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Questions and Answers
What does the net present value (NPV) calculation take into account?
What does the net present value (NPV) calculation take into account?
- The future value of the cash inflows and the initial investment
- The discount rate equal to the firm's cost of capital
- Both the future value of the cash inflows and the discount rate (correct)
- None of the above
What is the key decision rule for accepting or rejecting a project based on NPV?
What is the key decision rule for accepting or rejecting a project based on NPV?
- Accept the project if the NPV is less than zero dollars
- Accept the project if the NPV is positive, regardless of the value
- Accept the project if the NPV is greater than or equal to zero dollars (correct)
- Accept the project if the NPV is equal to zero dollars
What is the key difference between NPV and IRR in terms of reinvestment assumptions?
What is the key difference between NPV and IRR in terms of reinvestment assumptions?
- NPV and IRR both assume reinvestment at the cost of capital
- NPV and IRR both assume reinvestment at the project's IRR
- NPV assumes reinvestment at the cost of capital, while IRR assumes reinvestment at the project's IRR (correct)
- NPV assumes reinvestment at the project's IRR, while IRR assumes reinvestment at the cost of capital
Why do companies prefer larger cash inflows in the early years rather than later years?
Why do companies prefer larger cash inflows in the early years rather than later years?
What is the key relationship between NPV and IRR?
What is the key relationship between NPV and IRR?
How do companies typically view long-term payback periods for investment projects?
How do companies typically view long-term payback periods for investment projects?
What is the primary difference between the discount rate and the interest rate?
What is the primary difference between the discount rate and the interest rate?
What is the payback period?
What is the payback period?
If $1,000 is invested at 10% interest for one year, what is the future value according to the time value of money concept?
If $1,000 is invested at 10% interest for one year, what is the future value according to the time value of money concept?
If an investment of $10,000 earns 8% interest compounded annually, what will be its value after 5 years?
If an investment of $10,000 earns 8% interest compounded annually, what will be its value after 5 years?
If the cost of capital is 15%, which investment is better: Investment A that generates $100,000 two years from now or Investment B that generates $110,000 three years from now?
If the cost of capital is 15%, which investment is better: Investment A that generates $100,000 two years from now or Investment B that generates $110,000 three years from now?
If an investment of $20,000 earns interest at a rate of 6% compounded annually, how long will it take for the investment to double in value?
If an investment of $20,000 earns interest at a rate of 6% compounded annually, how long will it take for the investment to double in value?
What is the primary purpose of an economic evaluation?
What is the primary purpose of an economic evaluation?
What is the relationship between interest rate and the time value of money?
What is the relationship between interest rate and the time value of money?
If an investment has an 11% interest rate, what can be inferred?
If an investment has an 11% interest rate, what can be inferred?
How is the interest rate determined in a financial transaction?
How is the interest rate determined in a financial transaction?
What is the primary difference between interest rate and discount rate?
What is the primary difference between interest rate and discount rate?
If the market interest rate for a loan is 8%, what does this imply about the time value of money?
If the market interest rate for a loan is 8%, what does this imply about the time value of money?
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