Question 1

The average accounting return:

Accepted Answer

A)  Reﬂects the projected net effect of the cash ﬂows from a project on the overall ﬁrm. 
B)  Is comparable to the return on assets and thus provides a similar measure of performance. 
C)  Reﬂects the anticipated net impact of a project on the shareholders of the ﬁrm. 
D)  Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted. 
E)  Ignores all income produced by a project after an arbitrarily assigned cutoff point. 
A)  Reﬂects the projected net effect of the cash ﬂows from a project on the overall ﬁrm. 
B)  Is comparable to the return on assets and thus provides a similar measure of performance. 
C)  Reﬂects the anticipated net impact of a project on the shareholders of the ﬁrm. 
D)  Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted. 
E)  Ignores all income produced by a project after an arbitrarily assigned cutoff point.

Question 2

An investment's average net income divided by its average book value is the:

Accepted Answer

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

Question 3

Annmarie is considering a project which will produce cash inﬂows of $1,200 a year for 6 years. The project has a 15 percent required rate of return and an initial cost of $3,400. What is the discounted
Payback period?

Accepted Answer

A)  2.83 years 
B)  2.92 years 
C)  3.96 years 
D)  3.99 years 
E)  4.13 years 
A)  2.83 years 
B)  2.92 years 
C)  3.96 years 
D)  3.99 years 
E)  4.13 years

Question 4

The ﬁnal decision on which one of two mutually exclusive projects to accept ultimately depends upon the:

Accepted Answer

A)  Initial cost of each project. 
B)  Required discount rate. 
C)  Total cash inﬂows of each project. 
D)  Assigned payback period of each project. 
E)  Length of each project's life. 
A)  Initial cost of each project. 
B)  Required discount rate. 
C)  Total cash inﬂows of each project. 
D)  Assigned payback period of each project. 
E)  Length of each project's life.

Question 5

The average accounting rate of return is most similar to which one of the following ratios?

Accepted Answer

A)  Proﬁt margin. 
B)  Return on assets. 
C)  Return on equity. 
D)  Payout ratio. 
E)  Plowback ratio. 
A)  Proﬁt margin. 
B)  Return on assets. 
C)  Return on equity. 
D)  Payout ratio. 
E)  Plowback ratio.

Question 6

Which one of the following is a reason why managers may utilize more than one method when analyzing a project?

Accepted Answer

A)  To determine a guaranteed rate of return on a projected project. 
B)  To better understand the conditions under which the project can be successful. 
C)  To ensure that the projected cash ﬂows are accurate. 
D)  Because there are multiple methods of analysis with basically no associated disadvantages. 
E)  Because each of the ﬁve primary analytical methods is based on completely different data related to a proposed project. 
A)  To determine a guaranteed rate of return on a projected project. 
B)  To better understand the conditions under which the project can be successful. 
C)  To ensure that the projected cash ﬂows are accurate. 
D)  Because there are multiple methods of analysis with basically no associated disadvantages. 
E)  Because each of the ﬁve primary analytical methods is based on completely different data related to a proposed project.

Question 7

The discounted payback period of a project will decrease whenever the:

Accepted Answer

A)  Discount rate applied to the project is increased. 
B)  Initial cash outlay of the project is increased. 
C)  Time period of the project is increased. 
D)  Amount of each project cash ﬂow is increased. 
E)  Costs of the ﬁxed assets utilized in the project increase. 
A)  Discount rate applied to the project is increased. 
B)  Initial cash outlay of the project is increased. 
C)  Time period of the project is increased. 
D)  Amount of each project cash ﬂow is increased. 
E)  Costs of the ﬁxed assets utilized in the project increase.

Question 8

You are considering two independent projects with the following cash ﬂows. The required return for both projects is 12 percent. You should accept:

Accepted Answer

A)  Project A only. 
B)  Project B only. 
C)  Both projects. 
D)  Neither project. 
E)  Whichever project you prefer as their values are equal today. 
A)  Project A only. 
B)  Project B only. 
C)  Both projects. 
D)  Neither project. 
E)  Whichever project you prefer as their values are equal today.

Question 9

ABC Corporation purchased an asset costing $450,000. The asset has an 8 year life, a $50,000 salvage value, and is depreciated on a straight line method. During the past four years, ABC posted
Net income of $98,000, $112,000, $134,000 and $122,000. Given the following information,
Calculate the company's average accounting return over the past four years.

Accepted Answer

A)  35.85% 
B)  30.15% 
C)  25.85% 
D)  20.15% 
E)  15.85% 
A)  35.85% 
B)  30.15% 
C)  25.85% 
D)  20.15% 
E)  15.85%

Question 10

If a project has a net present value equal to zero, then the present value of the cash inﬂows
exceeds the initial cost of the project.

Accepted Answer

A) True 
 B)False

Question 11

If ﬁnancial managers only invest in projects that have a proﬁtability index greater than one, then
share price will be maximized.

Accepted Answer

A) True 
 B)False

Question 12

For most projects, the average accounting return (AAR) should be less than the IRR.

Accepted Answer

A) True 
 B)False

Question 13

The internal rate of return will tell you the _____ which can be applied to a project while still creating a situation where the project is acceptable.

