NPV as the decision rule

NPV as the decision rule

1. 1. A project costs $1,000 today and pays $500 at the end of each of the next three years. The cost of capital is 10%. What is the NPV? Answer in dollars to the nearest cent.

   $

2. 2. Two mutually exclusive projects: A has NPV = $100 and IRR = 30%; B has NPV = $1,000 and IRR = 15%. Cost of capital is 10%. Which should the firm take?

   A — higher IRR means better return on capitalB — NPV measures dollar value created and is the correct criterion for mutually exclusive projectsBoth — they're both positive NPVNeither — too risky

3. 3. Which of the following are real problems with using payback period as a project-selection criterion?

   Ignores time value of moneyIgnores cash flows after the cutoff dateEasy to computeCan reject very long-lived high-NPV projects

4. 4. When can IRR give multiple valid answers (so the IRR rule becomes ambiguous)?

   When the project has only positive cash flowsWhen the cash flow changes sign more than once (e.g., investment, profits, then a large closure cost)When the discount rate is above 10%Whenever the cash flows include depreciation