Reading 44: Capital Budgeting - LOS e, (Part 1) ～ Q1-3 net, following, discount, present, white

mayanfang1

Q3. If the calculated net present value (NPV) is negative, which of the following must be TRUE? The discount rate used is:

A)   greater than the internal rate of return (IRR).

B)   less than the internal rate of return (IRR).

C)   equal to the internal rate of return (IRR).

Q2. When using net present value (NPV) profiles:

A)   the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return.

B)   one should accept all mutually exclusive projects with positive NPVs.

C)   one should accept all independent projects with positive NPVs.

Q3. The NPV profile is a graphical representation of the change in net present value relative to a change in the:

A)   prime rate.

B)   discount rate.

C)   internal rate of return.

mayanfang1

答案和详解如下：

Q1. If the calculated net present value (NPV) is negative, which of the following must be TRUE? The discount rate used is:

A)   greater than the internal rate of return (IRR).

B)   less than the internal rate of return (IRR).

C)   equal to the internal rate of return (IRR).

Correct answer is A)

When the NPV = 0, this means the discount rate used is equal to the IRR.  If a discount rate is used that is higher than the IRR, the NPV will be negative.  Conversely, if a discount rate is used that is lower than the IRR, the NPV will be positive.

Q2. When using net present value (NPV) profiles:

A)   the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return.

B)   one should accept all mutually exclusive projects with positive NPVs.

C)   one should accept all independent projects with positive NPVs.

Correct answer is C)

Where the NPV intersects the vertical y-axis you have the value of the cash inflows less the cash outflows, assuming an absence of money having a time value (i.e., the discount rate is zero). Where the NPV intersects the horizontal x-axis you have the project’s internal rate of return. At this cost of financing, the cash inflows and cash outflows offset each other. The NPV profile is a tool that graphically plots the project’s NPV as calculated using different discount rates. Assuming an appropriate discount rate, one should accept all projects with positive net present values, if the projects are independent. If projects are mutually exclusive select the one with the higher NPV at any given level of the cost of capital.

Q3. The NPV profile is a graphical representation of the change in net present value relative to a change in the:

A)   prime rate.

B)   discount rate.

C)   internal rate of return.

Correct answer is B)

As discount rates change the net present values change. The NPV profile is a graphic illustration of how sensitive net present values are to different discount rates. By comparison, every project has a single internal rate of return and payback period because the values are determined solely by the investment’s expected cash flows.

[此贴子已经被作者于2009-1-22 9:23:11编辑过]

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