Question 1

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

Accepted Answer

A situation whereby a choice h

Question 2

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

Accepted Answer

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

Question 3

An investment is acceptable if the profitability index (PI) of the investment is:

Accepted Answer

A)  Greater than one. 
B)  Less than one. 
C)  Greater than the internal rate of return (IRR). 
D)  Less than the net present value (NPV). 
E)  Greater than a pre-specified rate of return. 
A)  Greater than one. 
B)  Less than one. 
C)  Greater than the internal rate of return (IRR). 
D)  Less than the net present value (NPV). 
E)  Greater than a pre-specified rate of return.

Question 4

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6 %. This implies that you should always accept project A and always reject project
B.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is false?

Accepted Answer

A)  If a project has a profitability index greater than one the project should be accepted. 
B)  If a firm's target average accounting return is less than that calculated for a given project then the project should be accepted. 
C)  If the cost of capital is greater than the IRR, the project should be accepted. 
D)  If a project has a payback which is faster than the company requires the project should be accepted. 
E)  If the NPV of a project is positive, it should be accepted. 
A)  If a project has a profitability index greater than one the project should be accepted. 
B)  If a firm's target average accounting return is less than that calculated for a given project then the project should be accepted. 
C)  If the cost of capital is greater than the IRR, the project should be accepted. 
D)  If a project has a payback which is faster than the company requires the project should be accepted. 
E)  If the NPV of a project is positive, it should be accepted.

Question 6

Project A and B have 4 year timelines. Project A has an initial investment of $120,000 and cash inflows of $50,000, $50,000 $30,000 and $30,000. Project B has an initial investment of $190,000 and cash inflows of $80,000, $70,000, $70,000 and $60,000. At what rate of interest would a company be indifferent at choosing project A or B?

Accepted Answer

A)  25.77% 
B)  24.66% 
C)  23.55% 
D)  22.44% 
E)  21.33% 
A)  25.77% 
B)  24.66% 
C)  23.55% 
D)  22.44% 
E)  21.33%

Question 7

You are considering two independent projects with the following cash flows, both of which have been assigned a discount rate of 9.5 %. Based on the profitability index (PI), what is your recommendation concerning these projects?

Accepted Answer

A)  Accept Project A only. 
B)  Accept Project B only. 
C)  Accept both Project A and B. 
D)  Reject both Project A and B. 
E)  You cannot use the PI method of analysis in this situation. 
A)  Accept Project A only. 
B)  Accept Project B only. 
C)  Accept both Project A and B. 
D)  Reject both Project A and B. 
E)  You cannot use the PI method of analysis in this situation.

Question 8

The capital budgeting process addresses what products or services are offered or sold, in what markets to compete, and what new products to introduce.

Accepted Answer

A) True 
 B)False

Question 9

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect decisions when applied to mutually exclusive investments.

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 10

You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.     You should _____ Project A and _____ Project B based on the payback period of each project.

Accepted Answer

A)  accept; accept 
B)  accept; reject 
C)  reject; accept 
D)  reject; reject 
E)  The payback method should not be used to determine which of these projects should be accepted. 
A)  accept; accept 
B)  accept; reject 
C)  reject; accept 
D)  reject; reject 
E)  The payback method should not be used to determine which of these projects should be accepted.

Question 11

The IRR is the most widely used capital budgeting technique.

Accepted Answer

A) True 
 B)False

Question 12

Larry's Lanterns is considering a project which will produce sales of $240,000 a year for the next five years. The profit margin is estimated at 6 %. The project will cost $290,000 and be depreciated straight-line to a book value of zero over the life of the project. Larry's has a required accounting return of 8 %. This project should be _____ because the AAR is _____

Accepted Answer

A)  Rejected; 4.14 %. 
B)  Rejected; 6 %. 
C)  Rejected; 8.28 %. 
D)  Accepted; 8.28 %. 
E)  Accepted; 9.93 %. 
A)  Rejected; 4.14 %. 
B)  Rejected; 6 %. 
C)  Rejected; 8.28 %. 
D)  Accepted; 8.28 %. 
E)  Accepted; 9.93 %.

Question 13

Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, calculate the company's average accounting return over the past four years.

Accepted Answer

A)  5.12% 
B)  6.24% 
C)  7.36% 
D)  8.48% 
E)  9.60% 
A)  5.12% 
B)  6.24% 
C)  7.36% 
D)  8.48% 
E)  9.60%

Question 14

Project X has a cost of $750 and a three year annual cash flow of $350 per year. Project Y has a cost of $500 and a three year annual cash flow of $300, $225 and $200. Given this information, calculate the IRR cross-over rate.

Accepted Answer

A)  12.21% 
B)  13.21% 
C)  14.21% 
D)  15.21% 
E)  16.21% 
A)  12.21% 
B)  13.21% 
C)  14.21% 
D)  15.21% 
E)  16.21%

Question 15

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another firm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and fixed assets using funds from the same bond issue. 
A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another firm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and fixed assets using funds from the same bond issue.

Question 16

Without using formulas, provide a definition of discounted cash flow (DCF) valuation.

Accepted Answer

The process of valui

Question 17

The IRR method can produce multiple rates of return if the cash flows are nonconventional.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 %.

Accepted Answer

A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02 
A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02

Question 20

The use of the internal rate of return could lead to incorrect decisions in comparing mutually exclusive investments.

Accepted Answer

A) True 
 B)False

Exam 9: Net Present Value and Other Investment Criteria

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

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

An investment is acceptable if the profitability index (PI) of the investment is:

You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6 %. This implies that you should always accept project A and always reject project B.

Which of the following statements is false?

You are considering two independent projects with the following cash flows, both of which have been assigned a discount rate of 9.5 %. Based on the profitability index (PI), what is your recommendation concerning these projects?

The capital budgeting process addresses what products or services are offered or sold, in what markets to compete, and what new products to introduce.

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect decisions when applied to mutually exclusive investments.

The IRR is the most widely used capital budgeting technique.

Project X has a cost of $750 and a three year annual cash flow of $350 per year. Project Y has a cost of $500 and a three year annual cash flow of $300, $225 and $200. Given this information, calculate the IRR cross-over rate.

Which one of the following is the best example of two mutually exclusive projects?

Without using formulas, provide a definition of discounted cash flow (DCF) valuation.

The IRR method can produce multiple rates of return if the cash flows are nonconventional.

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

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 %.

The use of the internal rate of return could lead to incorrect decisions in comparing mutually exclusive investments.

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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