Question 1

The AAR is based on cash flows and market values.

Accepted Answer

A) True 
 B)False

Question 2

A project produces annual net income of $14,600, $18,700, and $23,500 over three years, respectively. The initial cost of the project is $310,800. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 9 %?

Accepted Answer

A)  12.18 % 
B)  14.29 % 
C)  15.63 % 
D)  17.67 % 
E)  18.28 % 
A)  12.18 % 
B)  14.29 % 
C)  15.63 % 
D)  17.67 % 
E)  18.28 %

Question 3

Without using formulas, provide a definition of net present value profile.

Accepted Answer

A graphical representation of

Question 4

What is the discounted payback of the following project if the required return is 14%?

Accepted Answer

A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  It doesn't pay back on a discounted basis. 
A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  It doesn't pay back on a discounted basis.

Question 5

Which one of the following statements concerning net present value (NPV) is correct?

Accepted Answer

A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be accepted only if the NPV is equal to the initial cash flow. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E)  Any project that has positive cash flows for every time period after the initial investment should be accepted. 
A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be accepted only if the NPV is equal to the initial cash flow. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E)  Any project that has positive cash flows for every time period after the initial investment should be accepted.

Question 6

According to the capital budgeting surveys cited in the text, in general, most financial managers of large Canadian firms:

Accepted Answer

A)  Prefer to rely exclusively on payback analysis to evaluate projects. 
B)  Use the AAR as their primary method of evaluating capital budgeting projects. 
C)  Who use payback analysis use it only in conjunction with some other type of analysis. 
D)  Prefer to use NPV or IRR to analyze their investment projects. 
E)  Make use of payback analysis more heavily than discounted cash flow methods. 
A)  Prefer to rely exclusively on payback analysis to evaluate projects. 
B)  Use the AAR as their primary method of evaluating capital budgeting projects. 
C)  Who use payback analysis use it only in conjunction with some other type of analysis. 
D)  Prefer to use NPV or IRR to analyze their investment projects. 
E)  Make use of payback analysis more heavily than discounted cash flow methods.

Question 7

Without using formulas, provide a definition of discounted payback period.

Accepted Answer

A project analysis tool that m

Question 8

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 % required rate of return and an initial cost of $2,800. What is the discounted payback period?

Accepted Answer

A)  3.11 years 
B)  3.18 years 
C)  3.82 years 
D)  4.18 years 
E)  never 
A)  3.11 years 
B)  3.18 years 
C)  3.82 years 
D)  4.18 years 
E)  never

Question 9

Martha's Cupboards just purchased $172,500 of new equipment. The equipment is expected to increase the net income of the firm by $15,000, $35,000, $25,000, and $10,000 a year in each of the next four years. Martha's uses straight-line depreciation over the projected life of each project. What is the average accounting rate of return on this equipment?

Accepted Answer

A)  5.90% 
B)  12.32% 
C)  18.37% 
D)  24.64% 
E)  49.28% 
A)  5.90% 
B)  12.32% 
C)  18.37% 
D)  24.64% 
E)  49.28%

Question 10

NPV and IRR can lead to different decisions in situations where the IRR is negative.

Accepted Answer

A) True 
 B)False

Question 11

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.

Suppose that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what is the NPV of this deal?

Accepted Answer

A)  $44.11 
B)  $111.01 
C)  $226.17 
D)  $261.37 
E)  $292.01 
A)  $44.11 
B)  $111.01 
C)  $226.17 
D)  $261.37 
E)  $292.01

Question 12

Determining whether to sell bonds or issue stock is a capital budgeting decision.

Accepted Answer

A) True 
 B)False

Question 13

By definition, the net present value is equal to zero when the discount rate is equal to the:

Accepted Answer

A)  Average account rate of return. 
B)  Rate used in the discounted payback formula. 
C)  Profitability index rate. 
D)  Internal rate of return. 
E)  Crossover rate. 
A)  Average account rate of return. 
B)  Rate used in the discounted payback formula. 
C)  Profitability index rate. 
D)  Internal rate of return. 
E)  Crossover rate.

Question 14

A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 %?

