Question 1

The internal rate of return method of analysis should not be used for comparing two independent
projects of differing sizes.

Accepted Answer

A) True 
 B)False

Question 2

Without using formulas, provide a deﬁnition of net present value proﬁle.

Accepted Answer

A)  A graphical representation of the relationship between varying rates of return and the corresponding NPV value. 
B)  A situation whereby a choice has to be made between two or more projects, and choosing multiple projects is not an option 
C)  The rate of return provided by a project. The value is compared with a company's rate of return to determine viability of a project. 
D)  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. 
E)  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. 
A)  A graphical representation of the relationship between varying rates of return and the corresponding NPV value. 
B)  A situation whereby a choice has to be made between two or more projects, and choosing multiple projects is not an option 
C)  The rate of return provided by a project. The value is compared with a company's rate of return to determine viability of a project. 
D)  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. 
E)  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.

Question 3

NPV and IRR can lead to different decisions in situations where project cash ﬂow are conventional.

Accepted Answer

A) True 
 B)False

Question 4

A manager will prefer the IRR rule over the NPV rule if the manager:

Accepted Answer

A)  Prefers to talk in terms of rates of return. 
B)  Can accurately forecast future cash ﬂows. 
C)  Dislikes the discounted payback analysis. 
D)  Also prefers use of payback analysis. 
E)  Is considering mutually exclusive projects. 
A)  Prefers to talk in terms of rates of return. 
B)  Can accurately forecast future cash ﬂows. 
C)  Dislikes the discounted payback analysis. 
D)  Also prefers use of payback analysis. 
E)  Is considering mutually exclusive projects.

Question 5

If a ﬁrm uses the _____________ as an investment criterion, one of the risks it takes is that it may ignore some future cash ﬂows.

Accepted Answer

A)  AAR 
B)  NPV 
C)  IRR 
D)  Proﬁtability. index 
E)  Payback rule 
A)  AAR 
B)  NPV 
C)  IRR 
D)  Proﬁtability. index 
E)  Payback rule

Question 6

An investment has the following cash ﬂows. Should the project be accepted if it has been assigned a required return of 14.5 percent? Why or why not?

Accepted Answer

A)  Yes; because the IRR is 14.8 percent. 
B)  Yes; because the IRR is 14.3 percent. 
C)  Yes; because the IRR is 13.9 percent. 
D)  No; because the IRR is 13.9 percent. 
E)  No; because the IRR is 14.3 percent. 
A)  Yes; because the IRR is 14.8 percent. 
B)  Yes; because the IRR is 14.3 percent. 
C)  Yes; because the IRR is 13.9 percent. 
D)  No; because the IRR is 13.9 percent. 
E)  No; because the IRR is 14.3 percent.

Question 7

The internal rate of return (IRR) is often preferred by managers over the net present value (NPV) because the IRR:

Accepted Answer

A)  Is more reliable given unconventional cash ﬂows. 
B)  Is the discount rate that maximizes net proﬁts. 
C)  Is contingent upon the current market rates of return. 
D)  Reveals the discount rate that maximizes the net present value. 
E)  Is expressed as a rate while the NPV is expressed in dollar terms. 
A)  Is more reliable given unconventional cash ﬂows. 
B)  Is the discount rate that maximizes net proﬁts. 
C)  Is contingent upon the current market rates of return. 
D)  Reveals the discount rate that maximizes the net present value. 
E)  Is expressed as a rate while the NPV is expressed in dollar terms.

Question 8

The internal rate of return should:

Accepted Answer

A)  Not be used for ranking mutually exclusive projects. 
B)  Only be applied to small projects. 
C)  Be relied upon more heavily than the net present value. 
D)  Always result in the same decision as discounted payback. 
E)  Lead to correct decisions when comparing mutually exclusive projects. 
A)  Not be used for ranking mutually exclusive projects. 
B)  Only be applied to small projects. 
C)  Be relied upon more heavily than the net present value. 
D)  Always result in the same decision as discounted payback. 
E)  Lead to correct decisions when comparing mutually exclusive projects.

