Question 1

All else constant, the net present value of a project increases when:

Accepted Answer

A)  The discount rate increases. 
B)  Each cash inﬂow is delayed by one year. 
C)  The initial cost of a project increases. 
D)  The rate of return decreases. 
E)  All cash inﬂows occur during the last year of a project's life instead of periodically throughout the life of the project. 
A)  The discount rate increases. 
B)  Each cash inﬂow is delayed by one year. 
C)  The initial cost of a project increases. 
D)  The rate of return decreases. 
E)  All cash inﬂows occur during the last year of a project's life instead of periodically throughout the life of the project.

Question 2

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. If the
Company's required rate of return is 10%, determine the discounted payback for the project.

Accepted Answer

A)  15.90 years 
B)  13.90 years 
C)  11.90 years 
D)  9.90 years 
E)  7.90 years 
A)  15.90 years 
B)  13.90 years 
C)  11.90 years 
D)  9.90 years 
E)  7.90 years

Question 3

In actual practice, managers frequently use the AAR because the information is so readily available.

Accepted Answer

A) True 
 B)False

Question 4

An investment has the following cash ﬂows. Should the project be accepted if it has been assigned a required return of 14 percent? Why or why not?

Accepted Answer

A)  No; The IRR exceeds the required return by about 1.08 percent. 
B)  No; The IRR is less than the required return by about 0.97 percent. 
C)  Yes; The IRR exceeds the required return by about 1.08 percent. 
D)  Yes; The IRR is less than the required return by about 0.97 percent 
E)  Yes; The IRR is less than the required return by about 1.08 percent. 
A)  No; The IRR exceeds the required return by about 1.08 percent. 
B)  No; The IRR is less than the required return by about 0.97 percent. 
C)  Yes; The IRR exceeds the required return by about 1.08 percent. 
D)  Yes; The IRR is less than the required return by about 0.97 percent 
E)  Yes; The IRR is less than the required return by about 1.08 percent.

Question 5

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

Accepted Answer

The process of valui

Question 6

Which of the following is NOT correct?

Accepted Answer

A)  NPV is one of the two or three most important concepts in ﬁnance. 
B)  NPV is always just the difference between the market value of an asset or project and its cost. 
C)  The ﬁnancial manager acts in the shareholders' best interests by identifying and taking positive NPV projects. 
D)  NPV's can normally be directly observed in the market. 
E)  Investment criteria other than NPV provide additional information about whether or not a project truly has a positive NPV. 
A)  NPV is one of the two or three most important concepts in ﬁnance. 
B)  NPV is always just the difference between the market value of an asset or project and its cost. 
C)  The ﬁnancial manager acts in the shareholders' best interests by identifying and taking positive NPV projects. 
D)  NPV's can normally be directly observed in the market. 
E)  Investment criteria other than NPV provide additional information about whether or not a project truly has a positive NPV.

Question 7

Payback is frequently used to analyze independent projects because:

Accepted Answer

A)  It considers the time value of money. 
B)  All relevant cash ﬂows are included in the analysis. 
C)  The cost of the analysis is less than the potential loss from a faulty decision. 
D)  It is the most desirable of all the available analytical methods from a ﬁnancial perspective. 
E)  It produces better decisions than those made using either NPV or IRR. 
A)  It considers the time value of money. 
B)  All relevant cash ﬂows are included in the analysis. 
C)  The cost of the analysis is less than the potential loss from a faulty decision. 
D)  It is the most desirable of all the available analytical methods from a ﬁnancial perspective. 
E)  It produces better decisions than those made using either NPV or IRR.

Question 8

You are considering a project that costs $300 and has expected cash ﬂows of $110, $121, and $133.10 over the next three years. If the appropriate discount rate for the project's cash ﬂows is 10%,
What is the net present value of this project?

Accepted Answer

A)  ($8.58) 
B)  $0.00 
C)  $0.71 
D)  $19.79 
E)  $64.10 
A)  ($8.58) 
B)  $0.00 
C)  $0.71 
D)  $19.79 
E)  $64.10

Question 9

You have a choice between two mutually exclusive investments. If you require a 14% return, which investment should you choose?

Accepted Answer

A)  Project B, because it has a smaller initial investment. 
B)  Project A, because it has a higher NPV. 
C)  Either one, because they have the same proﬁtability indexes. 
D)  Project B, because it has the higher internal rate of return. 
E)  Project B, because it pays back faster. 
A)  Project B, because it has a smaller initial investment. 
B)  Project A, because it has a higher NPV. 
C)  Either one, because they have the same proﬁtability indexes. 
D)  Project B, because it has the higher internal rate of return. 
E)  Project B, because it pays back faster.

Question 10

A negative net present value indicates that:

Accepted Answer

A)  A project's cash inﬂows must be less than the project's initial cost. 
B)  A project is acceptable. 
C)  A project's initial cash outﬂow is greater than the present value of the project's cash inﬂows. 
D)  The discount rate is greater than the current market rate of return. 
E)  The discount rate applied to the project is less than the project's internal rate of return. 
A)  A project's cash inﬂows must be less than the project's initial cost. 
B)  A project is acceptable. 
C)  A project's initial cash outﬂow is greater than the present value of the project's cash inﬂows. 
D)  The discount rate is greater than the current market rate of return. 
E)  The discount rate applied to the project is less than the project's internal rate of return.

