Question 1

Which of the following can cause a project to have multiple IRRs?

Accepted Answer

A)  The project has a large initial outlay. 
B)  A ten-year project has a negative cash ﬂow in the last year of the project's life. 
C)  A project has negative cash ﬂows in the ﬁrst three years, but positive cash ﬂows thereafter. 
D)  Whenever project cash ﬂows are conventional. 
E)  With mutually exclusive investments. 
A)  The project has a large initial outlay. 
B)  A ten-year project has a negative cash ﬂow in the last year of the project's life. 
C)  A project has negative cash ﬂows in the ﬁrst three years, but positive cash ﬂows thereafter. 
D)  Whenever project cash ﬂows are conventional. 
E)  With mutually exclusive investments.

Question 2

A payback period that is less than the required period signals an accept decision.

Accepted Answer

A) True 
 B)False

Question 3

A project has multiple IRRs. Which should you use in determining whether or not to accept the
project, the highest, the lowest, or the intermediate IRR?

Accepted Answer

This is basically a

Question 4

Which of the following ranks decision rules from worst to best in terms of their overall usefulness in capital budgeting analysis.

Accepted Answer

A)  Payback, IRR, NPV. 
B)  Payback, NPV, IRR. 
C)  IRR, NPV, Payback. 
D)  NPV, IRR, Payback. 
E)  IRR, Payback, NPV. 
A)  Payback, IRR, NPV. 
B)  Payback, NPV, IRR. 
C)  IRR, NPV, Payback. 
D)  NPV, IRR, Payback. 
E)  IRR, Payback, NPV.

Question 5

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

Accepted Answer

A)  11.113 percent 
B)  13.008 percent 
C)  14.901 percent 
D)  16.750 percent 
E)  17.899 percent 
A)  11.113 percent 
B)  13.008 percent 
C)  14.901 percent 
D)  16.750 percent 
E)  17.899 percent

Question 6

When computing the net present value of a project, the net amount received from salvaging the ﬁxed assets used in the project is:

Accepted Answer

A)  Subtracted from the initial cash outlay. 
B)  Included in the ﬁnal cash ﬂow of the project. 
C)  Excluded from the analysis since it occurs only when the project ends. 
D)  Subtracted from the original cost of the assets. 
E)  Added to the net present value of the project to determine if the project is acceptable. 
A)  Subtracted from the initial cash outlay. 
B)  Included in the ﬁnal cash ﬂow of the project. 
C)  Excluded from the analysis since it occurs only when the project ends. 
D)  Subtracted from the original cost of the assets. 
E)  Added to the net present value of the project to determine if the project is acceptable.

Question 7

A project produces annual net income of $11,500, $13,700, and $16,900 over the three years of its life, respectively. The initial cost of the project is $257,000. This cost is depreciated straight-line to a
Zero book value over three years. What is the average accounting rate of return if the required
Discount rate is 6.75 percent?

Accepted Answer

A)  5.33 percent 
B)  5.46 percent 
C)  6.58 percent 
D)  10.92 percent 
E)  13.90 percent 
A)  5.33 percent 
B)  5.46 percent 
C)  6.58 percent 
D)  10.92 percent 
E)  13.90 percent

Question 8

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 IRR of the project.

Accepted Answer

A)  30.25% 
B)  28.28% 
C)  26.22% 
D)  24.25% 
E)  22.25% 
A)  30.25% 
B)  28.28% 
C)  26.22% 
D)  24.25% 
E)  22.25%

Question 9

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 percent, and a required accounting
Return of 11 percent. Which one of these values indicates an accept decision?

Accepted Answer

A)  Net present value of ($1,200). 
B)  Accounting rate of return of 10 percent. 
C)  Proﬁtability index of 1.02. 
D)  Internal rate of return of 13.6 percent. 
E)  Payback period of 3.2 years. 
A)  Net present value of ($1,200). 
B)  Accounting rate of return of 10 percent. 
C)  Proﬁtability index of 1.02. 
D)  Internal rate of return of 13.6 percent. 
E)  Payback period of 3.2 years.

Question 10

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying suﬃcient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another ﬁrm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and ﬁxed assets using funds from the same bond issue. 
A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying suﬃcient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another ﬁrm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and ﬁxed assets using funds from the same bond issue.

