Question 1

Two projects which each _____ is an example of mutually exclusive projects.

Accepted Answer

A)  Require an initial investment of $1.5 million. 
B)  Must occur during the same period of time. 
C)  Must start up in the same fiscal year. 
D)  Require the total use of the same limited economic resource. 
E)  Have differing internal rates of return. 
A)  Require an initial investment of $1.5 million. 
B)  Must occur during the same period of time. 
C)  Must start up in the same fiscal year. 
D)  Require the total use of the same limited economic resource. 
E)  Have differing internal rates of return.

Question 2

Explain why the internal rate of return (IRR) is so useful to decision makers when analyzing an independent project.

Accepted Answer

The IRR is the discount rate which makes

Question 3

A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the NPV of the project.

Accepted Answer

A)  $0.50 million 
B)  $0.70 million 
C)  $0.87 million 
D)  $1.00 million 
E)  $1.10 million 
A)  $0.50 million 
B)  $0.70 million 
C)  $0.87 million 
D)  $1.00 million 
E)  $1.10 million

Question 4

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Jamaica.

Assume the required return is 17%. What is the project's IRR? Should it be accepted?

Accepted Answer

A)  12.2%; yes 
B)  12.2%; no 
C)  16.3%; yes 
D)  16.3%; no 
E)  17.0%; indifferent 
A)  12.2%; yes 
B)  12.2%; no 
C)  16.3%; yes 
D)  16.3%; no 
E)  17.0%; indifferent

Question 5

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

Accepted Answer

A)  The other methods help validate whether or not the results from the net present value analysis are reliable. 
B)  You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. 
C)  You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows. 
D)  The average accounting return must always indicate acceptance since this is the best method from a financial perspective. 
E)  The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project. 
A)  The other methods help validate whether or not the results from the net present value analysis are reliable. 
B)  You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. 
C)  You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows. 
D)  The average accounting return must always indicate acceptance since this is the best method from a financial perspective. 
E)  The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project.

Question 6

Without using formulas, provide a definition of net present value (NPV).

Accepted Answer

A)  A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. 
B)  A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. 
C)  A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. 
D)  A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. 
E)  A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects. 
A)  A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. 
B)  A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. 
C)  A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. 
D)  A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. 
E)  A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects.

Question 7

Calculate the payback of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Accepted Answer

A)  4 
B)  5 
C)  6 
D)  7 
E)  8 
A)  4 
B)  5 
C)  6 
D)  7 
E)  8

Question 8

Under the payback method of analysis:

Accepted Answer

A)  The initial cash outlay is ignored. 
B)  The cash flow in year 3 is ignored if the required payback period is 4 years. 
C)  A project's initial cost is discounted. 
D)  The cash flow in year 2 is valued just as highly as the cash flow in year 1 as long as the required payback period is 3 years or more. 
E)  A project will be acceptable whenever the payback period exceeds the pre-specified number of years. 
A)  The initial cash outlay is ignored. 
B)  The cash flow in year 3 is ignored if the required payback period is 4 years. 
C)  A project's initial cost is discounted. 
D)  The cash flow in year 2 is valued just as highly as the cash flow in year 1 as long as the required payback period is 3 years or more. 
E)  A project will be acceptable whenever the payback period exceeds the pre-specified number of years.

Question 9

The payback method assumes that the cash flows:

Accepted Answer

A)  Are an annuity stream. 
B)  Occur evenly throughout the year. 
C)  Occur at the end of the year. 
D)  Are discounted at the IRR rate. 
E)  Are calculated with the consideration of the time value of money. 
A)  Are an annuity stream. 
B)  Occur evenly throughout the year. 
C)  Occur at the end of the year. 
D)  Are discounted at the IRR rate. 
E)  Are calculated with the consideration of the time value of money.

Question 10

The advantages of the payback method of project analysis include the application of a discount rate to each separate cash flow.

Accepted Answer

A) True 
 B)False

Question 11

An investment's average net income divided by its average book value is the:

Accepted Answer

A)  Net present value. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Profitability index. 
E)  Payback period. 
A)  Net present value. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Profitability index. 
E)  Payback period.

Question 12

The ABC Co. is considering the purchase of a $249,000 piece of equipment. This equipment is expected to produce cash flows of $78,500, $149,000, and $80,000 over the next three years. The rate of return on this equipment is:

Accepted Answer

A)  9.88% 
B)  11.26% 
C)  12.50% 
D)  15.23% 
E)  23.49% 
A)  9.88% 
B)  11.26% 
C)  12.50% 
D)  15.23% 
E)  23.49%

Question 13

The NPV method quickly determines the discount rate that changes an accept decision into a reject decision and vice versa.

