NPV, the project could, in fact, turn out not to be profitable. a) True b) False
- True or False: If its IRR is greater than the cost of capital, a project should be accepted.
- Positive NPV projects may be rejected when capital must be rationed. True False
- The mutually exclusive project with the highest positive NPV will also have the highest IRR. True False
- True or False: The mutually exclusive project with the highest positive NPV will also have the highest IRR.
- True or False:A basic rule in capital budgeting is that if a project's NPV exceeds its IRR, then the project should be accepted.
- True or false? If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
- True or False: An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.
- A firm is considering only 2 projects, both of which have positive a NPV. The firm only has enough capital to invest in one project. The firm should select the project with the lowest NPV. a) True b) False
- Which one of the following statements is false? a. A project destroys value when the NPV is less than 0. b. When the IRR is less than the cost of capital, the NPV is negative. c. When the NPV is 0, the IRR is equal to the cost of capital. d. A project is
- If a project's IRR is equal to its required return, then the project's NPV is equal to zero and its PI is equal to one. True False
- True or False? A project's NPV decreases as the WACC declines.
- True or false? A project with NPV = 0 is never acceptable.
- Answer true or false and explain. A project's IRR is independent of the firm's cost of capital. In other words, a project's IRR doesn't change with a change in the firm's cost of capital.
- True or False? A project's IRR increases as the WACC declines.
- We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV. True False
- Ranking projects on IRR is OK if each project's cash flows can be reinvested at the project's IRR. True False
- If the net present value of a project is greater than zero, the firm will earn a return greater than its cost of capital. The acceptance of such a project would enhance the wealth of the firm's owners. a. True b. False
- The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. True False
- Project cost of capital and company cost of capital are synonymous terms. a. True b. False
- A project's equivalent annual annuity (EAA) is the annuity cash flow that yields the same present value as the project's NPV. True False
- An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. True False
- An NPV profile graph shows how a project's payback varies as the cost of capital changes. True False
- When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value. True or false?
- The project cost of capital depends on how the capital is used. a. True b. False
- If a project has zero NPV when the expected cash flows are discounted at the weighted-average cost of capital, then the project's cash flows are just sufficient to give debt holders and shareholders the return they require. True or false?
- Project A and Project B are mutually exclusive. Project A has an expected NPV of $2.00, while Project B has an expected NPV of $2.25. The correct decision is to accept both projects. Is this statement true or false? Explain.
- If the NPV of a project is positive, the IRR is __________ the cost of capital. a. riskier than b. less than c. greater than d. equal to
- The cost of capital for a project refers to the percent at which a company can borrow money for the project. a. True. b. False.
- True or False: In a regular project with an initial cash outflow and subsequent cash inflows, the net present value is negative when the cost of capital is less than IRR.
- The cost of capital always depends on the risk of the project being evaluated. Therefore the company cost of capital is useless. True False
- The costs of external financing must be deducted from the net present value (NPV)of a project to evaluate if it is worth undertaking. a. True b. False
- If two projects are mutually exclusive then the IRR is more important than the NPV in deciding the project that should be chosen. True False
- If two projects are mutually exclusive, then the IRR is more important than the NPV in deciding the project that should be chosen. a. True b. False
- A project with a NPV of zero should be rejected since even the returns on U.S. Treasury bill are greater than zero. True False
- As a project's beta increases, the project's opportunity cost of capital increases. a. True b. False
- The profitability index is the ratio of the company's net income (or profits) to the initial outlay or cost of a capital budgeting project. True False
- True or false? Stock dividends may come at the expense of forgoing positive net present value projects.
- In a capital rationing situation, the profitability index may be used in place of net present value to choose among projects. a. True b. False
- True or false? If a project's internal rate of return (IRR) exceeds the required return, then the project's net present value (NPV) must be negative.
- Determine if the following statement is true or false. If the relative riskiness of two projects are being incorporated into a net present value analysis by using a risk adjusted cost of capital, then
- If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. True or False?
- True or False? One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
- True or false? A project with a shorter payback period will always have a larger NPV than a project with a longer payback period.
- The goal of the capital budgeting decisions is to select capital projects that will decrease the value of the firm. True False
- The goal of capital budgeting decisions is to select capital projects that will decrease the value of the firm. True or false?
