Chapter 3

Question 1

Net Present Value (NPV) considers the time value of money.

Answer 1

True

Question 2

Internal Rate of Return (IRR) is the discount rate that makes NPV zero.

Answer 2

True

Question 3

Discounted Payback Period ignores cash flows beyond the break-even point.

Answer 3

True

Question 4

The Profitability Index (PI) is calculated by dividing total cash flows by the initial investment.

Answer 4

False
(It’s calculated as the present value of cash inflows divided by the initial investment.)

Question 5

NPV is generally preferred over IRR when ranking mutually exclusive projects.

Answer 5

True

Question 6

Net Present Value (NPV) measures the increase in wealth a project generates in present value terms.

Answer 6

True

Question 7

A project is acceptable if its Internal Rate of Return (IRR) is lower than the required rate of return.

Answer 7

False
(IRR must exceed the required rate of return.)

Question 8

The Discounted Payback Period considers cash flows beyond the payback time frame.

Answer 8

False
(It only accounts for cash flows up to the payback period.)

Question 9

The Profitability Index (PI) is a ratio that evaluates a project’s relative profitability.

Answer 9

True

Question 10

A project with a negative NPV can still be acceptable if it has significant strategic benefits.

Answer 10

True
(Some projects may be approved for non-financial reasons, like entering new markets.)

Question 11

The discounted payback period method includes the residual value of assets at the end of the project.

Answer 11

False
(It focuses only on cash flows during the payback period.)

Question 12

The internal rate of return (IRR) assumes that all intermediate cash flows are reinvested at the IRR itself.

Answer 12

True

Question 13

Profitability Index (PI) is useful for ranking projects when resources are limited.

Answer 13

True

Question 14

A higher discount rate generally reduces the NPV of a project.

Answer 14

True

Question 15

Financial feasibility primarily focuses on the ability of a project to meet its financial obligations and requirements when the project maintains a positive accumulated cash balance in all periods.

Answer 15

True

Question 16

The necessary condition to carry out any business project is that the investment gives higher returns that the cost of financing used to carry it out

Answer 16

True

Question 17

The IRR is a measure of absolute profitability (in monetary units €), net profitability and updated (present value terms).

Answer 17

False (NVP is a measure)