Question 1

You have a choice between two mutually exclusive investments. If you require a 14% return, which investment should you choose?

Accepted Answer

A)  Project B, because it has a smaller initial investment. 
B)  Project A, because it has a higher NPV. 
C)  Either one, because they have the same profitability indexes. 
D)  Project B, because it has the higher internal rate of return. 
E)  Project B, because it pays back faster. 
A)  Project B, because it has a smaller initial investment. 
B)  Project A, because it has a higher NPV. 
C)  Either one, because they have the same profitability indexes. 
D)  Project B, because it has the higher internal rate of return. 
E)  Project B, because it pays back faster.

Question 2

AAR is biased in favour of liquid investments.

Accepted Answer

A) True 
 B)False

Question 3

If the required return is 12%, what is the discounted payback period of the following cash flows?

Accepted Answer

A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  The project does not pay back on a discounted basis. 
A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  The project does not pay back on a discounted basis.

Question 4

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Accepted Answer

A)  6.02 % 
B)  7.23 % 
C)  10.92 % 
D)  12.21 % 
E)  14.47 % 
A)  6.02 % 
B)  7.23 % 
C)  10.92 % 
D)  12.21 % 
E)  14.47 %

Question 5

Without using formulas, provide a definition of payback period.

Accepted Answer

A)  A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. 
B)  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. 
C)  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. 
D)  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. 
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 determines the amount of time required for an investment to generate cash flows to recover its initial cost. 
B)  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. 
C)  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. 
D)  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. 
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 6

When multiple IRR's exist, a project must have a negative NPV at the highest IRR.

Accepted Answer

A) True 
 B)False

Question 7

A project produces the following cash flows over the next five years: $600, $200, $350, $400 and $500, respectively. The initial cost of the project is $1,400. What is the internal rate of return on this project?

Accepted Answer

A)  - 4.56% 
B)  3.67% 
C)  12.87% 
D)  14.39% 
E)  The rate cannot be computed with certainty. 
A)  - 4.56% 
B)  3.67% 
C)  12.87% 
D)  14.39% 
E)  The rate cannot be computed with certainty.

Question 8

To find the __________ we begin by setting the NPV of a project equal to zero.

Accepted Answer

A)  Payback period. 
B)  Discounted payback period. 
C)  Internal rate of return. 
D)  Profitability index. 
E)  Average accounting return. 
A)  Payback period. 
B)  Discounted payback period. 
C)  Internal rate of return. 
D)  Profitability index. 
E)  Average accounting return.

Question 9

Which of the following is NOT a true statement?

Accepted Answer

A)  The payback rule ignores the time value of money. 
B)  The discounted payback rule requires a cutoff hurdle be set. 
C)  The profitability index is closely related to the payback period. 
D)  The AAR is based on accounting data. 
E)  There may be multiple IRRs for an independent project. 
A)  The payback rule ignores the time value of money. 
B)  The discounted payback rule requires a cutoff hurdle be set. 
C)  The profitability index is closely related to the payback period. 
D)  The AAR is based on accounting data. 
E)  There may be multiple IRRs for an independent project.

Question 10

A situation in which taking one investment prevents the taking of another is called:

Accepted Answer

A)  Net present value profiling. 
B)  Operational ambiguity. 
C)  Mutually exclusive investment decisions. 
D)  Issues of scale. 
E)  Multiple rates of return. 
A)  Net present value profiling. 
B)  Operational ambiguity. 
C)  Mutually exclusive investment decisions. 
D)  Issues of scale. 
E)  Multiple rates of return.

Question 11

The primary idea behind the net present value rule is that an investment:

Accepted Answer

A)  Is worthwhile if it creates value for the owners. 
B)  Must have total cash flows that equal zero. 
C)  Should be accepted if it enhances management's position. 
D)  Should break-even from an accounting point of view. 
E)  Should earn a rate of return that is less than the discount rate. 
A)  Is worthwhile if it creates value for the owners. 
B)  Must have total cash flows that equal zero. 
C)  Should be accepted if it enhances management's position. 
D)  Should break-even from an accounting point of view. 
E)  Should earn a rate of return that is less than the discount rate.