Accepted Answer

A)  minimum discount rate 
B)  maximum discount rate 
C)  minimum period of time 
D)  maximum period of time 
E)  accounting rate 
A)  minimum discount rate 
B)  maximum discount rate 
C)  minimum period of time 
D)  maximum period of time 
E)  accounting rate

Question 14

Net present value _____________.

Accepted Answer

A)  Is equal to the initial investment in a project 
B)  Compares project cost to the present value of the project beneﬁts 
C)  Is equal to zero when the discount rate used is less than the IRR 
D)  Is simpliﬁed by the fact that future cash ﬂows are easy to estimate 
E)  Requires the ﬁrm set an arbitrary cutoff point for determining whether an investment is acceptable 
A)  Is equal to the initial investment in a project 
B)  Compares project cost to the present value of the project beneﬁts 
C)  Is equal to zero when the discount rate used is less than the IRR 
D)  Is simpliﬁed by the fact that future cash ﬂows are easy to estimate 
E)  Requires the ﬁrm set an arbitrary cutoff point for determining whether an investment is acceptable

Question 15

Ilona is considering two projects both of which have an initial cost of $17,000 and total cash inﬂows of $21,000. The cash inﬂows of project A are $6,000, $5,000, $5,000, and $5,000 over the next
Four years, respectively. The cash inﬂows for project B are $9,000, $7,000, $3,000 and $2,000 over
The next four years, respectively. Which one of the following statements is correct if Ilona requires a
12 percent rate of return and has a required discounted payback period of 3.5 years?

Accepted Answer

A)  Both projects should be accepted. 
B)  Neither project ever pays back. 
C)  Project A should be accepted and Project B should be rejected. 
D)  Project A should be rejected and Project B should be accepted. 
E)  Both projects should be rejected even though Project B does pay back. 
A)  Both projects should be accepted. 
B)  Neither project ever pays back. 
C)  Project A should be accepted and Project B should be rejected. 
D)  Project A should be rejected and Project B should be accepted. 
E)  Both projects should be rejected even though Project B does pay back.

Question 16

You are comparing two mutually exclusive projects. The crossover point is 9 percent. You determine
that you should accept project A if the required return is 6 percent. This implies that you should
always accept project A anytime the discount rate is less than 9 percent.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  Yes; because the PI is .98 
B)  Yes; because the PI is 1.03 
C)  No; because the PI is .95 
D)  No; because the PI is .98 
E)  No; because the PI is 1.03 
A)  Yes; because the PI is .98 
B)  Yes; because the PI is 1.03 
C)  No; because the PI is .95 
D)  No; because the PI is .98 
E)  No; because the PI is 1.03

Question 18

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

Accepted Answer

A)  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. 
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 amount of proﬁt that can be expected based on an investment made. 
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 length of time required for an investment's discounted cash ﬂows to equal its initial cost. 
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 amount of proﬁt that can be expected based on an investment made. 
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 19

Project A has a ﬁve-year life and an initial cost of $1,600 and annual cash ﬂows of $600 per year. Project B also has a ﬁve-year life and an initial cost of $2,500 with annual cash ﬂows of $850 per
Year. Given this information, calculate the NPV that the IRR cross-over rate provides.

Accepted Answer

A)  $400 
B)  $560 
C)  $600 
D)  $700 
E)  $800 
A)  $400 
B)  $560 
C)  $600 
D)  $700 
E)  $800

Question 20

The use of the proﬁtability index could lead to incorrect decisions in comparing mutually exclusive
investments.

Accepted Answer

A) True 
 B)False

Exam 9: Net Present Value and Other Investment Criteria

The average accounting return:

An investment's average net income divided by its average book value is the:

Annmarie is considering a project which will produce cash inﬂows of $1,200 a year for 6 years. The project has a 15 percent required rate of return and an initial cost of $3,400. What is the discounted Payback period?

The ﬁnal decision on which one of two mutually exclusive projects to accept ultimately depends upon the:

The average accounting rate of return is most similar to which one of the following ratios?

Which one of the following is a reason why managers may utilize more than one method when analyzing a project?

The discounted payback period of a project will decrease whenever the:

You are considering two independent projects with the following cash ﬂows. The required return for both projects is 12 percent. You should accept:

If a project has a net present value equal to zero, then the present value of the cash inﬂows exceeds the initial cost of the project.

If ﬁnancial managers only invest in projects that have a proﬁtability index greater than one, then share price will be maximized.

For most projects, the average accounting return (AAR) should be less than the IRR.

The internal rate of return will tell you the _____ which can be applied to a project while still creating a situation where the project is acceptable.

Net present value _____________.

You are comparing two mutually exclusive projects. The crossover point is 9 percent. You determine that you should accept project A if the required return is 6 percent. This implies that you should always accept project A anytime the discount rate is less than 9 percent.

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

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

Project A has a ﬁve-year life and an initial cost of $1,600 and annual cash ﬂows of $600 per year. Project B also has a ﬁve-year life and an initial cost of $2,500 with annual cash ﬂows of $850 per Year. Given this information, calculate the NPV that the IRR cross-over rate provides.

The use of the proﬁtability index could lead to incorrect decisions in comparing mutually exclusive investments.

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