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A major disadvantage of the payback period is that it 



1.	For a typical firm, which of the following is correct?  All rates are after taxes, and assume the firm operates at its target capital structure. Note. d is for debt; e is for equity

a.	rd > re > > WACC.
b.	 re > >rd > WACC.
c.	WACC > re > rd.
d.	re > > WACC > rd.  
2.	Which of the following statements is most correct?

a.	The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the IRR.  
b.	The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
c.	The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the risk-free rate.
d.	The NPV method does not consider the inflation premium.
3.	A major disadvantage of the payback period is that it 

a.	Is useless as a risk indicator.
b.	Ignores cash flows beyond the payback period.
c.	Does not directly account for the time value of money.
d.	Statements b and c are correct.  
4.	Which of the following statements is most correct?

a.	If a project- internal rate of return (IRR) exceeds the cost of capital, then the project- net present value (NPV) must be positive.  
b.	If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
c.	The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
d.	Statements a and c are correct.
5.	The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.  This investment will cost the firm $150,000 today, and the firm- cost of capital is 10 percent.  Assume cash flows occur evenly during the year, 1/365th each day.  What is the payback period for this investment?

a.	5.23 years
b.	4.86 years  
c.	4.00 years
d.	6.12 years




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