Question 1

The average accounting return (AAR) rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its AAR is less than a target AAR. 
B)  An investment is acceptable if its AAR exceeds a target AAR. 
C)  An investment is acceptable if its AAR exceeds the firm's return on equity (RO
E) . 
D)  An investment is acceptable if its AAR is less than the firm's return on assets (RO
A) . 
A)  An investment is acceptable if its AAR is less than a target AAR. 
B)  An investment is acceptable if its AAR exceeds a target AAR. 
C)  An investment is acceptable if its AAR exceeds the firm's return on equity (RO
E) . 
D)  An investment is acceptable if its AAR is less than the firm's return on assets (RO
A) .

Question 2

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon the:

Accepted Answer

A)  Initial cost of each project. 
B)  Required discount rate. 
C)  Total cash inflows of each project. 
D)  Assigned payback period of each project. 
E)  Length of each project's life. 
A)  Initial cost of each project. 
B)  Required discount rate. 
C)  Total cash inflows of each project. 
D)  Assigned payback period of each project. 
E)  Length of each project's life.

Question 3

You are analyzing a project and have prepared the following data:     Based on the internal rate of return of _____ % for this project, you should _____ the project.

Accepted Answer

A)  3.45; reject 
B)  5.68; reject 
C)  8.79; accept 
D)  9.45; reject 
E)  9.96; accept 
A)  3.45; reject 
B)  5.68; reject 
C)  8.79; accept 
D)  9.45; reject 
E)  9.96; accept

Question 4

A disadvantage with the average accounting return is the accounting basis of the values used in the computation.

Accepted Answer

A) True 
 B)False

Question 5

The __________ decision rule is considered the "best" in principle.

Accepted Answer

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

Question 6

When computing the net present value of a project, the net amount received from salvaging the fixed assets used in the project is:

Accepted Answer

A)  Subtracted from the initial cash outlay. 
B)  Included in the final cash flow of the project. 
C)  Excluded from the analysis since it occurs only when the project ends. 
D)  Subtracted from the original cost of the assets. 
E)  Added to the net present value of the project to determine if the project is acceptable. 
A)  Subtracted from the initial cash outlay. 
B)  Included in the final cash flow of the project. 
C)  Excluded from the analysis since it occurs only when the project ends. 
D)  Subtracted from the original cost of the assets. 
E)  Added to the net present value of the project to determine if the project is acceptable.

Question 7

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year over the next four years, respectively?

Accepted Answer

A)  2.04 years 
B)  2.36 years 
C)  2.89 years 
D)  3.04 years 
E)  3.36 years 
A)  2.04 years 
B)  2.36 years 
C)  2.89 years 
D)  3.04 years 
E)  3.36 years

Question 8

What is the NPV of the following set of cash flows if the required return is 14%?

Accepted Answer

A)  ($1,286) 
B)  $3,034 
C)  $9,525 
D)  $10,376 
E)  $41,410 
A)  ($1,286) 
B)  $3,034 
C)  $9,525 
D)  $10,376 
E)  $41,410

Question 9

Use the following mutually exclusive investment cash flows for the question(s) below:   Based on the payback criterion, which of the following is NOT true?

Accepted Answer

A)  With a payback cutoff of 2.5 years, both projects are acceptable. 
B)  With a payback cutoff of three years, both projects are acceptable. 
C)  With a payback cutoff of 1.5 years, neither project is acceptable. 
D)  With a payback cutoff of 1.75 years, only Project A is acceptable. 
E)  If you choose the project that pays back the fastest, Project A is preferred. 
A)  With a payback cutoff of 2.5 years, both projects are acceptable. 
B)  With a payback cutoff of three years, both projects are acceptable. 
C)  With a payback cutoff of 1.5 years, neither project is acceptable. 
D)  With a payback cutoff of 1.75 years, only Project A is acceptable. 
E)  If you choose the project that pays back the fastest, Project A is preferred.

Question 10

NPV and IRR can lead to different decisions in situations investment decision involves mutually exclusive choices.

Accepted Answer

A) True 
 B)False

Question 11

The profitability index calculation takes the time value of money into account.

Accepted Answer

A) True 
 B)False

Question 12

Net present value is the preferred method of analyzing a project even though the cash flows are only estimates.

Accepted Answer

A) True 
 B)False

Question 13

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. If the discount rate is 10%, what is the discounted payback period?

Accepted Answer

A)  The project never pays back on a discounted basis 
B)  5 years 
C)  6 years 
D)  7 years 
E)  8 years 
A)  The project never pays back on a discounted basis 
B)  5 years 
C)  6 years 
D)  7 years 
E)  8 years

Question 14

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.   Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

Accepted Answer

A)  Project B because it has the shortest payback period. 
B)  Both projects as they both have positive net present values. 
C)  Project A and reject project B based on their net present values. 
D)  Project B and reject project A based on their average accounting returns. 
E)  Project B and reject project A based on both the payback period and the average accounting return. 
A)  Project B because it has the shortest payback period. 
B)  Both projects as they both have positive net present values. 
C)  Project A and reject project B based on their net present values. 
D)  Project B and reject project A based on their average accounting returns. 
E)  Project B and reject project A based on both the payback period and the average accounting return.

Question 15

What is the payback period for the following investment?

Accepted Answer

A)  4 years 
B)  3 years 
C)  2 years 
D)  1 year 
E)  The investment doesn't pay back 
A)  4 years 
B)  3 years 
C)  2 years 
D)  1 year 
E)  The investment doesn't pay back

Exam 9: Net Present Value and Other Investment Criteria

The average accounting return (AAR) rule can be best stated as:

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon the:

You are analyzing a project and have prepared the following data: Based on the internal rate of return of _____ % for this project, you should _____ the project.

A disadvantage with the average accounting return is the accounting basis of the values used in the computation.

The __________ decision rule is considered the "best" in principle.

When computing the net present value of a project, the net amount received from salvaging the fixed assets used in the project is:

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year over the next four years, respectively?

What is the NPV of the following set of cash flows if the required return is 14%?

Use the following mutually exclusive investment cash flows for the question(s) below: Based on the payback criterion, which of the following is NOT true?

NPV and IRR can lead to different decisions in situations investment decision involves mutually exclusive choices.

The profitability index calculation takes the time value of money into account.

Net present value is the preferred method of analyzing a project even though the cash flows are only estimates.

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. If the discount rate is 10%, what is the discounted payback period?

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

What is the payback period for the following investment?

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 internal rate of return of _ % for this project, you should _ the project.