Question 1

The advantages of the payback method of project analysis include the bias towards arbitrary cutoff
point.

Accepted Answer

A) True 
 B)False

Question 2

The primary reason that company projects with positive net present values are considered acceptable is that:

Accepted Answer

A)  They create value for the owners of the ﬁrm. 
B)  The project's rate of return exceeds the rate of inﬂation. 
C)  They return the initial cash outlay within three years or less. 
D)  The required cash inﬂows exceed the actual cash inﬂows. 
E)  The investment's cost exceeds the present value of the cash inﬂows. 
A)  They create value for the owners of the ﬁrm. 
B)  The project's rate of return exceeds the rate of inﬂation. 
C)  They return the initial cash outlay within three years or less. 
D)  The required cash inﬂows exceed the actual cash inﬂows. 
E)  The investment's cost exceeds the present value of the cash inﬂows.

Question 3

Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected
Average accounting rate of return on this venture?

Accepted Answer

A)  14.93% 
B)  21.88% 
C)  31.25% 
D)  38.76% 
E)  43.75% 
A)  14.93% 
B)  21.88% 
C)  31.25% 
D)  38.76% 
E)  43.75%

Question 4

Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are
Expected to produce net cash inﬂows of $1,200, $1,500, $1,600, and $1,750 over the next four
Years, respectively. Should Jack add toys to his store if he assigns a three-year payback period to
This project?

Accepted Answer

A)  yes; because the payback period is 2.94 years 
B)  yes; because the payback period is 2.02 years 
C)  yes; because the payback period is 3.80 years 
D)  no; because the payback period is 2.02 years 
E)  no; because the payback period is 3.80 years 
A)  yes; because the payback period is 2.94 years 
B)  yes; because the payback period is 2.02 years 
C)  yes; because the payback period is 3.80 years 
D)  no; because the payback period is 2.02 years 
E)  no; because the payback period is 3.80 years

Question 5

The internal rate of return method of analysis works best for independent projects with
conventional cash ﬂows.

Accepted Answer

A) True 
 B)False

Question 6

The proﬁtability index calculation takes the time value of money into account.

Accepted Answer

A) True 
 B)False

Question 7

A 30 year project is estimated to cost $35 million dollars and provide annual cash ﬂows of $5 per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. Given this
Information, determine the IRR of the project.

Accepted Answer

A)  8.85% 
B)  9.85% 
C)  10.85% 
D)  11.85% 
E)  12.85% 
A)  8.85% 
B)  9.85% 
C)  10.85% 
D)  11.85% 
E)  12.85%

Question 8

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 percent. 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 percent. This project should be _____ because the AAR is _____

Accepted Answer

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

Question 9

Given our goals of ﬁrm value and shareholder wealth maximization, we have stressed the
importance of NPV. And yet, many of the ﬁnancial decision-makers at some of the most prominent
ﬁrms in the world continue to use less desirable measures such as the payback period and AAR, in
addition to the NPV and IRR. Why do you think this is the case?

Accepted Answer

This is an open-ended question which all

Question 10

Proﬁtability index employs some sort of arbitrary value against which the project measurement must
be compared when determining whether to accept or reject a project.

Accepted Answer

A) True 
 B)False

Question 11

The following four-year project has an initial cost of $1,000,000. The future cash inﬂows for the next four years are $600,000, $500,000, $400,000, and $400,000, respectively. If the rate of return is
12%, determine the discounted payback period for this project.

Accepted Answer

A)  2.74 years 
B)  2.44 years 
C)  2.14 years 
D)  1.94 years 
E)  1.74 years 
A)  2.74 years 
B)  2.44 years 
C)  2.14 years 
D)  1.94 years 
E)  1.74 years

Question 12

The crossover point is deﬁned as the discount rate that:

Accepted Answer

A)  Causes the net present value of a project to equal zero. 
B)  Causes the IRR of one project to exceed the IRR of a second project. 
C)  Indicates the point where the IRR equals zero as IRR moves in a downward direction. 
D)  Makes the net present values of two projects equal. 
E)  Causes a project to move from a positive net present value to a negative net present value. 
A)  Causes the net present value of a project to equal zero. 
B)  Causes the IRR of one project to exceed the IRR of a second project. 
C)  Indicates the point where the IRR equals zero as IRR moves in a downward direction. 
D)  Makes the net present values of two projects equal. 
E)  Causes a project to move from a positive net present value to a negative net present value.

