Question

1. If a company must choose between two mutually exclusive investment projects, the best general method to employ for decision-making purposes is:

1. Cash-flow bailout
2. Cash-flow break-even
3. Net Present value (NPV)
4. Discounted payback
5. Accounting (book) rate of return, based on average investment over the life of each project

2. The profitability index (PI) is calculated as:

1. Net present value (NPV) divided by average investment
2. New present value (NPV) divided by initial investment
3. Average investment divided by net present value (NPV)
4. Initial investment divided by net present value (NPV)

3. Effects of cash flows include direct effects which are changes in income-tax payments. True/False
4. When using the project profitability index to rank competing investments projects, the preference rule is: the higher the project profitability index, the more desirable the project. True/False
5. A positive net present value of a project indicates that the project’s return is lower than the discount rate. True/False

Answer 1

NPV helps to determine the profitability of a project over a period of time. Thus it helps in selecting the appropriate project for the prosperity of the business. Project with higher or positive NPV will be desirable.

Answer: c

The PI is calculated by dividing the PV of future cash flow by the initial investment.

Answer: b

Income tax payment is part of operating cash flow. Thus any changes in the income tax payments will have a direct effect on the operating cash flow.

Answer: True

Project with higher PI have a higher profitability and more attractive. Top rank is given to the project having the highest PI.

Answer: True

As per policy, I can solve first 4 questions.