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LO.a: Calculate and interpret the net present value (NPV) and the internal rate of return
(IRR) of an investment.
1. The Chinese government wishes to invest in a project that requires an initial investment of
$18 million. The project is expected to produce positive cash flows of $5 million for the first
three years, and $3 million for the next two years. Given that the required rate of return is 10
percent, the approximate internal rate of return (IRR) of this project is closest to:
A. 2%.
B. 6%.
C. 10%.
2. A company is planning to invest $25,000 in a new project. The project is expected to
generate annual after-tax cash flows of $5000 for the next 3 years and $15,000 in its fourth
year. Given that the appropriate discount rate for this project is 5.5 percent, the NPV of the
project is closest to:
A. $598.
B. $567.
C. $1,519.
3. The expected cash flows of a project are given below:
Time Cash Flow ($)
0 (180,000)
1 100,000
2 200,000
3 250,000
Given that the risk-free rate is assumed to be 3 percent, the market risk premium is 6 percent,
the beta for the project is 1.2 and the expected inflation is 2 percent, the investment’s net
present value (NPV) is closest to:
A. $237,000.
B. $255,000.
C. $262,000.
4. Lee Kwan Group is about to invest in a 2-year project that requires an initial outlay of $5
million. The expected cash flows in years 1 and 2 are $3 million and $3.5 million
respectively. The internal rate of return of this project is closest to:
A. 18%.
B. 19%.
C. 20%.
5. The table below shows the after-tax cash flows of a project:
Year 0 1 2 3 4 5 6
Cash flow (€) -50,000 35,000 25,000 10,000 2,000 2,000 3,000
The IRR of the project is closest to:
A. 27%.
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B. 29%.
C. 30%.
6. The incremental after-tax cash flows of a project are given below:
Year 0 1 2 3 4
Cash flow (€) -50,000 25,000 20,000 10,000 3,000
Using 12 percent as the discount rate, the NPV (in €) of the project is closest to:
A. -2,710.
B. 1,535.
C. 3,804.
7. Alexander Stan plans to invest $1.5 million in a project today. The project is expected to pay
$200,000 per year in perpetuity. The cost of capital is 8 percent. Will Stan benefit by
investing in the project, as judged by the NPV rule?
A. No, the project is not worth the investment.
B. Yes, the project is worth the investment.
C. Additional information is required to make the decision.
8. A project requires an initial outlay of $750,000. It is expected to produce $200,000 in the
first year, $300,000 in the second year, and $400,000 in the third year. The project’s
opportunity cost of capital is 10 percent. Which of the following is most likely the net present
value of the project?
A. $11,833.
B. -$19,722.
C. $769,722.
9. Billy Bowden intends to invest $1.5 million in a project today. The project’s expected cash
flows are $200,000 per year in perpetuity. The cost of capital is 8 percent. Should Bowden
invest in the project based on the IRR rule?
A. No, the project is not worth the investment.
B. Yes, the project is worth the investment.
C. Additional information is required to make the decision.
10. A project requires an initial outlay of $750,000. It is expected to produce cash flows of
$200,000 in the first year, $300,000 in the second year, and $400,000 in the third year. The
cost of capital for this project is 10%. What is the internal rate of return of the project?
A. 8.65%.
B. 10.00%.
C. 11.00%.
LO.b: Contrast the NPV rule to the IRR rule, and identify problems associated with the
IRR rule.
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LO.a: Calculate and interpret the net present value (NPV) and the internal rate of return
(IRR) of an investment.
1. The Chinese government wishes to invest in a project that requires an initial investment of
$18 million. The project is expected to produce positive cash flows of $5 million for the first
three years, and $3 million for the next two years. Given that the required rate of return is 10
percent, the approximate internal rate of return (IRR) of this project is closest to:
A. 2%.
B. 6%.
C. 10%.
2. A company is planning to invest $25,000 in a new project. The project is expected to
generate annual after-tax cash flows of $5000 for the next 3 years and $15,000 in its fourth
year. Given that the appropriate discount rate for this project is 5.5 percent, the NPV of the
project is closest to:
A. $598.
B. $567.
C. $1,519.
3. The expected cash flows of a project are given below:
Time Cash Flow ($)
0 (180,000)
1 100,000
2 200,000
3 250,000
Given that the risk-free rate is assumed to be 3 percent, the market risk premium is 6 percent,
the beta for the project is 1.2 and the expected inflation is 2 percent, the investment’s net
present value (NPV) is closest to:
A. $237,000.
B. $255,000.
C. $262,000.
4. Lee Kwan Group is about to invest in a 2-year project that requires an initial outlay of $5
million. The expected cash flows in years 1 and 2 are $3 million and $3.5 million
respectively. The internal rate of return of this project is closest to:
A. 18%.
B. 19%.
C. 20%.
5. The table below shows the after-tax cash flows of a project:
Year 0 1 2 3 4 5 6
Cash flow (€) -50,000 35,000 25,000 10,000 2,000 2,000 3,000
The IRR of the project is closest to:
A. 27%.
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B. 29%.
C. 30%.
6. The incremental after-tax cash flows of a project are given below:
Year 0 1 2 3 4
Cash flow (€) -50,000 25,000 20,000 10,000 3,000
Using 12 percent as the discount rate, the NPV (in €) of the project is closest to:
A. -2,710.
B. 1,535.
C. 3,804.
7. Alexander Stan plans to invest $1.5 million in a project today. The project is expected to pay
$200,000 per year in perpetuity. The cost of capital is 8 percent. Will Stan benefit by
investing in the project, as judged by the NPV rule?
A. No, the project is not worth the investment.
B. Yes, the project is worth the investment.
C. Additional information is required to make the decision.
8. A project requires an initial outlay of $750,000. It is expected to produce $200,000 in the
first year, $300,000 in the second year, and $400,000 in the third year. The project’s
opportunity cost of capital is 10 percent. Which of the following is most likely the net present
value of the project?
A. $11,833.
B. -$19,722.
C. $769,722.
9. Billy Bowden intends to invest $1.5 million in a project today. The project’s expected cash
flows are $200,000 per year in perpetuity. The cost of capital is 8 percent. Should Bowden
invest in the project based on the IRR rule?
A. No, the project is not worth the investment.
B. Yes, the project is worth the investment.
C. Additional information is required to make the decision.
10. A project requires an initial outlay of $750,000. It is expected to produce cash flows of
$200,000 in the first year, $300,000 in the second year, and $400,000 in the third year. The
cost of capital for this project is 10%. What is the internal rate of return of the project?
A. 8.65%.
B. 10.00%.
C. 11.00%.
LO.b: Contrast the NPV rule to the IRR rule, and identify problems associated with the
IRR rule.
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