Question 13

Jackson Traders is considering two mutually exclusive projects with the following cash ﬂows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____
Should be accepted.

Accepted Answer

A)  10.90 percent; A 
B)  10.90 percent; B 
C)  13.87 percent; B 
D)  14.14 percent; A 
E)  14.14 percent; B 
A)  10.90 percent; A 
B)  10.90 percent; B 
C)  13.87 percent; B 
D)  14.14 percent; A 
E)  14.14 percent; B

Question 14

Hayolom is analyzing a project and has gathered the following data. The ﬁrm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. What is the project's
Average accounting rate of return?

Accepted Answer

A)  6.02 percent 
B)  6.41 percent 
C)  7.21 percent 
D)  8.34 percent 
E)  8.54 percent 
A)  6.02 percent 
B)  6.41 percent 
C)  7.21 percent 
D)  8.34 percent 
E)  8.54 percent

Question 15

Net present value is the preferred method of analyzing a project even though the cash ﬂows are
only estimates.

Accepted Answer

A) True 
 B)False

Question 16

The net present value (NPV) rule can be best stated as:

Accepted Answer

A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be rejected if the NPV is positive and accepted if it is negative. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inﬂows than cash outﬂows, regardless of when the cash ﬂows occur, will always have a positive NPV and therefore should always be accepted. 
E)  An investment should be accepted if it equals its depreciation value. 
A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be rejected if the NPV is positive and accepted if it is negative. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inﬂows than cash outﬂows, regardless of when the cash ﬂows occur, will always have a positive NPV and therefore should always be accepted. 
E)  An investment should be accepted if it equals its depreciation value.

Question 17

Which of the following is calculated using ONLY accounting numbers?

Accepted Answer

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

Question 18

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 19

Without using formulas, provide a deﬁnition of average accounting return (AAR).

Accepted Answer

A)  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. 
B)  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. 
C)  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. 
D)  A project analysis tool that determines the amount of time required for an investment to generate cash ﬂows to recover its initial cost. 
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 measures the acceptability of a project by determining the amount of proﬁt that can be expected based on an investment made. 
B)  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. 
C)  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. 
D)  A project analysis tool that determines the amount of time required for an investment to generate cash ﬂows to recover its initial cost. 
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 20

Lack of consideration of the time value of money is a weakness of the average accounting return
method of analysis.

Accepted Answer

A) True 
 B)False

Exam 9: Net Present Value and Other Investment Criteria

The advantages of the payback method of project analysis include the bias towards arbitrary cutoff point.

The primary reason that company projects with positive net present values are considered acceptable is that:

Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected Average accounting rate of return on this venture?

The internal rate of return method of analysis works best for independent projects with conventional cash ﬂows.

The proﬁtability index calculation takes the time value of money into account.

A 30 year project is estimated to cost $35 million dollars and provide annual cash ﬂows of $5 per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. Given this Information, determine the IRR of the project.

Proﬁtability index employs some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project.

The following four-year project has an initial cost of $1,000,000. The future cash inﬂows for the next four years are $600,000, $500,000, $400,000, and $400,000, respectively. If the rate of return is 12%, determine the discounted payback period for this project.

The crossover point is deﬁned as the discount rate that:

Jackson Traders is considering two mutually exclusive projects with the following cash ﬂows. The crossover rate is _____ and if the required rate is lower than the crossover rate then project _____ Should be accepted.

Hayolom is analyzing a project and has gathered the following data. The ﬁrm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. What is the project's Average accounting rate of return?

Net present value is the preferred method of analyzing a project even though the cash ﬂows are only estimates.

The net present value (NPV) rule can be best stated as:

Which of the following is calculated using ONLY accounting numbers?

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

Without using formulas, provide a deﬁnition of average accounting return (AAR).

Lack of consideration of the time value of money is a weakness of the average accounting return method of analysis.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and 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

Some 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 Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters

Jackson Traders is considering two mutually exclusive projects with the following cash ﬂows. The crossover rate is _ and if the required rate is lower than the crossover rate then project _ Should be accepted.