Question 1

When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:

Accepted Answer

A) independent. 
B) marginally proﬁtable. 
C) mutually exclusive. 
D) acceptable. 
E) internally proﬁtable. 
A) independent. 
B) marginally proﬁtable. 
C) mutually exclusive. 
D) acceptable. 
E) internally proﬁtable. C

Question 2

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected
Remaining life of the cooling system.What is the payback period of the ice cream cart?

Accepted Answer

A) 0.86 year. 
B) 1.46 years. 
C) 1.86 years. 
D) 2.46 years. 
E) 2.86 years. 
A) 0.86 year. 
B) 1.46 years. 
C) 1.86 years. 
D) 2.46 years. 
E) 2.86 years. C

Question 3

A project will produce cash inﬂows of €1,750 a year for four years.The project initially costs €10,600 to get started.In year ﬁve, the project will be closed and as a result should produce a cash inﬂow of
€8,500.What is the net present value of this project if the required rate of return is 13.75%?

Accepted Answer

A) -€5,474.76 
B) -€1,011.40 
C) -€935.56 
D) €1,011.40 
E) €5,474.76 
A) -€5,474.76 
B) -€1,011.40 
C) -€935.56 
D) €1,011.40 
E) €5,474.76 B

Question 4

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?

Accepted Answer

At some interest rates K, NPV = £0; by d

Question 5

The difference between the present value of an investment and its cost is the:

Accepted Answer

A) net present value. 
B) internal rate of return. 
C) payback period. 
D) proﬁtability index. 
E) discounted payback period. 
A) net present value. 
B) internal rate of return. 
C) payback period. 
D) proﬁtability index. 
E) discounted payback period.

Question 6

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

Accepted Answer

A) how the incremental IRR varies with changes in the discount rate. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the payback period and the initial cash outﬂow of a project are related. 
E) how the proﬁtability index and the net present value are related. 
A) how the incremental IRR varies with changes in the discount rate. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the payback period and the initial cash outﬂow of a project are related. 
E) how the proﬁtability index and the net present value are related.

Question 7

The problem of multiple IRRs can occur when:

Accepted Answer

A) there is only one sign change in the cash ﬂows. 
B) the ﬁrst cash ﬂow is always positive. 
C) the cash ﬂows decline over the life of the project. 
D) there is more than one sign change in the cash ﬂows. 
E) None of the above. 
A) there is only one sign change in the cash ﬂows. 
B) the ﬁrst cash ﬂow is always positive. 
C) the cash ﬂows decline over the life of the project. 
D) there is more than one sign change in the cash ﬂows. 
E) None of the above.

Question 8

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 9

Accepting positive NPV projects beneﬁts the shareholders because:

Accepted Answer

A) it is the most easily understood valuation process. 
B) the present value of the expected cash ﬂows are equal to the cost. 
C) the present value of the expected cash ﬂows are greater than the cost. 
D) it is the most easily calculated. 
E) None of the above. 
A) it is the most easily understood valuation process. 
B) the present value of the expected cash ﬂows are equal to the cost. 
C) the present value of the expected cash ﬂows are greater than the cost. 
D) it is the most easily calculated. 
E) None of the above.

Question 10

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 11

$$\begin{array}{l}
\text { You are analyzing a project and have prepared the following data: }\
\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - £ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £ 41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}
\end{array}$$ Required payback period: 2.5 years Required AAR: 7.25%
Required return: 8.50%
Based on the proﬁtability index of _____ for this project, you should _____ the project.

Accepted Answer

A) .97; accept 
B) 1.05; accept 
C) 1.18; accept 
D) .97; reject 
E) 1.05; reject 
A) .97; accept 
B) 1.05; accept 
C) 1.18; accept 
D) .97; reject 
E) 1.05; reject

Question 12

What is the net present value of a project with the following cash flows and a required return of $12 \%$ ?

Accepted Answer

A) -£287.22 
B) -£177.62 
C) £177.62 
D) £204.36 
E) £287.22 
A) -£287.22 
B) -£177.62 
C) £177.62 
D) £204.36 
E) £287.22

Question 13

Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is $8 \%$ ? Why or why not?