Accepted Answer

A)  ($5,474.76) 
B)  ($1,011.40) 
C)  ($935.56) 
D)  $1,011.40 
E)  $5,474.76 
A)  ($5,474.76) 
B)  ($1,011.40) 
C)  ($935.56) 
D)  $1,011.40 
E)  $5,474.76

Question 15

A four-year project has an initial outlay of $100,000. The future cash inflows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%, will the project be accepted?

Accepted Answer

A)  Accept the project as the NPV is $44,150. 
B)  Reject the project as the NPV is $44,150. 
C)  Reject the project as the NPV is $(44,150). 
D)  Accept the project as the NPV is $18,250. 
E)  Reject the project as the NPV is $18,250. 
A)  Accept the project as the NPV is $44,150. 
B)  Reject the project as the NPV is $44,150. 
C)  Reject the project as the NPV is $(44,150). 
D)  Accept the project as the NPV is $18,250. 
E)  Reject the project as the NPV is $18,250.

Question 16

A financial manager who consistently underestimates the ___________ will tend to incorrectly reject projects that would actually create wealth for the stockholders.

Accepted Answer

A)  Marginal income tax rate. 
B)  Initial cost of projects. 
C)  Future cash outlays associated with projects. 
D)  Required return on projects. 
E)  Future cash inflows associated with projects. 
A)  Marginal income tax rate. 
B)  Initial cost of projects. 
C)  Future cash outlays associated with projects. 
D)  Required return on projects. 
E)  Future cash inflows associated with projects.

Question 17

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.

Suppose the pawn shop has more customers than funds. Which capital budgeting technique would allow it to rank potential customers in order to maximize current wealth?

Accepted Answer

A)  AAR 
B)  Payback period 
C)  Profitability index 
D)  NPV 
E)  Discounted payback 
A)  AAR 
B)  Payback period 
C)  Profitability index 
D)  NPV 
E)  Discounted payback

Question 18

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 payback of the project.

Accepted Answer

A)  2.25 years 
B)  2.75 years 
C)  3.25 years 
D)  3.75 years 
E)  4.25 years 
A)  2.25 years 
B)  2.75 years 
C)  3.25 years 
D)  3.75 years 
E)  4.25 years

Question 19

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Accepted Answer

A)  Accepted because the internal rate of return is positive. 
B)  Accepted because the profitability index is greater than 1. 
C)  Accepted because the profitability index is negative. 
D)  Rejected because the internal rate of return is negative. 
E)  Rejected because the net present value is negative. 
A)  Accepted because the internal rate of return is positive. 
B)  Accepted because the profitability index is greater than 1. 
C)  Accepted because the profitability index is negative. 
D)  Rejected because the internal rate of return is negative. 
E)  Rejected because the net present value is negative.

Question 20

For a project with an initial investment of $40,000 and cash inflows of $11,000 a year for five years, calculate NPV given a required return of 11.65%.

Accepted Answer

A)  -$1,205 
B)  -$1,103 
C)  -$1.23 
D)  $567 
E)  $1,218 
A)  -$1,205 
B)  -$1,103 
C)  -$1.23 
D)  $567 
E)  $1,218

Exam 9: Net Present Value and Other Investment Criteria

The AAR is based on cash flows and market values.

Without using formulas, provide a definition of net present value profile.

What is the discounted payback of the following project if the required return is 14%?

Which one of the following statements concerning net present value (NPV) is correct?

According to the capital budgeting surveys cited in the text, in general, most financial managers of large Canadian firms:

Without using formulas, provide a definition of discounted payback period.

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 % required rate of return and an initial cost of $2,800. What is the discounted payback period?

NPV and IRR can lead to different decisions in situations where the IRR is negative.

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year. Suppose that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what is the NPV of this deal?

Determining whether to sell bonds or issue stock is a capital budgeting decision.

By definition, the net present value is equal to zero when the discount rate is equal to the:

A four-year project has an initial outlay of $100,000. The future cash inflows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%, will the project be accepted?

A financial manager who consistently underestimates the ___________ will tend to incorrectly reject projects that would actually create wealth for the stockholders.

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 payback of the project.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

For a project with an initial investment of $40,000 and cash inflows of $11,000 a year for five years, calculate NPV given a required return of 11.65%.

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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