Question 1

Without using formulas, provide a deﬁnition of payback period.

Accepted Answer

A)  A project analysis tool that determines the amount of time required for an investment to generate cash ﬂows to recover its initial cost. 
B)  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. 
C)  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. 
D)  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. 
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 determines the amount of time required for an investment to generate cash ﬂows to recover its initial cost. 
B)  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. 
C)  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. 
D)  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. 
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 2

List and identify the discounted cash ﬂow (DCF) and the non-discounted cash ﬂow capital
budgeting techniques. If you were asked to evaluate a project using one of each, which techniques
would you use? Why?

Accepted Answer

The purpose here is to test the student'

Question 3

Kim Lee is analyzing two projects. The ﬁrst requires a $1,200 initial investment and returns $600 a year for four years. The second project requires a $1,500 initial investment and returns $700 a year
For four years. What is the crossover point for these two projects?

Accepted Answer

A)  4.25% 
B)  6.37% 
C)  8.14% 
D)  12.59% 
E)  The crossover point cannot be computed based on the information provided. 
A)  4.25% 
B)  6.37% 
C)  8.14% 
D)  12.59% 
E)  The crossover point cannot be computed based on the information provided.

Question 4

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Accepted Answer

A)  6.02 percent 
B)  7.23 percent 
C)  10.92 percent 
D)  12.21 percent 
E)  14.47 percent 
A)  6.02 percent 
B)  7.23 percent 
C)  10.92 percent 
D)  12.21 percent 
E)  14.47 percent

Question 5

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.
Suppose the pawn shop has more customers than funds. Which capital budgeting technique would
Allow it to rank potential customers in order to maximize current wealth?

Accepted Answer

A)  AAR 
B)  Payback period 
C)  Proﬁtability index 
D)  NPV 
E)  Discounted payback 
A)  AAR 
B)  Payback period 
C)  Proﬁtability index 
D)  NPV 
E)  Discounted payback

Question 6

For a project with an initial investment of $40,000 and cash inﬂows of $11,000 a year for ﬁve years, calculate NPV given a required return of 11.65%.

Accepted Answer

A)  -$1,205 
B)  -$1,103 
C)  -$1.23 
D)  $567 
E)  $1,218 
A)  -$1,205 
B)  -$1,103 
C)  -$1.23 
D)  $567 
E)  $1,218

Question 7

A project has an initial investment of $10,000, with $3,500 annual inﬂows for each of the subsequent four years. If the required return is 15%, what is the NPV?

Accepted Answer

A)  ($435.26) 
B)  ($32.48) 
C)  ($7.58) 
D)  $4.63 
E)  $5.49 
A)  ($435.26) 
B)  ($32.48) 
C)  ($7.58) 
D)  $4.63 
E)  $5.49

Question 8

The discount rate that makes the net present value of investment exactly equal to zero is the:

Accepted Answer

A)  Payback period. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Proﬁtability index. 
E)  Discounted payback period. 
A)  Payback period. 
B)  Internal rate of return. 
C)  Average accounting return. 
D)  Proﬁtability index. 
E)  Discounted payback period.

Question 9

When comparing the payback and discounted payback from a ﬁnancial point of view, the
discounted payback method is preferred over the payback method.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following decision rules is best for evaluating projects for which cash ﬂows beyond a speciﬁed point in time, and the time value of money, can both be ignored?

Accepted Answer

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

Question 11

Net present value is affected by the timing of each and every cash ﬂow related to a project.

Accepted Answer

A) True 
 B)False

Question 12

_________ quantiﬁes, in dollar terms, how stockholder wealth will be affected by undertaking a project.

Accepted Answer

A)  Discounted payback analysis. 
B)  The average accounting return. 
C)  The internal rate of return. 
D)  Net present value. 
E)  The proﬁtability index. 
A)  Discounted payback analysis. 
B)  The average accounting return. 
C)  The internal rate of return. 
D)  Net present value. 
E)  The proﬁtability index.

Question 13

The internal rate of return (IRR) is the rate that causes the net present value of a project to exactly
equal zero.

