Question 1

The average accounting return (AAR) rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its AAR is less than a target AAR. 
B)  An investment is acceptable if its AAR exceeds a target AAR. 
C)  An investment is acceptable if its AAR exceeds the ﬁrm's return on equity (RO
E) . 
D)  An investment is acceptable if its AAR is less than the ﬁrm's return on assets (RO
A) . 
A)  An investment is acceptable if its AAR is less than a target AAR. 
B)  An investment is acceptable if its AAR exceeds a target AAR. 
C)  An investment is acceptable if its AAR exceeds the ﬁrm's return on equity (RO
E) . 
D)  An investment is acceptable if its AAR is less than the ﬁrm's return on assets (RO
A) .

Question 2

_______________ is the focus of corporate ﬁnance as it is concerned with making the optimal choice between project alternatives.

Accepted Answer

A)  Capital budgeting. 
B)  Capital structure. 
C)  Payback period. 
D)  Short-term budgeting. 
E)  Capital Allocation. 
A)  Capital budgeting. 
B)  Capital structure. 
C)  Payback period. 
D)  Short-term budgeting. 
E)  Capital Allocation.

Question 3

What is the net present value of a project that has an initial cash outﬂow of $12,670 and the following cash inﬂows? The required return is 11.5 percent.

Accepted Answer

A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02 
A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02

Question 4

Roger is considering adding toys to his general store. He estimates that the cost of inventory will be $6,400. The remodeling expenses and shelving costs are estimated at $2,100. Toy sales are
Expected to produce net cash inﬂows of $1,400, $2,300, $3,100, and $2,000 over the next four
Years, respectively. Should Roger add toys to his store if he assigns a three-year payback period to
This project? Why or why not?

Accepted Answer

A)  No; The payback period is 3.55 years. 
B)  No; The payback period is 3.85 years. 
C)  Yes; The payback period is 2.55 years. 
D)  Yes; The payback period is 2.87 years. 
E)  Yes; The payback period is 3.13 years. 
A)  No; The payback period is 3.55 years. 
B)  No; The payback period is 3.85 years. 
C)  Yes; The payback period is 2.55 years. 
D)  Yes; The payback period is 2.87 years. 
E)  Yes; The payback period is 3.13 years.

Question 5

The internal rate of return (IRR) rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its IRR is exactly equal to its net present value (NPV). 
B)  An investment is acceptable if its IRR is exactly equal to zero. 
C)  An investment is acceptable if its IRR is less than the required return, or else it should be rejected. 
D)  An investment is acceptable if its IRR exceeds the required return, or else it should be rejected. 
E)  An investment is acceptable if its IRR exceeds its depreciation rate. 
A)  An investment is acceptable if its IRR is exactly equal to its net present value (NPV). 
B)  An investment is acceptable if its IRR is exactly equal to zero. 
C)  An investment is acceptable if its IRR is less than the required return, or else it should be rejected. 
D)  An investment is acceptable if its IRR exceeds the required return, or else it should be rejected. 
E)  An investment is acceptable if its IRR exceeds its depreciation rate.

Question 6

The average accounting rate of return:

Accepted Answer

A)  Is actually based more on ﬁnancial values than on accounting values. 
B)  Measures net income against the market value of a ﬁrm. 
C)  Is highly recommended by ﬁnancial professionals as one of the two best methodologies used in the analysis of independent projects. 
D)  Is the primary methodology used in analyzing independent projects. 
E)  Is similar to the return on assets ratio. 
A)  Is actually based more on ﬁnancial values than on accounting values. 
B)  Measures net income against the market value of a ﬁrm. 
C)  Is highly recommended by ﬁnancial professionals as one of the two best methodologies used in the analysis of independent projects. 
D)  Is the primary methodology used in analyzing independent projects. 
E)  Is similar to the return on assets ratio.

Question 7

Which of the following is a correct statement?

Accepted Answer

A)  The IRR is considered to be the most important project analysis technique. 
B)  The AAR is considered preferable to the PI. 
C)  Discounted payback analysis requires use of a discount rate. 
D)  It is reasonable to use IRR to analyze mutually exclusive investments. 
E)  Regular payback analysis is preferable to discounted payback analysis. 
A)  The IRR is considered to be the most important project analysis technique. 
B)  The AAR is considered preferable to the PI. 
C)  Discounted payback analysis requires use of a discount rate. 
D)  It is reasonable to use IRR to analyze mutually exclusive investments. 
E)  Regular payback analysis is preferable to discounted payback analysis.

Question 8

The internal rate of return for a project will increase if:

Accepted Answer

A)  The initial cost of the project can be reduced. 
B)  The total amount of the cash inﬂows is reduced. 
C)  Each cash inﬂow is moved such that it occurs one year later than originally projected. 
D)  The required rate of return is reduced. 
E)  The salvage value of the project is omitted from the analysis. 
A)  The initial cost of the project can be reduced. 
B)  The total amount of the cash inﬂows is reduced. 
C)  Each cash inﬂow is moved such that it occurs one year later than originally projected. 
D)  The required rate of return is reduced. 
E)  The salvage value of the project is omitted from the analysis.

