Question 1

A project has the following cash flows.What is the payback period?

Accepted Answer

A) 2.83 years 
B) 2.38 years 
C) 2.75 years 
D) 2.92 years 
E) 3.03 years 
A) 2.83 years 
B) 2.38 years 
C) 2.75 years 
D) 2.92 years 
E) 3.03 years

Question 2

Which one of the following statements is correct?

Accepted Answer

A) The internal rate of return is the most reliable method of analysis for any type of investment decision. 
B) The payback method is biased toward short-term projects. 
C) The modified internal rate of return is most useful when projects are mutually exclusive. 
D) The average accounting return is the most difficult method of analysis to compute. 
E) The net present value method is applicable only if a project has conventional cash flows. 
A) The internal rate of return is the most reliable method of analysis for any type of investment decision. 
B) The payback method is biased toward short-term projects. 
C) The modified internal rate of return is most useful when projects are mutually exclusive. 
D) The average accounting return is the most difficult method of analysis to compute. 
E) The net present value method is applicable only if a project has conventional cash flows.

Question 3

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Accepted Answer

A) produce a positive annual cash flow. 
B) produce a positive cash flow from assets. 
C) offset its fixed expenses. 
D) offset its total expenses. 
E) recoup its initial cost. 
A) produce a positive annual cash flow. 
B) produce a positive cash flow from assets. 
C) offset its fixed expenses. 
D) offset its total expenses. 
E) recoup its initial cost.

Question 4

Auto Detailers is buying some new equipment at a cost of $188,900.This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life.The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years.What is the average accounting rate of return?

Accepted Answer

A) 15.48 percent 
B) 17.76 percent 
C) 18.09 percent 
D) 22.68 percent 
E) 18.53 percent 
A) 15.48 percent 
B) 17.76 percent 
C) 18.09 percent 
D) 22.68 percent 
E) 18.53 percent

Question 5

Which one of the following statements is correct?

Accepted Answer

A) The net present value is a measure of profits expressed in today's dollars. 
B) The net present value is positive when the required return exceeds the internal rate of return. 
C) If the initial cost of a project is increased, the net present value of that project will also increase. 
D) If the internal rate of return equals the required return, the net present value will equal zero. 
E) Net present value is equal to an investment's cash inflows discounted to today's dollars. 
A) The net present value is a measure of profits expressed in today's dollars. 
B) The net present value is positive when the required return exceeds the internal rate of return. 
C) If the initial cost of a project is increased, the net present value of that project will also increase. 
D) If the internal rate of return equals the required return, the net present value will equal zero. 
E) Net present value is equal to an investment's cash inflows discounted to today's dollars.

Question 6

The payback method of analysis ignores which one of the following?

Accepted Answer

A) Initial cost of an investment 
B) Arbitrary cutoff point 
C) Cash flow direction 
D) Time value of money 
E) Timing of each cash inflow 
A) Initial cost of an investment 
B) Arbitrary cutoff point 
C) Cash flow direction 
D) Time value of money 
E) Timing of each cash inflow

Question 7

Which one of the following can be defined as a benefit-cost ratio?

Accepted Answer

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

Question 8

Daniel's Market is considering a project with an initial cost of $176,500.The project will not produce any cash flows for the first three years.Starting in Year 4, the project will produce cash inflows of $127,500 a year for three years.This project is risky, so the firm has assigned it a discount rate of 17 percent.What is the project's net present value?

Accepted Answer

A) $105,222 
B) -$6,500 
C) $ 29,301.80 
D) $ 621.30 
E) -$601.03 
A) $105,222 
B) -$6,500 
C) $ 29,301.80 
D) $ 621.30 
E) -$601.03

Question 9

Quattro, Inc.has the following mutually exclusive projects available.The company has historically used a four-year cutoff for projects.The required return is 11 percent.   The payback for Project A is ____ while the payback for Project B is ____.The NPV for Project A is _____ while the NPV for Project B is ____.Which project, if any, should the company accept?

