Question 1

The payback rule ignores all cash flows after the cut-off date.

Accepted Answer

A) True 
 B)False

Question 2

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Accepted Answer

A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years 
A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years

Question 3

Which investment analysis technique is used the least by CFOs?

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) Payback 
D) Book rate of return 
A) Net present value 
B) Internal rate of return 
C) Payback 
D) Book rate of return

Question 4

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.

Accepted Answer

A) $169, 935 
B) $1,200,000 
C) $339,870 
D) $125,846 
A) $169, 935 
B) $1,200,000 
C) $339,870 
D) $125,846

Question 5

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Accepted Answer

A) +$30. 
B) -$60. 
C) -$30. 
D) -$1,800. 
A) +$30. 
B) -$60. 
C) -$30. 
D) -$1,800.

Question 6

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150. If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

Accepted Answer

A) accept the project. 
B) reject the project. 
A) accept the project. 
B) reject the project.

Question 7

If an investment project (normal project)has an IRR equal to the cost of capital, the NPV for that project is

Accepted Answer

A) positive. 
B) negative. 
C) zero. 
D) unable to be determined. 
A) positive. 
B) negative. 
C) zero. 
D) unable to be determined.

Question 8

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Accepted Answer

A) $5,000 
B) $2,352 
C) $3,201 
D) $1,857 
A) $5,000 
B) $2,352 
C) $3,201 
D) $1,857

Question 9

Briefly explain the term hard rationing.

Accepted Answer

A firm faces hard rationing when it cann

Question 10

The benefit-cost ratio is defined as the ratio of

Accepted Answer

A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR. 
A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR.

Question 11

The survey of CFOs indicates that the NPV method is always, or almost always, used for evaluating investment projects by approximately

Accepted Answer

A) 12 percent of firms. 
B) 20 percent of firms. 
C) 57 percent of firms. 
D) 75 percent of firms. 
A) 12 percent of firms. 
B) 20 percent of firms. 
C) 57 percent of firms. 
D) 75 percent of firms.

Question 12

The quickest way to calculate the internal rate of return (IRR)of a project is by

Accepted Answer

A) trial and error method. 
B) using the graphical method. 
C) using a financial calculator. 
D) doubling the opportunity cost of capital. 
A) trial and error method. 
B) using the graphical method. 
C) using a financial calculator. 
D) doubling the opportunity cost of capital.

Question 13

Soft rationing may be used to control managerial behavior.

Accepted Answer

A) True 
 B)False

Question 14

The main advantage of the payback rule is that it

Accepted Answer

A) adjusts for uncertainty of early cash flows. 
B) is simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project. 
A) adjusts for uncertainty of early cash flows. 
B) is simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project.

Exam 5: Net Present Value and Other Investment Criteria

The payback rule ignores all cash flows after the cut-off date.

If the cash flows for project Z are C0 = -1,000; C1 = 600; C2 = 720; and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Which investment analysis technique is used the least by CFOs?

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.

If the NPV of project A is + $30 and that of project B is -$60, then the NPV of the combined projects is

Project X has the following cash flows: C0 = +2,000, C1 = -1,150, and C2 = -1,150. If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If an investment project (normal project)has an IRR equal to the cost of capital, the NPV for that project is

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

Briefly explain the term hard rationing.

The benefit-cost ratio is defined as the ratio of

The survey of CFOs indicates that the NPV method is always, or almost always, used for evaluating investment projects by approximately

The quickest way to calculate the internal rate of return (IRR)of a project is by

Soft rationing may be used to control managerial behavior.

The main advantage of the payback rule is that it

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

If the cash flows for project Z are C₀ = -1,000; C₁ = 600; C₂ = 720; and C₃ = 2,000, calculate the discounted payback period for the project at a discount rate of 20 percent.

Project X has the following cash flows: C₀ = +2,000, C₁ = -1,150, and C₂ = -1,150. If the IRR of the project is 9.85 percent and if the cost of capital is 12.00 percent, you would

If the cash flows for project A are C₀ = -3,000, C₁= +500; C₂ = +1,500; and C₃= +5,000, calculate the NPV of the project using a 15 percent discount rate.