Accepted Answer

A) True 
 B)False

Question 14

A project which has an initial cash outlay, with all future cash ﬂows positive, is said to be:

Accepted Answer

A)  Independent. 
B)  Conventional. 
C)  Mutually exclusive. 
D)  Value-creating. 
E)  Short term. 
A)  Independent. 
B)  Conventional. 
C)  Mutually exclusive. 
D)  Value-creating. 
E)  Short term.

Question 15

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

Accepted Answer

A)  0.87; accept 
B)  0.87; reject 
C)  1.02; accept 
D)  1.02; reject 
E)  1.08; reject 
A)  0.87; accept 
B)  0.87; reject 
C)  1.02; accept 
D)  1.02; reject 
E)  1.08; reject

Question 16

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 proﬁtability index of the project.

Accepted Answer

A)  1.74 
B)  1.50 
C)  1.25 
D)  1.00 
E)  0.75 
A)  1.74 
B)  1.50 
C)  1.25 
D)  1.00 
E)  0.75

Question 17

Generally, the most diﬃcult part of utilizing the net present value concept is:

Accepted Answer

A)  Determining the initial cash outﬂow required to start a project. 
B)  Computing the net present value once the discount rate and cash ﬂows are determined. 
C)  Determining whether the discount rate used is higher or lower than the internal rate of return. 
D)  Estimating the future cash ﬂows given the initial investment in the project. 
E)  Making the accept/reject decision once the net present value is computed. 
A)  Determining the initial cash outﬂow required to start a project. 
B)  Computing the net present value once the discount rate and cash ﬂows are determined. 
C)  Determining whether the discount rate used is higher or lower than the internal rate of return. 
D)  Estimating the future cash ﬂows given the initial investment in the project. 
E)  Making the accept/reject decision once the net present value is computed.

Question 18

Calculate the NPV of a 20-year project with a cost of $400,000 and annual cash ﬂows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Accepted Answer

A)  ($33,547) 
B)  ($18,547) 
C)  $0 
D)  $18,547 
E)  $33,547 
A)  ($33,547) 
B)  ($18,547) 
C)  $0 
D)  $18,547 
E)  $33,547

Question 19

The difference between the market 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 20

Without using formulas, provide a deﬁnition of discounted payback period.

Accepted Answer

A project analysis tool that m

Exam 9: Net Present Value and Other Investment Criteria

Without using formulas, provide a deﬁnition of payback period.

List and identify the discounted cash ﬂow (DCF) and the non-discounted cash ﬂow capital budgeting techniques. If you were asked to evaluate a project using one of each, which techniques would you use? Why?

Kim Lee is analyzing two projects. The ﬁrst requires a $1,200 initial investment and returns $600 a year for four years. The second project requires a $1,500 initial investment and returns $700 a year For four years. What is the crossover point for these two projects?

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

For a project with an initial investment of $40,000 and cash inﬂows of $11,000 a year for ﬁve years, calculate NPV given a required return of 11.65%.

A project has an initial investment of $10,000, with $3,500 annual inﬂows for each of the subsequent four years. If the required return is 15%, what is the NPV?

The discount rate that makes the net present value of investment exactly equal to zero is the:

When comparing the payback and discounted payback from a ﬁnancial point of view, the discounted payback method is preferred over the payback method.

Which of the following decision rules is best for evaluating projects for which cash ﬂows beyond a speciﬁed point in time, and the time value of money, can both be ignored?

Net present value is affected by the timing of each and every cash ﬂow related to a project.

_________ quantiﬁes, in dollar terms, how stockholder wealth will be affected by undertaking a project.

The internal rate of return (IRR) is the rate that causes the net present value of a project to exactly equal zero.

A project which has an initial cash outlay, with all future cash ﬂows positive, is said to be:

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

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 proﬁtability index of the project.

Generally, the most diﬃcult part of utilizing the net present value concept is:

Calculate the NPV of a 20-year project with a cost of $400,000 and annual cash ﬂows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

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

Without using formulas, provide a deﬁnition of discounted payback period.

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 proﬁtability index of _ for this project, you should _ the project.