1. Other things being equal, for projects having identical outlays, the accounting rate of return will favour:
a. the project with the highest discount rate
b. the project with the lowest discount rate
c. the project with the longer life
d. the project with the shorter life
2. A firm has to decide between two mutually exclusive projects, Alpha and Beta. Project Alpha has an NPV of $25 000 (IRR = 12 per cent) and project Beta has an NPV of $15 000 (IRR = 16 per cent). Given this information and assuming a required rate of return of 10 per cent, what should the firm do?
a. invest in project A
b. invest in project B
c. not invest in project A or project B, as NPV and IRR signals are mixed
d. invest in both project A and project B
3. Two projects, A and B, are said to be mutually exclusive if:
a. acceptance of project A increases the probability of accepting project B
b. acceptance of project A has no effect on the probability of accepting project B
c. acceptance of project A decreases the probability of accepting project B
d. both projects A and B are acceptable
4. Consider an investment that costs $120 000. If the investment returns cash flows of $15 000 each year, what is the payback period?
a. 4 years
b. 5.5 years
c. 7.5years
d. 8 years
5. Consider an investment that costs $70 000. If the investment returns cash flows of $10 000 in the first year and the cash flows increase by 35% each year, when will the initial investment costs be recovered?
a. in year 3
b. in year 5
c. in year 7
d. in year 9