Question 11

Projects should be accepted when the proﬁtability index is less than 1.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a project costs $300 and produces cash ﬂows of $100 over each of the following six years. What is the IRR of the project?

Accepted Answer

A)  There is not enough information; a discount rate is required 
B)  10.0% 
C)  24.3% 
D)  34.9% 
E)  38.1% 
A)  There is not enough information; a discount rate is required 
B)  10.0% 
C)  24.3% 
D)  34.9% 
E)  38.1%

Question 13

Consider a project with an initial investment and positive future cash ﬂows. As the discount rate is increased the ___________________.

Accepted Answer

A)  IRR remains constant while the NPV increases 
B)  IRR decreases while the NPV remains constant 
C)  IRR remains constant while the NPV decreases 
D)  IRR increases while the NPV remains constant 
E)  IRR decreases while the NPV decreases 
A)  IRR remains constant while the NPV increases 
B)  IRR decreases while the NPV remains constant 
C)  IRR remains constant while the NPV decreases 
D)  IRR increases while the NPV remains constant 
E)  IRR decreases while the NPV decreases

Question 14

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate,
then the proﬁtability index will be greater than 1.0.

Accepted Answer

A) True 
 B)False

Question 15

Graphing the crossover point helps explain:

Accepted Answer

A)  Why one project is always superior to another project. 
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 net present value and the initial cash outﬂow of a project are related. 
E)  How the proﬁtability index and the net present value are related. 
A)  Why one project is always superior to another project. 
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 net present value and the initial cash outﬂow of a project are related. 
E)  How the proﬁtability index and the net present value are related.

Question 16

You are analyzing a project and have prepared the following data:       Based on the payback period of _____ years for this project, you should _____ the project.

Accepted Answer

A)  3.27; accept 
B)  3.27; reject 
C)  3.42; accept 
D)  3.42; reject 
E)  3.51; reject 
A)  3.27; accept 
B)  3.27; reject 
C)  3.42; accept 
D)  3.42; reject 
E)  3.51; reject

Question 17

A 30 year project is estimated to cost $35 million and provide annual cash ﬂows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the
Company's required rate of return is 10%, determine the NPV.

Accepted Answer

A)  $0.67 million 
B)  $1.67 million 
C)  $2.67 million 
D)  $3.67 million 
E)  $4.67 million 
A)  $0.67 million 
B)  $1.67 million 
C)  $2.67 million 
D)  $3.67 million 
E)  $4.67 million

Question 18

The initial cost of an investment is not an element in computing the internal rate of return method.

Accepted Answer

A) True 
 B)False

Question 19

Bodner Corporation purchased an asset costing $475,000. The asset has a 4 year life, no salvage value, and is depreciated on a straight line method. During the past four years, Bodner posted net
Income of $30,000, $25,000, $20,000 and $15,000. Given the following information, calculate the
Company's average accounting return over the past four years.

Accepted Answer

A)  20.15% 
B)  18.32% 
C)  16.45% 
D)  14.51% 
E)  12.63% 
A)  20.15% 
B)  18.32% 
C)  16.45% 
D)  14.51% 
E)  12.63%

Question 20

As the required rate of return increases, the:

Accepted Answer

A)  Net present value increases. 
B)  Payback period decreases. 
C)  Proﬁtability index decreases. 
D)  Discounted payback period decreases. 
E)  Average accounting return decreases. 
A)  Net present value increases. 
B)  Payback period decreases. 
C)  Proﬁtability index decreases. 
D)  Discounted payback period decreases. 
E)  Average accounting return decreases.

Exam 9: Net Present Value and Other Investment Criteria

All else constant, the net present value of a project increases when:

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. If the Company's required rate of return is 10%, determine the discounted payback for the project.

In actual practice, managers frequently use the AAR because the information is so readily available.

An investment has the following cash ﬂows. Should the project be accepted if it has been assigned a required return of 14 percent? Why or why not?

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

Which of the following is NOT correct?

Payback is frequently used to analyze independent projects because:

You are considering a project that costs $300 and has expected cash ﬂows of $110, $121, and $133.10 over the next three years. If the appropriate discount rate for the project's cash ﬂows is 10%, What is the net present value of this project?

You have a choice between two mutually exclusive investments. If you require a 14% return, which investment should you choose?

A negative net present value indicates that:

Projects should be accepted when the proﬁtability index is less than 1.

Suppose a project costs $300 and produces cash ﬂows of $100 over each of the following six years. What is the IRR of the project?

Consider a project with an initial investment and positive future cash ﬂows. As the discount rate is increased the ___________________.

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the proﬁtability index will be greater than 1.0.

Graphing the crossover point helps explain:

You are analyzing a project and have prepared the following data: Based on the payback period of _____ years for this project, you should _____ the project.

A 30 year project is estimated to cost $35 million and provide annual cash ﬂows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the Company's required rate of return is 10%, determine the NPV.

The initial cost of an investment is not an element in computing the internal rate of return method.

As the required rate of return increases, the:

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

You are analyzing a project and have prepared the following data: Based on the payback period of _ years for this project, you should _ the project.