1. The internal rate of return method assumes that the cash flows over the life of the project are reinvested at
a) the risk-free rate
b) the firm's cost of capital
c) the computed internal rate of return
d) the market capitalization rate
2. Which of the following best describes the appropriate way to evaluate mutually exclusive projects with unequal lives?
a) NPV is the appropriate method because NPV is always the method of choice
b) IRR is the appropriate method because IRR adjusts for the fact that the projects are not of the same length
c) Replacement chain is the appropriate method because it equalizes the length of the unequal projects
d) Equivalent annual annuity is the appropriate method because it adjusts for the fact that the projects are not of the same length
e) Both c. and d. are correct
3. Use the following information for the next four questions. Norlin Corporation is considering an expansion project that will begin next year (Time 0). Norlin's cost of capital is 12%. The initial cost of the project will be $250,000, and it is expected to generate the following cash flows over its five-year life:
Year $
1 $40,000
2 $60,000
3 $90,000
4 $90,000
5 $90,000
a) What is the payback period for the expansion project?
i) 3.67 years
ii) 4.00 years
iii) 4.25 years
iv) 4.67 years
v) 5.00 years
b) What is the net present value (NPV) of for the expansion project?
i) ($45,197)
ii) $5,871
iii) $13,784
iv) $25,726
v) $120,000
c) What is the internal rate of return (IRR) for the expansion project?
i) 4.13%
ii) 6.50%
iii) 10.36%
iv) 12.83%
v) 14.67%
d) What is the Profitability Index (PI) for the expansion project?
i) 1.02
ii) 1.05
iii) 1.10
iv) 1.48
v) Cannot be determined