Question 1

If you want to review a project from a beneﬁt-cost perspective, you should use the _____ method of analysis.

Accepted Answer

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

Question 2

Draw a graph that illustrates two mutually exclusive investments, A and B, with a crossover rate of
return equal to 10%, and with A having the higher NPV at a discount rate of zero percent. Explain
the graph, including under which conditions project A or project B would be chosen using NPV and
then using IRR.

Accepted Answer

The studen

Question 3

An investment is acceptable if its average accounting return (AAR):

Accepted Answer

A)  Is less than a target AAR. 
B)  Exceeds a target AAR. 
C)  Exceeds the ﬁrm's return on equity (RO
E) . 
D)  Is less than the ﬁrm's return on assets (RO
A) . 
E)  Is equal to zero and only when it is equal to zero. 
A)  Is less than a target AAR. 
B)  Exceeds a target AAR. 
C)  Exceeds the ﬁrm's return on equity (RO
E) . 
D)  Is less than the ﬁrm's return on assets (RO
A) . 
E)  Is equal to zero and only when it is equal to zero.

Question 4

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate
The NPV of the project.

Accepted Answer

A)  $0.50 million 
B)  $0.70 million 
C)  $0.87 million 
D)  $1.00 million 
E)  $1.10 million 
A)  $0.50 million 
B)  $0.70 million 
C)  $0.87 million 
D)  $1.00 million 
E)  $1.10 million

Question 5

A project costs $12,500 to initiate. Cash ﬂows are estimated as $2,500 a year for the ﬁrst two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for
This project is _____ and the internal rate of return is _________ the discount rate.

Accepted Answer

A)  -$2,138.52; more than 
B)  -$2,138.52; less than 
C)  $1,800.00; more than 
D)  $1,800.00; less than 
E)  $2,138.52; less than 
A)  -$2,138.52; more than 
B)  -$2,138.52; less than 
C)  $1,800.00; more than 
D)  $1,800.00; less than 
E)  $2,138.52; less than

Question 6

When the present value of the cash inﬂows exceeds the initial cost of a project, then the project should be:

Accepted Answer

A)  Accepted because the internal rate of return is positive. 
B)  Accepted because the proﬁtability index is greater than 1. 
C)  Accepted because the proﬁtability index is negative. 
D)  Rejected because the internal rate of return is negative. 
E)  Rejected because the net present value is negative. 
A)  Accepted because the internal rate of return is positive. 
B)  Accepted because the proﬁtability index is greater than 1. 
C)  Accepted because the proﬁtability index is negative. 
D)  Rejected because the internal rate of return is negative. 
E)  Rejected because the net present value is negative.

Question 7

AAR and payback use an arbitrary cutoff number in their decision rules.

Accepted Answer

A) True 
 B)False

Question 8

You are considering the following projects but have limited funds to invest and can't take them all. Using the proﬁtability index, rank the projects in the order in which you would accept them. That is,
Rank them from best to worst.

Accepted Answer

A)  A, BC 
B)  B, CA 
C)  C, AB 
D)  C, BA 
E)  A, CB 
A)  A, BC 
B)  B, CA 
C)  C, AB 
D)  C, BA 
E)  A, CB

Question 9

A 50- year project has a cost of $500,000 and has annual cash ﬂows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the
Discounted payback of the project.

Accepted Answer

A)  9.95years 
B)  8.85years 
C)  7.75years 
D)  6.65years 
E)  5.55years 
A)  9.95years 
B)  8.85years 
C)  7.75years 
D)  6.65years 
E)  5.55years

Question 10

The internal rate of return method of analysis should not be used for comparing two mutually
exclusive projects of similar size.

Accepted Answer

A) True 
 B)False

Question 11

The discounted payback rule may cause:

Accepted Answer

A)  Some positive net present value projects to be rejected. 
B)  The most liquid projects to be rejected in favor of less liquid projects. 
C)  Projects to be incorrectly accepted due to ignoring the time value of money. 
D)  Projects with negative net present values to be accepted. 
E)  Some projects to be accepted which would otherwise be rejected under the payback rule. 
A)  Some positive net present value projects to be rejected. 
B)  The most liquid projects to be rejected in favor of less liquid projects. 
C)  Projects to be incorrectly accepted due to ignoring the time value of money. 
D)  Projects with negative net present values to be accepted. 
E)  Some projects to be accepted which would otherwise be rejected under the payback rule.

Question 12

Net present value is a highly valued decision-making tool because:

Accepted Answer

A)  It only includes information which is known with certainty. 
B)  It is computed using the internal rate of return. 
C)  It can be applied to either independent or mutually exclusive projects. 
D)  It reveals the rate of return which investors will earn on average over the lifetime of the project. 
E)  It is affected by the magnitude rather than the timing of a project's cash ﬂows. 
A)  It only includes information which is known with certainty. 
B)  It is computed using the internal rate of return. 
C)  It can be applied to either independent or mutually exclusive projects. 
D)  It reveals the rate of return which investors will earn on average over the lifetime of the project. 
E)  It is affected by the magnitude rather than the timing of a project's cash ﬂows.

