Question 1

The payback period and discounted payback are biased in favour of liquid investments.

Accepted Answer

A) True 
 B)False

Question 2

The internal rate of return (IRR) rule states that a project with an IRR that is less than the required rate should be accepted.

Accepted Answer

A) True 
 B)False

Question 3

A 30 year project is estimated to cost $35 million and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the company's required rate of return is 10%, determine the NPV.

Accepted Answer

A)  $0.67 million 
B)  $1.67 million 
C)  $2.67 million 
D)  $3.67 million 
E)  $4.67 million 
A)  $0.67 million 
B)  $1.67 million 
C)  $2.67 million 
D)  $3.67 million 
E)  $4.67 million

Question 4

When comparing the payback and discounted payback, the discounted payback is more difficult to compute and thus is not as widely used as the payback method.

Accepted Answer

A) True 
 B)False

Question 5

Complete the following decision rule: A project should be accepted if its ______ exceeds the firm's required rate of return.

Accepted Answer

A)  IRR 
B)  NPV 
C)  payback 
D)  discounted payback 
E)  AAR 
A)  IRR 
B)  NPV 
C)  payback 
D)  discounted payback 
E)  AAR

Question 6

The use of either the internal rate of return or the profitability index could lead to incorrect decisions when comparing mutually exclusive investments.

Accepted Answer

A) True 
 B)False

Question 7

Which one of the following statements is correct?

Accepted Answer

A)  A negative net present value indicates that a project is acceptable. 
B)  A profitability index that is less than 1.0 indicates that a project is acceptable. 
C)  A project with a net present value of zero is earning exactly the required rate of return. 
D)  When the internal rate of return is less than the required rate, the project should be accepted. 
E)  If the accounting rate of return exceeds the required discount rate, the project should be accepted. 
A)  A negative net present value indicates that a project is acceptable. 
B)  A profitability index that is less than 1.0 indicates that a project is acceptable. 
C)  A project with a net present value of zero is earning exactly the required rate of return. 
D)  When the internal rate of return is less than the required rate, the project should be accepted. 
E)  If the accounting rate of return exceeds the required discount rate, the project should be accepted.

Question 8

The internal rate of return is:

Accepted Answer

A)  More reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B)  Equivalent to the discount rate that makes the net present value equal to one. 
C)  Difficult to compute without the use of either a financial calculator or a computer. 
D)  Dependent upon the interest rates offered in the marketplace. 
E)  A better methodology than net present value when dealing with unconventional cash flows. 
A)  More reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B)  Equivalent to the discount rate that makes the net present value equal to one. 
C)  Difficult to compute without the use of either a financial calculator or a computer. 
D)  Dependent upon the interest rates offered in the marketplace. 
E)  A better methodology than net present value when dealing with unconventional cash flows.

Question 9

The New Blues Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Minglewood Retail Center. Project B consists of building a sit-down restaurant on lot #169 of the Minglewood Retail Center. When trying to decide whether or build the book outlet or the restaurant, management should rely most heavily on the analysis results from the _____ method of analysis.

Accepted Answer

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

Question 10

You are analyzing a project and have prepared the following data:     Based on the net present value of _____ for this project, you should _____ the project.

Accepted Answer

A)  -$2,021.28; reject 
B)  -$406.19; reject 
C)  $7,978.72; accept 
D)  $9,836.74; accept 
E)  $12,684.23; accept 
A)  -$2,021.28; reject 
B)  -$406.19; reject 
C)  $7,978.72; accept 
D)  $9,836.74; accept 
E)  $12,684.23; accept

Question 11

Lack of consideration of the time value of money is a weakness of the average accounting return method of analysis.

Accepted Answer

A) True 
 B)False

Question 12

Projects should be accepted when the profitability index is less than 1.

Accepted Answer

A) True 
 B)False

Question 13

A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.

Accepted Answer

A) True 
 B)False

Question 14

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6%%. This implies that you should always accept project A anytime the discount rate is less than 9%%.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A project analysis tool that measures th

Question 16

Net present value can be defined as:

Accepted Answer

A)  The rate of return that causes the present value of all cash flows associated with a project to equal zero. 
B)  The discount rate that causes the current value of cash inflows to exceed the current value of cash outflows. 
C)  A measure of the value created or added today by undertaking a project. 
D)  The cash outflows from a project subtracted from the cash inflows for the project. 
E)  The net costs of a project subtracted from the net income generated from the project. 
A)  The rate of return that causes the present value of all cash flows associated with a project to equal zero. 
B)  The discount rate that causes the current value of cash inflows to exceed the current value of cash outflows. 
C)  A measure of the value created or added today by undertaking a project. 
D)  The cash outflows from a project subtracted from the cash inflows for the project. 
E)  The net costs of a project subtracted from the net income generated from the project.

Question 17

The advantages of the payback method of project analysis include the bias towards arbitrary cutoff point.

Accepted Answer

A) True 
 B)False

Question 18

What is the profitability index for an investment with the following cash flows given a 15 % required return?

Accepted Answer

A)  0.88 
B)  0.94 
C)  1.03 
D)  1.07 
E)  1.12 
A)  0.88 
B)  0.94 
C)  1.03 
D)  1.07 
E)  1.12

Question 19

Given our goals of firm value and shareholder wealth maximization, we have stressed the importance of NPV. And yet, many of the financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and AAR, in addition to the NPV and IRR. Why do you think this is the case?

Accepted Answer

This is an open-ended question which all

Question 20

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 %, and a required accounting return of 11 %. Which one of these values indicates an accept decision?

Accepted Answer

A)  Net present value of ($1,200). 
B)  Accounting rate of return of 10 %. 
C)  Profitability index of 1.02. 
D)  Internal rate of return of 13.6 %. 
E)  Payback period of 3.2 years. 
A)  Net present value of ($1,200). 
B)  Accounting rate of return of 10 %. 
C)  Profitability index of 1.02. 
D)  Internal rate of return of 13.6 %. 
E)  Payback period of 3.2 years.

Exam 9: Net Present Value and Other Investment Criteria

The payback period and discounted payback are biased in favour of liquid investments.

The internal rate of return (IRR) rule states that a project with an IRR that is less than the required rate should be accepted.

A 30 year project is estimated to cost $35 million and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the company's required rate of return is 10%, determine the NPV.

When comparing the payback and discounted payback, the discounted payback is more difficult to compute and thus is not as widely used as the payback method.

Complete the following decision rule: A project should be accepted if its ______ exceeds the firm's required rate of return.

The use of either the internal rate of return or the profitability index could lead to incorrect decisions when comparing mutually exclusive investments.

Which one of the following statements is correct?

The internal rate of return is:

You are analyzing a project and have prepared the following data: Based on the net present value of _____ for this project, you should _____ the project.

Lack of consideration of the time value of money is a weakness of the average accounting return method of analysis.

Projects should be accepted when the profitability index is less than 1.

A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6%%. This implies that you should always accept project A anytime the discount rate is less than 9%%.

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

Net present value can be defined as:

The advantages of the payback method of project analysis include the bias towards arbitrary cutoff point.

What is the profitability index for an investment with the following cash flows given a 15 % required return?

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 %, and a required accounting return of 11 %. Which one of these values indicates an accept decision?

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

Filters

You are analyzing a project and have prepared the following data: Based on the net present value of _ for this project, you should _ the project.