Question

8. Which of the following statementele mele wing statements is correct for a project with a positive NPV? A) IRR exceeds the cost of capital B) Accepting the project has an indeterminate effect on shareholders C) The discount rate exceeds the cost of capital. D) The profitability index equals one. 9. If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10%, then the: A) project's IRR equals 10%. B) project's rate of return is greater than 10%. C) net present value of the cash inflows is $4,500, D) project's cash inflows total $25,000. 10. Which of the following statements is true for a stock that sells now for 560, pays an annual dividend of $4.00, and experienced a 20% return on investment over the past year? Its price one year ago was: A) $42.00 B) $46.15 C) $48.46 D) $53.33

Answer 1

8.

A positive NPV means the project is accepted. For a positive NPV, the amount of cash inflows is greater than the amount of cash outflows.

For a positive NPV, the Internal rate of return will always be higher than cost of capital, because the higher the IRR, the higher is the amount of cash inflows for a project.

Therefore answer is option A) IRR exceeds the cost of capital

9.

NPV= Total present value of cash inflows - Total present value of cash outflows

NPV = Total present value of cash inflows - cost of investment

Given NPV = $5000

cost of investment = $20000

5000 = Total present value of cash inflows - 20,000

Total present value of cash inflows = 25,000

Therefore answer is option D) project's cash inflows total $25,000

10.

to calculate price of stock one year ago (P)

percentage return = [(current price + dividend)/ previous year price] -1

0.2 =[ (60 + 4)/P] -1

1.2 = 64/P

1.2P = 64

P = $53.33

Therefore answer is option D)$53.33