Question

Question 1

Which of the following is (are) true?

 a) If the net present value (NPV) is negative, then the profitability index must be less than zero.

 b) If the IRR of a project is greater than one (1), then the project should be accepted.

 c) Under capital rationing conditions, a firm can select all acceptable projects regardless of the initial investment required.

 d) If two projects are mutually exclusive, selecting one project prohibits the acceptance of the other project.

 e) None of the above statements are true. 

Question 2

Wade expects to inherit about $45,000 from his Aunt in 20 years. What is the value of his inheritance today, assuming an interest rate of 5%?

 a) $42,857.14 b) $119,398.40 c) $560,799.47

Answer 1

1. Option (d) is correct

If two projects are mutually exclusive, selecting one project prohibits the acceptance of the othe project.

Option (a) is incorrect as if NPV is negative then the profitability index must be less than 1.

Option (b) is incorrect as IRR is compared to cost of capital. If IRR is greater than cost of capital then the project should be accepted.

Option (c) is incorrect as under capital rationing conditions, a firm can select profitable projects, given the initial investment.

2.

Here we will use the following formula:

PV = FV / (1 + r%)n

where, FV = Future value = $45000, PV = Present value, r = rate of interest = 5%, n= time period = 20

Now,putting the values in the above equation, we get,

PV = $45000 / (1 + 5%)20

PV = $45000 / (1 + 0.05)20

PV = $45000 / (1.05)20

PV = $45000 / 2.65329770514

PV = $16960.03

So, value of inheritance today is $16960.03