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
Proﬁtability index of the project.

Accepted Answer

A)  1.76 
B)  2.06 
C)  2.16 
D)  2.46 
E)  2.76 
A)  1.76 
B)  2.06 
C)  2.16 
D)  2.46 
E)  2.76

Question 10

Which of the following is true about using discounted payback analysis for projects which have only positive cash ﬂows after the initial outlay and for which the discount rate is positive?

Accepted Answer

A)  Discounted payback is better than simple payback because in simple payback analysis the cutoff payback period is arbitrarily set by management 
B)  Any project that fails to pay back at all on a discounted basis must have a positive NPV 
C)  When comparing two projects, the one with shorter payback period on a discounted basis will have a larger NPV 
D)  Discounted payback is much simpler to calculate than regular payback 
E)  The discounted payback period will be longer than the regular payback period 
A)  Discounted payback is better than simple payback because in simple payback analysis the cutoff payback period is arbitrarily set by management 
B)  Any project that fails to pay back at all on a discounted basis must have a positive NPV 
C)  When comparing two projects, the one with shorter payback period on a discounted basis will have a larger NPV 
D)  Discounted payback is much simpler to calculate than regular payback 
E)  The discounted payback period will be longer than the regular payback period

Question 11

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for four years while investment B pays $30,000 a year for ﬁve years. If your
Required return is 13%, which should you choose?

Accepted Answer

A)  A, because the pays back sooner. 
B)  A, because the IRR exceeds 13%. 
C)  A, because the project has a higher IRR. 
D)  B, because the IRR exceeds 13%. 
E)  B, because it has a higher NPV. 
A)  A, because the pays back sooner. 
B)  A, because the IRR exceeds 13%. 
C)  A, because the project has a higher IRR. 
D)  B, because the IRR exceeds 13%. 
E)  B, because it has a higher NPV.

Question 12

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 that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what
Is the NPV of this deal?

Accepted Answer

A)  $44.11 
B)  $111.01 
C)  $226.17 
D)  $261.37 
E)  $292.01 
A)  $44.11 
B)  $111.01 
C)  $226.17 
D)  $261.37 
E)  $292.01

Question 13

Tim is considering two projects, both of which have an initial cost of $12,000 and total cash inﬂows
of $15,000. The cash inﬂows of project A are $1,000, $2,000, $4,000, and $8,000 over the next
four years, respectively. The cash inﬂows for project B are $8,000, $4,000, $2,000 and $1,000 over
the next four years, respectively. Which one of the following statements is correct if Tim requires a
10 percent rate of return and has a required discounted payback period of 3 years? Given this
information, Tim should accept project A because it has a payback period of 2.65 years.

Accepted Answer

A) True 
 B)False

Question 14

Your required return is 15%. Should you accept a project with the following cash ﬂows?

Accepted Answer

A)  No, because the IRR is 13.9%. 
B)  No, because the IRR is 14.7%. 
C)  Yes, because the IRR is 16.2%. 
D)  Yes, because the IRR is 17.2%. 
E)  Yes, because the IRR is 19.2%. 
A)  No, because the IRR is 13.9%. 
B)  No, because the IRR is 14.7%. 
C)  Yes, because the IRR is 16.2%. 
D)  Yes, because the IRR is 17.2%. 
E)  Yes, because the IRR is 19.2%.

Question 15

Use the following mutually exclusive investment cash ﬂows for the question(s) below:   If the discount rate is 14%, using proﬁtability index which of the following is true?