Question 12

The process of valuing an investment by determining the present value of its future cash flows is called (the):

Accepted Answer

A)  Constant dividend growth model. 
B)  Discounted cash flow valuation. 
C)  Average accounting valuation. 
D)  Expected earnings model. 
E)  Capital Asset Pricing Model. 
A)  Constant dividend growth model. 
B)  Discounted cash flow valuation. 
C)  Average accounting valuation. 
D)  Expected earnings model. 
E)  Capital Asset Pricing Model.

Question 13

In actual practice, managers frequently use the payback because of its simplicity.

Accepted Answer

A) True 
 B)False

Question 14

NPV and IRR can lead to different decisions in situations where project cash flow are conventional.

Accepted Answer

A) True 
 B)False

Question 15

Kim Lee is analyzing two projects. The first requires a $1,200 initial investment and returns $600 a year for four years. The second project requires a $1,500 initial investment and returns $700 a year for four years. What is the crossover point for these two projects?

Accepted Answer

A)  4.25% 
B)  6.37% 
C)  8.14% 
D)  12.59% 
E)  The crossover point cannot be computed based on the information provided. 
A)  4.25% 
B)  6.37% 
C)  8.14% 
D)  12.59% 
E)  The crossover point cannot be computed based on the information provided.

Question 16

If a project has a net present value equal to zero, then any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Accepted Answer

A) True 
 B)False

Question 17

A project which has a discounted payback period longer than its life also has a positive NPV.

Accepted Answer

A) True 
 B)False

Question 18

A negative net present value indicates that:

Accepted Answer

A)  A project's cash inflows must be less than the project's initial cost. 
B)  A project is acceptable. 
C)  A project's initial cash outflow is greater than the present value of the project's cash inflows. 
D)  The discount rate is greater than the current market rate of return. 
E)  The discount rate applied to the project is less than the project's internal rate of return. 
A)  A project's cash inflows must be less than the project's initial cost. 
B)  A project is acceptable. 
C)  A project's initial cash outflow is greater than the present value of the project's cash inflows. 
D)  The discount rate is greater than the current market rate of return. 
E)  The discount rate applied to the project is less than the project's internal rate of return.

Question 19

An increased availability of computers and financial calculators to handle the more complex computations may have contributed to the change in the primary methods used by chief financial officers to evaluate projects over the past forty years.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following decision rules has the advantage that the information needed for the calculation is readily available?

Accepted Answer

A)  Net present value 
B)  Internal rate of return 
C)  Average accounting return 
D)  Payback period 
E)  Discounted payback 
A)  Net present value 
B)  Internal rate of return 
C)  Average accounting return 
D)  Payback period 
E)  Discounted payback

Exam 9: Net Present Value and Other Investment Criteria

You have a choice between two mutually exclusive investments. If you require a 14% return, which investment should you choose?

AAR is biased in favour of liquid investments.

If the required return is 12%, what is the discounted payback period of the following cash flows?

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Without using formulas, provide a definition of payback period.

When multiple IRR's exist, a project must have a negative NPV at the highest IRR.

A project produces the following cash flows over the next five years: $600, $200, $350, $400 and $500, respectively. The initial cost of the project is $1,400. What is the internal rate of return on this project?

To find the __________ we begin by setting the NPV of a project equal to zero.

Which of the following is NOT a true statement?

A situation in which taking one investment prevents the taking of another is called:

The primary idea behind the net present value rule is that an investment:

The process of valuing an investment by determining the present value of its future cash flows is called (the):

In actual practice, managers frequently use the payback because of its simplicity.

NPV and IRR can lead to different decisions in situations where project cash flow are conventional.

Kim Lee is analyzing two projects. The first requires a $1,200 initial investment and returns $600 a year for four years. The second project requires a $1,500 initial investment and returns $700 a year for four years. What is the crossover point for these two projects?

If a project has a net present value equal to zero, then any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

A project which has a discounted payback period longer than its life also has a positive NPV.

A negative net present value indicates that:

An increased availability of computers and financial calculators to handle the more complex computations may have contributed to the change in the primary methods used by chief financial officers to evaluate projects over the past forty years.

Which of the following decision rules has the advantage that the information needed for the calculation is 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

Filters