Question 1

The internal rate of return method of analysis works best for independent projects with conventional cash flows.

Accepted Answer

A) True 
 B)False

Question 2

The length of time required for an investment's discounted cash flows to equal its initial cost is the:

Accepted Answer

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

Question 3

List and identify the discounted cash flow (DCF) and the non-discounted cash flow capital budgeting techniques. If you were asked to evaluate a project using one of each, which techniques would you use? Why?

Accepted Answer

The purpose here is to test the student'

Question 4

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 % rather than 11 %? If so, what should you do?

Accepted Answer

A)  Yes; Select A at 8 % and B at 11 %. 
B)  Yes; Select B at 8 % and A at 11 %. 
C)  Yes; Select A at 8 % and select neither at 11 %. 
D)  No; Regardless of the required rate, project A always has the higher NPV. 
E)  No; Regardless of the required rate, project B always has the higher NPV. 
A)  Yes; Select A at 8 % and B at 11 %. 
B)  Yes; Select B at 8 % and A at 11 %. 
C)  Yes; Select A at 8 % and select neither at 11 %. 
D)  No; Regardless of the required rate, project A always has the higher NPV. 
E)  No; Regardless of the required rate, project B always has the higher NPV.

Question 5

As the required rate of return increases, the:

Accepted Answer

A)  Net present value increases. 
B)  Payback period decreases. 
C)  Profitability index decreases. 
D)  Discounted payback period decreases. 
E)  Average accounting return decreases. 
A)  Net present value increases. 
B)  Payback period decreases. 
C)  Profitability index decreases. 
D)  Discounted payback period decreases. 
E)  Average accounting return decreases.

Question 6

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

Accepted Answer

A)  External rate of return. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Profitability index. 
E)  Equalizer. 
A)  External rate of return. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Profitability index. 
E)  Equalizer.

Question 7

Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per year. Given this information, calculate the IRR cross-over rate.

Accepted Answer

A)  5.93% 
B)  6.93% 
C)  7.93% 
D)  8.93% 
E)  9.93% 
A)  5.93% 
B)  6.93% 
C)  7.93% 
D)  8.93% 
E)  9.93%

Question 8

Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years, respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

A)  yes; because the payback period is 2.94 years 
B)  yes; because the payback period is 2.02 years 
C)  yes; because the payback period is 3.80 years 
D)  no; because the payback period is 2.02 years 
E)  no; because the payback period is 3.80 years 
A)  yes; because the payback period is 2.94 years 
B)  yes; because the payback period is 2.02 years 
C)  yes; because the payback period is 3.80 years 
D)  no; because the payback period is 2.02 years 
E)  no; because the payback period is 3.80 years

Question 9

A project which has an initial cash outlay, with all future cash flows positive, is said to be:

Accepted Answer

A)  Independent. 
B)  Conventional. 
C)  Mutually exclusive. 
D)  Value-creating. 
E)  Short term. 
A)  Independent. 
B)  Conventional. 
C)  Mutually exclusive. 
D)  Value-creating. 
E)  Short term.

Question 10

The discounted payback rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its discounted payback period is greater than some pre-specified number of years. 
B)  An investment should be accepted if the discounted payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the discounted payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its discounted payback period is less than some pre-specified number of years. 
A)  An investment is acceptable if its discounted payback period is greater than some pre-specified number of years. 
B)  An investment should be accepted if the discounted payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the discounted payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its discounted payback period is less than some pre-specified number of years.

Question 11

Without using formulas, provide a definition of average accounting return (AAR).

Accepted Answer

A)  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. 
B)  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. 
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 by determining the amount of profit that can be expected based on an investment made. 
B)  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. 
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 12

Capital budgeting decisions generally:

Accepted Answer

A)  Have long-term effects on a firm. 
B)  Are of short-duration. 
C)  Are easy to revise once implemented. 
D)  Focus solely on whether or not a particular asset should be purchased. 
E)  Have minimal effects on a firm's operations. 
A)  Have long-term effects on a firm. 
B)  Are of short-duration. 
C)  Are easy to revise once implemented. 
D)  Focus solely on whether or not a particular asset should be purchased. 
E)  Have minimal effects on a firm's operations.