Accepted Answer

A) yes; because the PI is 1.008 
B) yes; because the PI is .992 
C) yes; because the PI is .999 
D) no; because the PI is 1.008 
E) no; because the PI is .992 
A) yes; because the PI is 1.008 
B) yes; because the PI is .992 
C) yes; because the PI is .999 
D) no; because the PI is 1.008 
E) no; because the PI is .992

Question 14

Net present value:

Accepted Answer

A) cannot be used when deciding between two mutually exclusive projects. 
B) is more useful to decision makers than the internal rate of return when comparing different
Sized projects. 
C) is easy to explain to non-ﬁnancial managers and thus is the primary method of analysis
Used by the management. 
D) is not an as widely used tool as payback and discounted payback 
E) is very similar in its methodology to the average accounting return. 
A) cannot be used when deciding between two mutually exclusive projects. 
B) is more useful to decision makers than the internal rate of return when comparing different
Sized projects. 
C) is easy to explain to non-ﬁnancial managers and thus is the primary method of analysis
Used by the management. 
D) is not an as widely used tool as payback and discounted payback 
E) is very similar in its methodology to the average accounting return.

Question 15

Which of the following methods of project analysis are biased towards short-term projects? I.internal rate of return
II)accounting rate of return
III)payback
IV)discounted payback

Accepted Answer

A) I and II only. 
B) III and IV only. 
C) II and III only. 
D) I and IV only. 
E) II and IV only. 
A) I and II only. 
B) III and IV only. 
C) II and III only. 
D) I and IV only. 
E) II and IV only.

Question 16

Consider an investment with an initial cost of £20,000 and is expected to last for 5 years.The expected cash ﬂow in years 1 and 2 are £5,000, in years 3 and 4 are £5,500 and in year 5 is £1,000.
The total cash inﬂow is expected to be £22,000 or an average of £4,400 per year.Compute the
Payback period in years.

Accepted Answer

A) 3.18 years. 
B) 3.82 years. 
C) 4.00 years. 
D) 4.55 years. 
E) None of the above. 
A) 3.18 years. 
B) 3.82 years. 
C) 4.00 years. 
D) 4.55 years. 
E) None of the above.

Question 17

Internal rate of return: I.handles the the positive and negative cash ﬂows throughout the life span of a project effectively.
II)requires the use of a discount rate.
III)does not require the use of a discount rate.

Accepted Answer

A) (I) correct only. 
B) (II) correct only. 
C) (III) correct only. 
D) (I) and (II) correct only. 
E) (I) and (III) correct only. 
A) (I) correct only. 
B) (II) correct only. 
C) (III) correct only. 
D) (I) and (II) correct only. 
E) (I) and (III) correct only.

Question 18

Using internal rate of return, a conventional project should be accepted if the internal rate of return is:

Accepted Answer

A) equal to the discount rate. 
B) greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) equal to zero. 
A) equal to the discount rate. 
B) greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) equal to zero.

Question 19

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

Accepted Answer

A) net present value proﬁle. 
B) operational ambiguity decision. 
C) mutually exclusive investment decision. 
D) issues of scale problem. 
E) multiple choices of operations decision. 
A) net present value proﬁle. 
B) operational ambiguity decision. 
C) mutually exclusive investment decision. 
D) issues of scale problem. 
E) multiple choices of operations decision.

Question 20

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

Exam 6: Net Present Value and Other Investment Rules

When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected Remaining life of the cooling system.What is the payback period of the ice cream cart?

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?

The difference between the present value of an investment and its cost is the:

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

The problem of multiple IRRs can occur when:

Accepting positive NPV projects beneﬁts the shareholders because:

What is the net present value of a project with the following cash flows and a required return of 12%12 \%12% ?

Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is 8%8 \%8% ? Why or why not?

Net present value:

Which of the following methods of project analysis are biased towards short-term projects? I.internal rate of return II)accounting rate of return III)payback IV)discounted payback

Internal rate of return: I.handles the the positive and negative cash ﬂows throughout the life span of a project effectively. II)requires the use of a discount rate. III)does not require the use of a discount rate.

Using internal rate of return, a conventional project should be accepted if the internal rate of return is:

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

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

What is the net present value of a project with the following cash flows and a required return of $12 \%$ ? $What is the net present value of a project with the following cash flows and a required return of 12 \% ?$