Accepted Answer

A) 2.782 years; 3.25 years; $ 7.090.12; $12,011.48; accept both Projects 
B) 3.92 years; 3.79 years; -$6,197.89; $14,693.39; accept Project B only 
C) 3.60 years; 3.95 years; -$6,197.89; -$14,693.39; reject both projects 
D) 3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only 
E) 4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only 
A) 2.782 years; 3.25 years; $ 7.090.12; $12,011.48; accept both Projects 
B) 3.92 years; 3.79 years; -$6,197.89; $14,693.39; accept Project B only 
C) 3.60 years; 3.95 years; -$6,197.89; -$14,693.39; reject both projects 
D) 3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only 
E) 4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only

Question 10

The average accounting return:

Accepted Answer

A) measures profitability rather than cash flow. 
B) discounts all values to today's dollars. 
C) is expressed as a percentage of an investment's current market value. 
D) will equal the required return when the net present value equals zero. 
E) is used more often by CFOs than the internal rate of return. 
A) measures profitability rather than cash flow. 
B) discounts all values to today's dollars. 
C) is expressed as a percentage of an investment's current market value. 
D) will equal the required return when the net present value equals zero. 
E) is used more often by CFOs than the internal rate of return.

Question 11

You are considering the following two mutually exclusive projects.The crossover point is _____ percent and Project _____ should be accepted at a discount rate of 9 percent.

Accepted Answer

A) 15.68 percent; B 
B) 11.38 percent; A 
C) 11.38 percent; B 
D) 15.68 percent; A 
E) 14.02 percent; B 
A) 15.68 percent; B 
B) 11.38 percent; A 
C) 11.38 percent; B 
D) 15.68 percent; A 
E) 14.02 percent; B

Question 12

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Accepted Answer

A) PI equal to zero 
B) Negative rate of return 
C) Positive AAR 
D) Positive IRR 
E) Positive NPV 
A) PI equal to zero 
B) Negative rate of return 
C) Positive AAR 
D) Positive IRR 
E) Positive NPV

Question 13

The reinvestment approach to the modified internal rate of return:

Accepted Answer

A) individually discounts each separate cash flow back to the present. 
B) reinvests all the cash flows, including the initial cash flow, to the end of the project. 
C) discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. 
D) discounts all negative cash flows back to the present and combines them with the initial cost. 
E) compounds all of the cash flows, except for the initial cash flow, to the end of the project. 
A) individually discounts each separate cash flow back to the present. 
B) reinvests all the cash flows, including the initial cash flow, to the end of the project. 
C) discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. 
D) discounts all negative cash flows back to the present and combines them with the initial cost. 
E) compounds all of the cash flows, except for the initial cash flow, to the end of the project.

Question 14

The internal rate of return is the:

Accepted Answer

A) discount rate that causes a project's aftertax income to equal zero. 
B) discount rate that results in a zero net present value for the project. 
C) discount rate that results in a net present value equal to the project's initial cost. 
D) rate of return required by the project's investors. 
E) project's current market rate of return. 
A) discount rate that causes a project's aftertax income to equal zero. 
B) discount rate that results in a zero net present value for the project. 
C) discount rate that results in a net present value equal to the project's initial cost. 
D) rate of return required by the project's investors. 
E) project's current market rate of return.

Question 15

Performance Needlework needs to purchase a new machine costing $1.25 million.Management is estimating the machine will generate cash inflows of $175,000 the first year and $ 500,000 for the following three years.If management requires a minimum 10 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not?

Accepted Answer

A) Yes, because the IRR is 10.75 percent 
B) Yes, because the IRR is 11.28 percent 
C) No, because the IRR is 10.75 percent 
D) No, because the IRR is 11.28 percent 
E) The answer cannot be determined as there are multiple IRRs 
A) Yes, because the IRR is 10.75 percent 
B) Yes, because the IRR is 11.28 percent 
C) No, because the IRR is 10.75 percent 
D) No, because the IRR is 11.28 percent 
E) The answer cannot be determined as there are multiple IRRs

Question 16

The average net income of a project divided by the project's average book value is referred to as the project's:

Accepted Answer

A) required return. 
B) market rate of return. 
C) internal rate of return. 
D) average accounting return. 
E) discounted rate of return. 
A) required return. 
B) market rate of return. 
C) internal rate of return. 
D) average accounting return. 
E) discounted rate of return.