Question 13

In actual practice, managers frequently use the net present value because it is considered by many to be the best method of analysis.

Accepted Answer

A) True 
 B)False

Question 14

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash flows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV projects.

Accepted Answer

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

Question 15

Jackson Traders is considering two mutually exclusive projects with the following cash flows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____ should be accepted.

Accepted Answer

A)  10.90 %; A 
B)  10.90 %; B 
C)  13.87 %; B 
D)  14.14 %; A 
E)  14.14 %; B 
A)  10.90 %; A 
B)  10.90 %; B 
C)  13.87 %; B 
D)  14.14 %; A 
E)  14.14 %; B

Question 16

A project has an initial cost of $47,500 and produces cash inflows of $21,200, $24,800, and $21,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 14 %?

Accepted Answer

A)  2.07 years 
B)  2.13 years 
C)  2.46 years 
D)  2.68 years 
E)  2.74 years 
A)  2.07 years 
B)  2.13 years 
C)  2.46 years 
D)  2.68 years 
E)  2.74 years

Question 17

Your company accepts projects with a two year or less payback period. What should you do based on the following information?

Accepted Answer

A)  Accept project A and reject project B. 
B)  Accept project B and reject project A. 
C)  Accept both project A and project B. 
D)  Reject both project A and project B. 
E)  Extend the payback period for project A since it has a higher initial cost, which would make. 
A)  Accept project A and reject project B. 
B)  Accept project B and reject project A. 
C)  Accept both project A and project B. 
D)  Reject both project A and project B. 
E)  Extend the payback period for project A since it has a higher initial cost, which would make.

Question 18

Sun, Inc. is analyzing two projects. Project A requires an initial investment of $2,200 and produces cash inflows of $500, $550, $700, and $900 respectively over four years. Project B requires an initial investment of $2,400 and produces cash inflows of $550, $650, $700, and $1,100 respectively over four years. What is the crossover point?

Accepted Answer

A)  14.14% 
B)  16.88% 
C)  18.32% 
D)  19.76% 
E)  21.65% 
A)  14.14% 
B)  16.88% 
C)  18.32% 
D)  19.76% 
E)  21.65%

Question 19

If financial managers only invest in projects that have a profitability index greater than one, then share price will be maximized.

Accepted Answer

A) True 
 B)False

Question 20

If a project has a net present value equal to zero, then the present value of the cash inflows exceeds the initial cost of the project.

Accepted Answer

A) True 
 B)False

Exam 9: Net Present Value and Other Investment Criteria

The internal rate of return method of analysis works best for independent projects with conventional cash flows.

The length of time required for an investment's discounted cash flows to equal its initial cost is the:

List and identify the discounted cash flow (DCF) and the non-discounted cash flow capital budgeting techniques. If you were asked to evaluate a project using one of each, which techniques would you use? Why?

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 % rather than 11 %? If so, what should you do?

As the required rate of return increases, the:

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per year. Given this information, calculate the IRR cross-over rate.

A project which has an initial cash outlay, with all future cash flows positive, is said to be:

The discounted payback rule can be best stated as:

Without using formulas, provide a definition of average accounting return (AAR).

Capital budgeting decisions generally:

In actual practice, managers frequently use the net present value because it is considered by many to be the best method of analysis.

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash flows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV projects.

Jackson Traders is considering two mutually exclusive projects with the following cash flows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____ should be accepted.

A project has an initial cost of $47,500 and produces cash inflows of $21,200, $24,800, and $21,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 14 %?

Your company accepts projects with a two year or less payback period. What should you do based on the following information?

If financial managers only invest in projects that have a profitability index greater than one, then share price will be maximized.

If a project has a net present value equal to zero, then the present value of the cash inflows exceeds the initial cost of the project.

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

Jackson Traders is considering two mutually exclusive projects with the following cash flows. The crossover rate is _ and if the required rate is lower than the crossover rate then project _ should be accepted.