Accepted Answer

A) True 
 B)False

Question 14

What is the reasoning or logic behind using the average accounting return since it does not provide pure financial analysis?

Accepted Answer

Almost every manager is familiar with ne

Question 15

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the project will have a negative net present value.

Accepted Answer

A) True 
 B)False

Question 16

Elderkin& Martin is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 % rate of return and has a required discounted payback period of three years. The firm should _____ the project because the discounted payback period is _____ years. Accept or reject this project? Why?

Accepted Answer

A)  accept; 2.26 
B)  accept; 2.49 
C)  accept; 3.96 
D)  reject; 3.26 
E)  reject; 3.96 
A)  accept; 2.26 
B)  accept; 2.49 
C)  accept; 3.96 
D)  reject; 3.26 
E)  reject; 3.96

Question 17

The average accounting return:

Accepted Answer

A)  Reflects the projected net effect of the cash flows from a project on the overall firm. 
B)  Is comparable to the return on assets and thus provides a similar measure of performance. 
C)  Reflects the anticipated net impact of a project on the shareholders of the firm. 
D)  Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted. 
E)  Ignores all income produced by a project after an arbitrarily assigned cutoff point. 
A)  Reflects the projected net effect of the cash flows from a project on the overall firm. 
B)  Is comparable to the return on assets and thus provides a similar measure of performance. 
C)  Reflects the anticipated net impact of a project on the shareholders of the firm. 
D)  Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted. 
E)  Ignores all income produced by a project after an arbitrarily assigned cutoff point.

Question 18

A project has multiple IRRs. Which should you use in determining whether or not to accept the project, the highest, the lowest, or the intermediate IRR?

Accepted Answer

This is basically a

Question 19

Which of the following is a correct statement?

Accepted Answer

A)  The IRR is considered to be the most important project analysis technique. 
B)  The AAR is considered preferable to the PI. 
C)  Discounted payback analysis requires use of a discount rate. 
D)  It is reasonable to use IRR to analyze mutually exclusive investments. 
E)  Regular payback analysis is preferable to discounted payback analysis. 
A)  The IRR is considered to be the most important project analysis technique. 
B)  The AAR is considered preferable to the PI. 
C)  Discounted payback analysis requires use of a discount rate. 
D)  It is reasonable to use IRR to analyze mutually exclusive investments. 
E)  Regular payback analysis is preferable to discounted payback analysis.

Question 20

A project has an initial investment of $150,000. Its four year cash inflows are estimated to be $50,000 in year 1, $80,000 in years 2 and 3, and $50,000 in year 4. If the rate of return is 12%, calculate the project's Profitability Index.

Accepted Answer

A)  1.31 
B)  1.41 
C)  1.51 
D)  1.61 
E)  1.71 
A)  1.31 
B)  1.41 
C)  1.51 
D)  1.61 
E)  1.71

Exam 9: Net Present Value and Other Investment Criteria

Two projects which each _____ is an example of mutually exclusive projects.

Explain why the internal rate of return (IRR) is so useful to decision makers when analyzing an independent project.

A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the NPV of the project.

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

Without using formulas, provide a definition of net present value (NPV).

Calculate the payback of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Under the payback method of analysis:

The payback method assumes that the cash flows:

The advantages of the payback method of project analysis include the application of a discount rate to each separate cash flow.

An investment's average net income divided by its average book value is the:

The ABC Co. is considering the purchase of a $249,000 piece of equipment. This equipment is expected to produce cash flows of $78,500, $149,000, and $80,000 over the next three years. The rate of return on this equipment is:

The NPV method quickly determines the discount rate that changes an accept decision into a reject decision and vice versa.

What is the reasoning or logic behind using the average accounting return since it does not provide pure financial analysis?

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the project will have a negative net present value.

The average accounting return:

A project has multiple IRRs. Which should you use in determining whether or not to accept the project, the highest, the lowest, or the intermediate IRR?

Which of the following is a correct statement?

A project has an initial investment of $150,000. Its four year cash inflows are estimated to be $50,000 in year 1, $80,000 in years 2 and 3, and $50,000 in year 4. If the rate of return is 12%, calculate the project's Profitability Index.

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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