Question 1

The internal rate of return:

Accepted Answer

A)  Is the best analytical method to use when comparing mutually exclusive projects. 
B)  Determines the discount rate which should be used to evaluate a project given current market conditions. 
C)  Will increase as the initial investment in a project is increased. 
D)  Is relatively difficult to interpret and explain. 
E)  Method of analysis can result in multiple rates under certain conditions. 
A)  Is the best analytical method to use when comparing mutually exclusive projects. 
B)  Determines the discount rate which should be used to evaluate a project given current market conditions. 
C)  Will increase as the initial investment in a project is increased. 
D)  Is relatively difficult to interpret and explain. 
E)  Method of analysis can result in multiple rates under certain conditions.

Question 2

The discounted payback period of a project will decrease whenever the:

Accepted Answer

A)  Discount rate applied to the project is increased. 
B)  Initial cash outlay of the project is increased. 
C)  Time period of the project is increased. 
D)  Amount of each project cash flow is increased. 
E)  Costs of the fixed assets utilized in the project increase. 
A)  Discount rate applied to the project is increased. 
B)  Initial cash outlay of the project is increased. 
C)  Time period of the project is increased. 
D)  Amount of each project cash flow is increased. 
E)  Costs of the fixed assets utilized in the project increase.

Question 3

A project produces annual net income of $9,500, $12,500, and $15,500 over the three years of its life, respectively. The initial cost of the project is $260,400. 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 7 %?

Accepted Answer

A)  4.80 % 
B)  7.32 % 
C)  8.97 % 
D)  9.60 % 
E)  10.27 % 
A)  4.80 % 
B)  7.32 % 
C)  8.97 % 
D)  9.60 % 
E)  10.27 %

Question 4

The internal rate of return (IRR) rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its IRR is exactly equal to its net present value (NPV). 
B)  An investment is acceptable if its IRR is exactly equal to zero. 
C)  An investment is acceptable if its IRR is less than the required return, or else it should be rejected. 
D)  An investment is acceptable if its IRR exceeds the required return, or else it should be rejected. 
E)  An investment is acceptable if its IRR exceeds its depreciation rate. 
A)  An investment is acceptable if its IRR is exactly equal to its net present value (NPV). 
B)  An investment is acceptable if its IRR is exactly equal to zero. 
C)  An investment is acceptable if its IRR is less than the required return, or else it should be rejected. 
D)  An investment is acceptable if its IRR exceeds the required return, or else it should be rejected. 
E)  An investment is acceptable if its IRR exceeds its depreciation rate.

Question 5

Calculate the profitability index 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)  0.92 
B)  0.98 
C)  1.02 
D)  1.08 
E)  1.15 
A)  0.92 
B)  0.98 
C)  1.02 
D)  1.08 
E)  1.15

Question 6

A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimal average accounting return of 8.5 %. The firm should _____ the project based on the AAR of _____

Accepted Answer

A)  Accept; 6.46 %. 
B)  Accept; 9.69 %. 
C)  Accept; 12.92 %. 
D)  Reject; 6.46 %. 
E)  Reject; 12.92 %. 
A)  Accept; 6.46 %. 
B)  Accept; 9.69 %. 
C)  Accept; 12.92 %. 
D)  Reject; 6.46 %. 
E)  Reject; 12.92 %.

Question 7

Net present value _____________.

Accepted Answer

A)  Is equal to the initial investment in a project 
B)  Compares project cost to the present value of the project benefits 
C)  Is equal to zero when the discount rate used is less than the IRR 
D)  Is simplified by the fact that future cash flows are easy to estimate 
E)  Requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable 
A)  Is equal to the initial investment in a project 
B)  Compares project cost to the present value of the project benefits 
C)  Is equal to zero when the discount rate used is less than the IRR 
D)  Is simplified by the fact that future cash flows are easy to estimate 
E)  Requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable

Question 8

Without using formulas, provide a definition of mutually exclusive investment decisions.

Accepted Answer

A)  A situation whereby a choice has to be made between two or more projects, and choosing multiple projects is not an option. 
B)  A graphical representation of the relationship between varying rates of return and the corresponding NPV value. 
C)  The rate of return provided by a project. The value is compared with a company's rate of return to determine viability of a project. 
D)  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. 
E)  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. 
A)  A situation whereby a choice has to be made between two or more projects, and choosing multiple projects is not an option. 
B)  A graphical representation of the relationship between varying rates of return and the corresponding NPV value. 
C)  The rate of return provided by a project. The value is compared with a company's rate of return to determine viability of a project. 
D)  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. 
E)  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.

Question 9

Which of the following is true about using discounted payback analysis for projects which have only positive cash flows after the initial outlay and for which the discount rate is positive?

Accepted Answer

A)  Discounted payback is better than simple payback because in simple payback analysis the cutoff payback period is arbitrarily set by management 
B)  Any project that fails to pay back at all on a discounted basis must have a positive NPV 
C)  When comparing two projects, the one with shorter payback period on a discounted basis will have a larger NPV 
D)  Discounted payback is much simpler to calculate than regular payback 
E)  The discounted payback period will be longer than the regular payback period 
A)  Discounted payback is better than simple payback because in simple payback analysis the cutoff payback period is arbitrarily set by management 
B)  Any project that fails to pay back at all on a discounted basis must have a positive NPV 
C)  When comparing two projects, the one with shorter payback period on a discounted basis will have a larger NPV 
D)  Discounted payback is much simpler to calculate than regular payback 
E)  The discounted payback period will be longer than the regular payback period

Question 10

What is the internal rate of return on an investment with the following cash flows?