Question 9

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 1.008 
B)  Yes; because the PI is .992 
C)  Yes; because the PI is .999 
D)  No; because the PI is 1.008 
E)  No; because the PI is .992 
A)  Yes; because the PI is 1.008 
B)  Yes; because the PI is .992 
C)  Yes; because the PI is .999 
D)  No; because the PI is 1.008 
E)  No; because the PI is .992

Question 10

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

Accepted Answer

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

Question 11

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
IRR of the project.

Accepted Answer

A)  19.19% 
B)  20.20% 
C)  21.21% 
D)  22.22% 
E)  23.23% 
A)  19.19% 
B)  20.20% 
C)  21.21% 
D)  22.22% 
E)  23.23%

Question 12

A ﬁnancial manager who consistently underestimates the ___________ will tend to incorrectly reject projects that would actually create wealth for the stockholders.

Accepted Answer

A)  Marginal income tax rate. 
B)  Initial cost of projects. 
C)  Future cash outlays associated with projects. 
D)  Required return on projects. 
E)  Future cash inﬂows associated with projects. 
A)  Marginal income tax rate. 
B)  Initial cost of projects. 
C)  Future cash outlays associated with projects. 
D)  Required return on projects. 
E)  Future cash inﬂows associated with projects.

Question 13

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash ﬂows beyond the cutoff date; (2)
Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV
Projects.

Accepted Answer

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

Question 14

Analysis using the proﬁtability index:

Accepted Answer

A)  Frequently conﬂicts with the accept and reject decisions generated by the application of the net present value rule. 
B)  Is useful as a decision tool when investment funds are limited. 
C)  Is useful when trying to determine which one of two mutually exclusive projects should be accepted. 
D)  Utilizes the same basic variables as those used in the average accounting return. 
E)  Produces results which typically are diﬃcult to comprehend or apply. 
A)  Frequently conﬂicts with the accept and reject decisions generated by the application of the net present value rule. 
B)  Is useful as a decision tool when investment funds are limited. 
C)  Is useful when trying to determine which one of two mutually exclusive projects should be accepted. 
D)  Utilizes the same basic variables as those used in the average accounting return. 
E)  Produces results which typically are diﬃcult to comprehend or apply.

Question 15

Project A has a ﬁve-year life and an initial cost of $2,000 and annual cash ﬂows of $700 per year. Project B also has a ﬁve-year life and an initial cost of $3,000 with annual cash ﬂows of $950 per
Year. Given this information, calculate the IRR cross-over rate.

Accepted Answer

A)  5.93% 
B)  6.93% 
C)  7.93% 
D)  8.93% 
E)  9.93% 
A)  5.93% 
B)  6.93% 
C)  7.93% 
D)  8.93% 
E)  9.93%

Question 16

The internal rate of return method of analysis may lead to incorrect decisions when comparing
mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  1.87 years; accept 
B)  2.87 years; accept 
C)  2.87 years; reject 
D)  3.13 years; reject 
E)  3.87 years; reject 
A)  1.87 years; accept 
B)  2.87 years; accept 
C)  2.87 years; reject 
D)  3.13 years; reject 
E)  3.87 years; reject

Question 18

If a project has a net present value equal to zero, then the project is expected to produce only the
minimally required cash inﬂows.

Accepted Answer

A) True 
 B)False

Question 19

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.

Accepted Answer

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

Question 20

You are considering the following two mutually exclusive projects with the following cash ﬂows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life
Of the project. Neither project has any salvage value.     You should accept Project _____ because its net present value exceeds that of the other project by
_____.

Accepted Answer

A)  A; $418.02 
B)  A; $897.13 
C)  B; $656.94 
D)  B; $778.11 
E)  B; $813.27 
A)  A; $418.02 
B)  A; $897.13 
C)  B; $656.94 
D)  B; $778.11 
E)  B; $813.27

Exam 9: Net Present Value and Other Investment Criteria

The average accounting return (AAR) rule can be best stated as:

_______________ is the focus of corporate ﬁnance as it is concerned with making the optimal choice between project alternatives.

What is the net present value of a project that has an initial cash outﬂow of $12,670 and the following cash inﬂows? The required return is 11.5 percent.

The internal rate of return (IRR) rule can be best stated as:

The average accounting rate of return:

Which of the following is a correct statement?

The internal rate of return for a project will increase if:

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?

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

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 IRR of the project.

A ﬁnancial manager who consistently underestimates the ___________ will tend to incorrectly reject projects that would actually create wealth for the stockholders.

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash ﬂows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV Projects.

Analysis using the proﬁtability index:

Project A has a ﬁve-year life and an initial cost of $2,000 and annual cash ﬂows of $700 per year. Project B also has a ﬁve-year life and an initial cost of $3,000 with annual cash ﬂows of $950 per Year. Given this information, calculate the IRR cross-over rate.

The internal rate of return method of analysis may lead to incorrect decisions when comparing mutually exclusive projects.

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

If a project has a net present value equal to zero, then the project is expected to produce only the minimally required cash inﬂows.

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.

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 _ for this project, you should _ the project.