INTRODUCTION
TO CAPITAL BUDGETING 5-29
4
PROGRESS CHECK 5
Directions: Select the one best answer for each question. Check your responses with
the Answer Key on the next page.
1. If an analyst compares the net present value of several projects, s/he will know which
project:
_____ a) will yield the most profit.
_____ b) has cash flows that will exceed the initial investment by the greatest
amount.
_____ c) will recover the initial investment by the hurdle date.
_____ d) will yield a return on investment equal to the hurdle rate.
2. An investor with a one-year bond is interested in the number of compounding periods
in the year because:
_____ a) if the effective interest rate is compounded more frequently than on an
annual basis, the nominal interest rate will exceed the quoted interest
rate.
_____ b) the present value of the bond equals the face value plus the compounded
quoted interest rate.
_____ c) the nominal rate is a floating rate that may change from period to
period.
_____ d) the more frequently the nominal interest rate is compounded, the
greater will be the effective interest rate.
3. If the internal rate of return (IRR) of a project is 35% and the hurdle rate is 42%, then:
_____ a) the project should be considered. The hurdle rate includes a percentage
for risk, and anything below it is less risky.
_____ b) the profit is 7%.
_____ c) the project should be rejected because it will reduce the shareholder's
value.
_____ d) we calculate the cost of funds before making an "invest / don't invest"
decision.