1) The profitability index is calculated by dividing the project's net present value by the present value of the projected cash outflows.
True or False
2) It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.
True or Flase
3) There are several disadvantages to the payback method, among them:
a) Payback ignores the interest that is earned during the period of time the project is in place.
b) Payback emphasizes receiving money back as fast as possible for reinvestment.
c) Payback is basic to use and understand.
d) Payback can be used in conjunction with time-adjusted methods of evaluation.
4) The internal rate of return assumes that funds are reinvested at the
a) cost of capital.
b) yield on the investment.
c) minimal acceptable rate to the corporation.
d) yield to maturity.
5) The modified internal rate of return (MIRR) assumes that
a) inflows are invested at the traditional interest rate of return.
b) inflows are reinvested at the cost of capital.
c) outflows must be funded with debt.
d) outflows must be funded with equity.
6) A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the internal rate of return of project B?
a) Higher than 6%
b) Lower than 6%
c) Exactly 6%
d) Can not be determined from the given information