Accepted Answer

A)  6.33 % 
B)  6.75 % 
C)  6.87 % 
D)  7.50 % 
E)  7.67 % 
A)  6.33 % 
B)  6.75 % 
C)  6.87 % 
D)  7.50 % 
E)  7.67 %

Question 11

Use the following mutually exclusive investment cash flows for the question(s) below:   If the discount rate is 14%, using profitability index which of the following is true?

Accepted Answer

A)  The PI of project A is less than 1.0 
B)  The PI of project B is less than 1.0 
C)  Based on the PI, project A is preferable 
D)  Both projects would be rejected based on the PI criterion 
E)  Based on the two PI's, it is obvious the IRR for both projects is less than 14% 
A)  The PI of project A is less than 1.0 
B)  The PI of project B is less than 1.0 
C)  Based on the PI, project A is preferable 
D)  Both projects would be rejected based on the PI criterion 
E)  Based on the two PI's, it is obvious the IRR for both projects is less than 14%

Question 12

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 discounted payback of the project.

Accepted Answer

A)  5.5 years 
B)  5.70 years 
C)  5.90 years 
D)  6.10 years 
E)  6.30 years 
A)  5.5 years 
B)  5.70 years 
C)  5.90 years 
D)  6.10 years 
E)  6.30 years

Question 13

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 15%. What is the project's PI? Should it be accepted?

Accepted Answer

A)  0.88; yes 
B)  0.88; no 
C)  1.00; indifferent 
D)  1.04; yes 
E)  1.04; no 
A)  0.88; yes 
B)  0.88; no 
C)  1.00; indifferent 
D)  1.04; yes 
E)  1.04; no

Question 14

A conventional cash flow is defined as a series of cash flows where:

Accepted Answer

A)  The total of the cash flows is positive. 
B)  All of the cash flows are positive. 
C)  The sum of the cash flows is equal to zero. 
D)  The present value of the cash flows is equal to zero. 
E)  Only the initial cash flow is negative. 
A)  The total of the cash flows is positive. 
B)  All of the cash flows are positive. 
C)  The sum of the cash flows is equal to zero. 
D)  The present value of the cash flows is equal to zero. 
E)  Only the initial cash flow is negative.

Question 15

Both net present value and the internal rate of return incorporate the same data and utilize the same time value of money theory in their computations. Given this, why is net present value considered to be a superior measure when making capital budgeting decisions?

Accepted Answer

For independent projects that are simila

Question 16

Calculate the NPV 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)  ($33,547) 
B)  ($18,547) 
C)  $0 
D)  $18,547 
E)  $33,547 
A)  ($33,547) 
B)  ($18,547) 
C)  $0 
D)  $18,547 
E)  $33,547

Question 17

The _______________ produces a ranking of all projects.

Accepted Answer

A)  Modified internal rate of return method. 
B)  Profitability index. 
C)  Payback period method. 
D)  Discounted cash flow method. 
E)  IRR. 
A)  Modified internal rate of return method. 
B)  Profitability index. 
C)  Payback period method. 
D)  Discounted cash flow method. 
E)  IRR.

Question 18

A payback period that is less than the required period signals an accept decision.

Accepted Answer

A) True 
 B)False

Question 19

In actual practice, managers frequently use the AAR because the information is so readily available.

Accepted Answer

A) True 
 B)False

Question 20

Atlantic, Inc. is considering a project that is expected to produce the following cash flows over the next five years: $22,500, $27,900, $41,800, $33,000, and $15,000 respectively. Atlantic has $98,000 available, which is the amount needed to initiate the project. Should Atlantic accept this project if the required rate of return is 12%? Why or why not?

Accepted Answer

A)  No; Atlantic would lose $2,407 in today's dollars if they accept the project. 
B)  No; The IRR is 13.47%, which is greater than the required return. 
C)  No; The PI is 1.04, which is considered a reject signal. 
D)  Yes; Atlantic will make $3,567 in today's dollars if they accept the project. 
E)  Yes; The PI is.96, which is considered an acceptance signal. 
A)  No; Atlantic would lose $2,407 in today's dollars if they accept the project. 
B)  No; The IRR is 13.47%, which is greater than the required return. 
C)  No; The PI is 1.04, which is considered a reject signal. 
D)  Yes; Atlantic will make $3,567 in today's dollars if they accept the project. 
E)  Yes; The PI is.96, which is considered an acceptance signal.

Exam 9: Net Present Value and Other Investment Criteria

The internal rate of return:

The discounted payback period of a project will decrease whenever the:

The internal rate of return (IRR) rule can be best stated as:

Calculate the profitability index 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%.

Net present value _____________.

Without using formulas, provide a definition of mutually exclusive investment decisions.

Which of the following is true about using discounted payback analysis for projects which have only positive cash flows after the initial outlay and for which the discount rate is positive?

What is the internal rate of return on an investment with the following cash flows?

Use the following mutually exclusive investment cash flows for the question(s) below: If the discount rate is 14%, using profitability index which of the following is true?

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 discounted payback of the project.

A conventional cash flow is defined as a series of cash flows where:

Both net present value and the internal rate of return incorporate the same data and utilize the same time value of money theory in their computations. Given this, why is net present value considered to be a superior measure when making capital budgeting decisions?

Calculate the NPV 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%.

The _______________ produces a ranking of all projects.

A payback period that is less than the required period signals an accept decision.

In actual practice, managers frequently use the AAR because the information is so readily available.

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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