Question 1

The following are measures used by firms when making capital budgeting decisions except:

Accepted Answer

A)  Payback period 
B)  Internal rate of return 
C)  P/E ratio 
D)  Net present value 
A)  Payback period 
B)  Internal rate of return 
C)  P/E ratio 
D)  Net present value

Question 2

There can never be more than one value of IRR for any cash flow.

Accepted Answer

A) True 
 B)False

Question 3

The following are some of the shortcomings of the IRR method except:

Accepted Answer

A)  IRR is conceptually easy to communicate 
B)  Projects can have multiple IRRs 
C)  IRR method cannot distinguish between a borrowing project and a lending project 
D)  It is very cumbersome to evaluate mutually exclusive projects using the IRR method 
A)  IRR is conceptually easy to communicate 
B)  Projects can have multiple IRRs 
C)  IRR method cannot distinguish between a borrowing project and a lending project 
D)  It is very cumbersome to evaluate mutually exclusive projects using the IRR method

Question 4

Discuss some of the disadvantages of the payback rule.

Accepted Answer

The disadvantages are that it

Question 5

Present values have value adding-up property.

Accepted Answer

A) True 
 B)False

Question 6

In what way is the modified internal rate of return (MIRR) method better than the IRR
method?

Accepted Answer

With the modified internal rate of retur

Question 7

Which of the following statements regarding the discounted payback period rule is true?

Accepted Answer

A)  The discounted payback rule uses the time value of money concept. 
B)  The discounted payback rule is better than the NPV rule. 
C)  The discounted payback rule considers all cash flows. 
D)  The discounted payback rule exhibits the value additive property. 
A)  The discounted payback rule uses the time value of money concept. 
B)  The discounted payback rule is better than the NPV rule. 
C)  The discounted payback rule considers all cash flows. 
D)  The discounted payback rule exhibits the value additive property.

Question 8

What are some of the disadvantages of using the IRR method?

Accepted Answer

There are several disadvantages to IRR m

Question 9

If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:

Accepted Answer

A)  +$30 
B)  -$60 
C)  -$30 
D)  None of the above. NPV(A + 
B)  = 30 - 60 = -30 
A)  +$30 
B)  -$60 
C)  -$30 
D)  None of the above. NPV(A + 
B)  = 30 - 60 = -30

Question 10

Profitability index is the ratio of:

Accepted Answer

A)  Future value of cash flows to investment 
B)  Net present value of cash flows to investment 
C)  Net present value of cash flows to IRR 
D)  Present value of cash flows to IRR 
A)  Future value of cash flows to investment 
B)  Net present value of cash flows to investment 
C)  Net present value of cash flows to IRR 
D)  Present value of cash flows to IRR

Question 11

Decommissioning and clean-up cost for any project is always insignificant and should always be ignored.

Accepted Answer

A) True 
 B)False

Question 12

Discuss some of the advantages of using the payback method.

Accepted Answer

It tells you how quickly you c

Question 13

What is the profitability index of an investment with cash flows in years zero thru 4 of -
340, 120, 130, 153, and 166, respectively and a discount rate of 16%?

Accepted Answer

A)  .15 
B)  .22 
C)  .35 
D)  .42 
A)  .15 
B)  .22 
C)  .35 
D)  .42

Question 14

Project X has the following cash flows: C0 = +2000, C1 = -1,150 and C2 = -1,150. If the
IRR of the project is 9.85% and if the cost of capital is 12%, you would:

Accepted Answer

A)  Accept the project 
B)  Reject the project
This is a loan project therefore accept. 
A)  Accept the project 
B)  Reject the project
This is a loan project therefore accept.

Question 15

Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 =
2000, calculate the discounted payback period for the project at a discount rate of 20%.

Accepted Answer

A)  1 year 
B)  2 years 
C)  3 years 
D)  None of the above 
A)  1 year 
B)  2 years 
C)  3 years 
D)  None of the above

Question 16

The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:

Accepted Answer

A)  2 years 
B)  2.5 years 
C)  3 years 
D)  Cannot be determined because of insufficient data 
A)  2 years 
B)  2.5 years 
C)  3 years 
D)  Cannot be determined because of insufficient data

Question 17

The IRR rule states that firms should accept any project offering an internal rate of return in
excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 18

If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is:

Accepted Answer

A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine 
A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine

Question 19

The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:

Accepted Answer

A)  12% of firms 
B)  20% of firms 
C)  57% of firms 
D)  75% of firms 
A)  12% of firms 
B)  20% of firms 
C)  57% of firms 
D)  75% of firms

Question 20

Which of the following investment rules has value adding-up property?

Accepted Answer

A)  The payback period method 
B)  Net present value method 
C)  The book rate of return method 
D)  The internal rate of return method 
A)  The payback period method 
B)  Net present value method 
C)  The book rate of return method 
D)  The internal rate of return method

Exam 5: Net Present Value and Other Investment Criteria

The following are measures used by firms when making capital budgeting decisions except:

There can never be more than one value of IRR for any cash flow.

The following are some of the shortcomings of the IRR method except:

Discuss some of the disadvantages of the payback rule.

Present values have value adding-up property.

In what way is the modified internal rate of return (MIRR) method better than the IRR method?

Which of the following statements regarding the discounted payback period rule is true?

What are some of the disadvantages of using the IRR method?

If the NPV of project A is + $30 and that of project B is + $60, then the NPV of the combined project is:

Profitability index is the ratio of:

Decommissioning and clean-up cost for any project is always insignificant and should always be ignored.

Discuss some of the advantages of using the payback method.

What is the profitability index of an investment with cash flows in years zero thru 4 of - 340, 120, 130, 153, and 166, respectively and a discount rate of 16%?

Project X has the following cash flows: C0 = +2000, C1 = -1,150 and C2 = -1,150. If the IRR of the project is 9.85% and if the cost of capital is 12%, you would:

Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720 and C3 = 2000, calculate the discounted payback period for the project at a discount rate of 20%.

The cost of a new machine is $250,000. The machine has a 3-year life and no salvage value. If the cash flow each year is equal to 40% of the cost of the machine, calculate the payback period for the project:

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is:

The survey of CFOs indicates that NPV method is always, or almost always, used for evaluating investment projects by:

Which of the following investment rules has value adding-up property?

Goals and Governance of the Firm

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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