Question 13

The payback method assumes that the cash ﬂows:

Accepted Answer

A)  Are an annuity stream. 
B)  Occur evenly throughout the year. 
C)  Occur at the end of the year. 
D)  Are discounted at the IRR rate. 
E)  Are calculated with the consideration of the time value of money. 
A)  Are an annuity stream. 
B)  Occur evenly throughout the year. 
C)  Occur at the end of the year. 
D)  Are discounted at the IRR rate. 
E)  Are calculated with the consideration of the time value of money.

Question 14

What is the crossover rate for these two projects?

Accepted Answer

A)  12.2% 
B)  14.0% 
C)  15.4% 
D)  18.3% 
E)  19.1% 
A)  12.2% 
B)  14.0% 
C)  15.4% 
D)  18.3% 
E)  19.1%

Question 15

Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton
Posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information,
Calculate the company's average accounting return over the past four years.

Accepted Answer

A)  5.12% 
B)  6.24% 
C)  7.36% 
D)  8.48% 
E)  9.60% 
A)  5.12% 
B)  6.24% 
C)  7.36% 
D)  8.48% 
E)  9.60%

Question 16

In actual practice, managers frequently use the IRR because the results are easy to communicate
and understand.

Accepted Answer

A) True 
 B)False

Question 17

The use of either the internal rate of return or the proﬁtability index could lead to incorrect
decisions when comparing mutually exclusive investments.

Accepted Answer

A) True 
 B)False

Question 18

What is the internal rate of return for a project with the following cash ﬂows?

Accepted Answer

A)  11.9 percent 
B)  12.1 percent 
C)  12.3 percent 
D)  12.5 percent 
E)  12.7 percent 
A)  11.9 percent 
B)  12.1 percent 
C)  12.3 percent 
D)  12.5 percent 
E)  12.7 percent

Question 19

A project has an initial cost of $47,500 and produces cash inﬂows of $21,200, $24,800, and $21,500 over the next three years, respectively. What is the discounted payback period if the
Required rate of return is 14 percent?

Accepted Answer

A)  2.07 years 
B)  2.13 years 
C)  2.46 years 
D)  2.68 years 
E)  2.74 years 
A)  2.07 years 
B)  2.13 years 
C)  2.46 years 
D)  2.68 years 
E)  2.74 years

Question 20

Desiree, Inc. is considering adding a new product with a start-up cost of $540,000. This cost will be depreciated over 3 years, which is the estimated life of the product. Desiree has a 34% marginal tax
Rate. The net income for each of the three years is estimated at $15,000, $45,000, and $80,000.
What is the average accounting return for the new product?

Accepted Answer

A)  8.64% 
B)  11.30% 
C)  17.28% 
D)  21.00% 
E)  25.93% 
A)  8.64% 
B)  11.30% 
C)  17.28% 
D)  21.00% 
E)  25.93%

Exam 9: Net Present Value and Other Investment Criteria

If you want to review a project from a beneﬁt-cost perspective, you should use the _____ method of analysis.

An investment is acceptable if its average accounting return (AAR):

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate The NPV of the project.

A project costs $12,500 to initiate. Cash ﬂows are estimated as $2,500 a year for the ﬁrst two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for This project is _____ and the internal rate of return is _________ the discount rate.

When the present value of the cash inﬂows exceeds the initial cost of a project, then the project should be:

AAR and payback use an arbitrary cutoff number in their decision rules.

You are considering the following projects but have limited funds to invest and can't take them all. Using the proﬁtability index, rank the projects in the order in which you would accept them. That is, Rank them from best to worst.

A 50- year project has a cost of $500,000 and has annual cash ﬂows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the Discounted payback of the project.

The internal rate of return method of analysis should not be used for comparing two mutually exclusive projects of similar size.

The discounted payback rule may cause:

Net present value is a highly valued decision-making tool because:

The payback method assumes that the cash ﬂows:

What is the crossover rate for these two projects?

In actual practice, managers frequently use the IRR because the results are easy to communicate and understand.

The use of either the internal rate of return or the proﬁtability index could lead to incorrect decisions when comparing mutually exclusive investments.

What is the internal rate of return for a project with the following cash ﬂows?

A project has an initial cost of $47,500 and produces cash inﬂows of $21,200, $24,800, and $21,500 over the next three years, respectively. What is the discounted payback period if the Required rate of return is 14 percent?

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

A project costs $12,500 to initiate. Cash ﬂows are estimated as $2,500 a year for the ﬁrst two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for This project is _ and the internal rate of return is _____ the discount rate.