Question 17

China Importers would like to spend $215,000 to expand its warehouse.However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time.The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years.Should the firm expand at this time? Why or why not?

Accepted Answer

A) Yes; because the money will be recovered in 1.69 years 
B) Yes; because the money will be recovered in 1.87 years 
C) Yes; because the money will be recovered in 2.10 years 
D) No; because the project never pays back 
E) No; because the money will not be recovered in time to repay the loan 
A) Yes; because the money will be recovered in 1.69 years 
B) Yes; because the money will be recovered in 1.87 years 
C) Yes; because the money will be recovered in 2.10 years 
D) No; because the project never pays back 
E) No; because the money will not be recovered in time to repay the loan

Question 18

Which one of the following statements is correct? Assume cash flows are conventional.

Accepted Answer

A) If the IRR exceeds the required return, the profitability index will be less than 1.0. 
B) The profitability index will be greater than 1.0 when the net present value is negative. 
C) When the internal rate of return is greater than the required return, the net present value is positive. 
D) Projects with conventional cash flows have multiple internal rates of return. 
E) If two projects are mutually exclusive, you should select the project with the shortest payback period. 
A) If the IRR exceeds the required return, the profitability index will be less than 1.0. 
B) The profitability index will be greater than 1.0 when the net present value is negative. 
C) When the internal rate of return is greater than the required return, the net present value is positive. 
D) Projects with conventional cash flows have multiple internal rates of return. 
E) If two projects are mutually exclusive, you should select the project with the shortest payback period.

Question 19

A project has the following cash flows.What is the internal rate of return?

Accepted Answer

A) 14.79 percent 
B) 13.58 percent 
C) 12.96 percent 
D) 13.67 percent 
E) 13.10 percent 
A) 14.79 percent 
B) 13.58 percent 
C) 12.96 percent 
D) 13.67 percent 
E) 13.10 percent

Question 20

John is considering a project with cash inflows of $1,750, $1,850, $2,000, and $2,550 over the next four years, respectively.The relevant discount rate is 14 percent.What is the net present value of this project if it the start-up cost is $5,000?

Accepted Answer

A) $818.35 
B) $947.56 
C) -$600.00 
D) $693.61 
E) $379.75 
A) $818.35 
B) $947.56 
C) -$600.00 
D) $693.61 
E) $379.75

A project has the following cash flows.What is the payback period?

Which one of the following statements is correct?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Which one of the following statements is correct?

The payback method of analysis ignores which one of the following?

Which one of the following can be defined as a benefit-cost ratio?

The average accounting return:

You are considering the following two mutually exclusive projects.The crossover point is _ percent and Project _ should be accepted at a discount rate of 9 percent.

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

The reinvestment approach to the modified internal rate of return:

The internal rate of return is the:

The average net income of a project divided by the project's average book value is referred to as the project's:

Which one of the following statements is correct? Assume cash flows are conventional.

A project has the following cash flows.What is the internal rate of return?

John is considering a project with cash inflows of $1,750, $1,850, $2,000, and $2,550 over the next four years, respectively.The relevant discount rate is 14 percent.What is the net present value of this project if it the start-up cost is $5,000?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 8: Net Present Value and Other Investment Criteria

A project has the following cash flows.What is the payback period?

Which one of the following statements is correct?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Which one of the following statements is correct?

The payback method of analysis ignores which one of the following?

Which one of the following can be defined as a benefit-cost ratio?

The average accounting return:

You are considering the following two mutually exclusive projects.The crossover point is _____ percent and Project _____ should be accepted at a discount rate of 9 percent.

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

The reinvestment approach to the modified internal rate of return:

The internal rate of return is the:

The average net income of a project divided by the project's average book value is referred to as the project's:

Which one of the following statements is correct? Assume cash flows are conventional.

A project has the following cash flows.What is the internal rate of return?

John is considering a project with cash inflows of $1,750, $1,850, $2,000, and $2,550 over the next four years, respectively.The relevant discount rate is 14 percent.What is the net present value of this project if it the start-up cost is $5,000?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

You are considering the following two mutually exclusive projects.The crossover point is _ percent and Project _ should be accepted at a discount rate of 9 percent.