Accepted Answer

A)  The PI of project A is less than 1.0 
B)  The PI of project B is less than 1.0 
C)  Based on the PI, project A is preferable 
D)  Both projects would be rejected based on the PI criterion 
E)  Based on the two PI's, it is obvious the IRR for both projects is less than 14% 
A)  The PI of project A is less than 1.0 
B)  The PI of project B is less than 1.0 
C)  Based on the PI, project A is preferable 
D)  Both projects would be rejected based on the PI criterion 
E)  Based on the two PI's, it is obvious the IRR for both projects is less than 14%

Question 16

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inﬂows are $550, $970, $2,600, and $500 a year over the next four years,
Respectively?

Accepted Answer

A)  2.04 years 
B)  2.36 years 
C)  2.89 years 
D)  3.04 years 
E)  3.36 years 
A)  2.04 years 
B)  2.36 years 
C)  2.89 years 
D)  3.04 years 
E)  3.36 years

Question 17

IRR uses an arbitrary cutoff number in its decision rule.

Accepted Answer

A) True 
 B)False

Question 18

Martha's Cupboards just purchased $172,500 of new equipment. The equipment is expected to increase the net income of the ﬁrm by $15,000, $35,000, $25,000, and $10,000 a year in each of
The next four years. Martha's uses straight-line depreciation over the projected life of each project.
What is the average accounting rate of return on this equipment?

Accepted Answer

A)  5.90% 
B)  12.32% 
C)  18.37% 
D)  24.64% 
E)  49.28% 
A)  5.90% 
B)  12.32% 
C)  18.37% 
D)  24.64% 
E)  49.28%

Question 19

Your ﬁrm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labour to operate, and another that is manual, requiring a
Signiﬁcant amount of labour. This is an example of a decision involving ______________.

Accepted Answer

A)  Independent projects. 
B)  Working capital projects. 
C)  Positive NPV projects. 
D)  Crossover projects. 
E)  Mutually exclusive projects. 
A)  Independent projects. 
B)  Working capital projects. 
C)  Positive NPV projects. 
D)  Crossover projects. 
E)  Mutually exclusive projects.

Question 20

The length of time needed to recover the initial investment once time value of money is considered is called the:

Accepted Answer

A)  Discounted payback period. 
B)  Average accounting return period. 
C)  Discounted net present value period. 
D)  Payback period. 
E)  Internal time interval. 
A)  Discounted payback period. 
B)  Average accounting return period. 
C)  Discounted net present value period. 
D)  Payback period. 
E)  Internal time interval.

Exam 9: Net Present Value and Other Investment Criteria

The internal rate of return method of analysis should not be used for comparing two independent projects of differing sizes.

Without using formulas, provide a deﬁnition of net present value proﬁle.

NPV and IRR can lead to different decisions in situations where project cash ﬂow are conventional.

A manager will prefer the IRR rule over the NPV rule if the manager:

If a ﬁrm uses the _____________ as an investment criterion, one of the risks it takes is that it may ignore some future cash ﬂows.

An investment has the following cash ﬂows. Should the project be accepted if it has been assigned a required return of 14.5 percent? Why or why not?

The internal rate of return (IRR) is often preferred by managers over the net present value (NPV) because the IRR:

The internal rate of return should:

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 Proﬁtability index of the project.

Which of the following is true about using discounted payback analysis for projects which have only positive cash ﬂows after the initial outlay and for which the discount rate is positive?

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for four years while investment B pays $30,000 a year for ﬁve years. If your Required return is 13%, which should you choose?

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 that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what Is the NPV of this deal?

Your required return is 15%. Should you accept a project with the following cash ﬂows?

Use the following mutually exclusive investment cash ﬂows for the question(s) below: If the discount rate is 14%, using proﬁtability index which of the following is true?

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inﬂows are $550, $970, $2,600, and $500 a year over the next four years, Respectively?

IRR uses an arbitrary cutoff number in its decision rule.

Your ﬁrm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labour to operate, and another that is manual, requiring a Signiﬁcant amount of labour. This is an example of a decision involving ______________.

The length of time needed to recover the initial investment once time value of money is considered is called 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