- If the net present value of a project is zero, then the profitability index will equal one. True False
- Opportunity costs incurred due to a proposed project generally should be included in the capital budgeting analysis. True False
- A project's IRR is analogous to the concept of the yield to maturity for bonds. True False
- A project that is very sensitive to the selection of a discount rate will have a steep net present value profile. True False Explain.
- The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal). True False
- The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life. True False
- The project cost of capital depends on the use to which that capital is put. Therefore, it depends on both the risk of the project and also on the risk of the company. a. True b. False
- An investment project with a project profitability index of -0.02 has an internal rate of return that is larger than the discount rate. True or false?
- If a company with a low credit rating invests in a low-risk project, it should discount the cash flows at a relatively high cost of capital. a. True b. False
- The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay. True False
- The internal rate of return is the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay. True False
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- Mutually exclusive projects have more than one IRR. True False
- True or false? Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.
- True or False? One defect of the IRR method is that it does not take account of cash flows over a project's full life.
- NPV may be used to select among projects of different sizes. True False
- True or False? Real options can affect the size of a project's expected NPV but not project's risk as measured by the standard deviation or coefficient of variation of the NPV.
- Which of the following statements is CORRECT? a. If Project A's IRR exceeds Project B's, then A must also have the higher NPV. b. If the NPV is negative, the IRR must also be negative. c. If a project
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- Determine whether the following statement is true or false: If the present value of the benefits received outweigh the present value of the costs incurred, then a company should make the decision to invest in the project.
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- When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project. True or false?
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- State True or False. Two projects are being considered. The net investment required for both is the same. The project with the shorter payback will always be the more profitable project.
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- If the WACC of a project is 14% and the projected IRR of the project is 11%, what can you tell me about the NPV of the project?
- Indicate whether the following statement is true or false: The project cost of capital depends on the risk of the company undertaking the project.
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- Answer with true or false. In project cash flow estimation, strategic value is defined as the value inherent in projects that are large in comparison to the business's average project.
- Because the NPV and PI methods both yield the same accept/reject decision, a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results. True False
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- A project's net present value profile shows how sensitive the project is to the choice of a discount rate. True False
- When computing the project profitability index of an investment project, the investment required will include any investment made in working capital at the beginning of the project. True or false?
- Question 1 For mutually exclusive projects whose NPV Profiles (graphs) intersect, IRR is a more reliable criteria for project selection than NPV. True False 1 points Question 2 Other things the same,
- The IRR is the true or actual rate of return being earned by the project. Do you agree or disagree? Discuss.
- Compute the NPV for Project M if the appropriate cost of capital is 7 percent. (Negative amount s... Compute the NPV for Project M if the appropriate cost of capital is 7 percent. (Negative amount sho
- True or False: For a project with a normal cash flow pattern, other things held constant, an increase in the project's cost of capital will result in a decrease in the project's NPV.
- Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. a. True b. False
- State True or False: In a capital budgeting analysis, interest paid on a loan that must be taken to finance the project must be included in the analysis.
- Whenever the internal rate of return on a project equals that project's required rate of return, the net present value equals zero. True False
- Projects A and B both have an NPV of $42 at the opportunity cost of capital of 13 percent. Project A has an IRR of 14 percent and B has an IRR of 15 percent. What is the IRR of the incremental project
- The return on equity is equal to the return on assets of a project/firm. a. Never true. b. Always true. c. Sometimes true.
- Two projects being considered have the following projected cash flows: What is the NPV of Project B if the cost of capital were 15%? A. -$18,750 B. $4,917.70 C. $40,000.00 D. -$8,014.19
- Two projects that have the same cost and the same expected cash flows will have the same net present value. True False
- Compute the NPV for Project M if the appropriate cost of capital is 9%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your final answer to 2 decim
- A company that ranks projects on IRR will encourage managers to propose projects with quick paybacks and low up-front investment. True False Explain.
- A. If the NPV for a project is +400, using a discount rate(cost of capital) of 14%, then the IRR for the project must be: a. Less than 14% b. Equal to 14% c. Greater than 14% d. None of the above
- The usefulness of adjusting the firm's weighted average cost of capital to account for a project's risk is limited because the risk premium is arbitrarily determined and is subject to error. True or False?
- If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Revenues generated by a new fad product are forec
- Given the following cash flows for a capital project, calculate the IRR. Year 0 1 2 3 4 5 Cashflows ($50,467) $12,746 $14426 $21548 $8580 $4959
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