Question 11

Which of the following does NOT incorporate discounted cash ﬂow (DCF) valuation in its calculation?

Accepted Answer

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

Question 12

It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a year for three years. After the three years, the cart is expected to be worthless as that is the expected life of the
Heating system. What is the payback period of the hot dog cart?

Accepted Answer

A)  .87 year 
B)  .92 year 
C)  1.03 year 
D)  1.09 year 
E)  1.14 year 
A)  .87 year 
B)  .92 year 
C)  1.03 year 
D)  1.09 year 
E)  1.14 year

Question 13

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 IRR cross-over rate.

Accepted Answer

A)  12.05% 
B)  12.25% 
C)  12.45% 
D)  12.65% 
E)  12.85% 
A)  12.05% 
B)  12.25% 
C)  12.45% 
D)  12.65% 
E)  12.85%

Question 14

The average accounting return is deﬁned as the:

Accepted Answer

A)  Present value of a project's cash ﬂows divided by the average book value of the project's assets. 
B)  Present value of a project's cash ﬂows divided by the initial investment in the project. 
C)  Net income derived from a project divided by the initial investment in the project. 
D)  Average net income derived from a project divided by the initial investment in the project. 
E)  Average net income derived from a project divided by the average book value of the project's ﬁxed assets. 
A)  Present value of a project's cash ﬂows divided by the average book value of the project's assets. 
B)  Present value of a project's cash ﬂows divided by the initial investment in the project. 
C)  Net income derived from a project divided by the initial investment in the project. 
D)  Average net income derived from a project divided by the initial investment in the project. 
E)  Average net income derived from a project divided by the average book value of the project's ﬁxed assets.

Question 15

When the funds available for investment are limited and you wish to receive the greatest beneﬁt per dollar spent, you should use the _____ method of analysis to determine which one of two
Projects should be accepted.

Accepted Answer

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

Question 16

The internal rate of return (IRR) is the rate generated solely by the cash ﬂows of an investment.

Accepted Answer

A) True 
 B)False

Question 17

When the decision to accept or reject one project does not affect the decision to accept or reject any other project, the project is said to be:

Accepted Answer

A)  Mutually exclusive. 
B)  Mutually inclusive. 
C)  Independent. 
D)  A crossover project. 
E)  Acceptable. 
A)  Mutually exclusive. 
B)  Mutually inclusive. 
C)  Independent. 
D)  A crossover project. 
E)  Acceptable.

Question 18

A conventional cash ﬂow is deﬁned as a series of cash ﬂows where:

Accepted Answer

A)  The total of the cash ﬂows is positive. 
B)  All of the cash ﬂows are positive. 
C)  The sum of the cash ﬂows is equal to zero. 
D)  The present value of the cash ﬂows is equal to zero. 
E)  Only the initial cash ﬂow is negative. 
A)  The total of the cash ﬂows is positive. 
B)  All of the cash ﬂows are positive. 
C)  The sum of the cash ﬂows is equal to zero. 
D)  The present value of the cash ﬂows is equal to zero. 
E)  Only the initial cash ﬂow is negative.

Question 19

Compare and contrast the advantages and disadvantages of both the payback and the discounted
payback methods of analysis.

Accepted Answer

Payback is popular because it is simple

Question 20

Two projects that are mutually exclusive are said to be independent.

Accepted Answer

A) True 
 B)False

Exam 9: Net Present Value and Other Investment Criteria

Which of the following can cause a project to have multiple IRRs?

A payback period that is less than the required period signals an accept decision.

A project has multiple IRRs. Which should you use in determining whether or not to accept the project, the highest, the lowest, or the intermediate IRR?

Which of the following ranks decision rules from worst to best in terms of their overall usefulness in capital budgeting analysis.

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

When computing the net present value of a project, the net amount received from salvaging the ﬁxed assets used in the project is:

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 IRR of the project.

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 percent, and a required accounting Return of 11 percent. Which one of these values indicates an accept decision?

Which one of the following is the best example of two mutually exclusive projects?

Which of the following does NOT incorporate discounted cash ﬂow (DCF) valuation in its calculation?

It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a year for three years. After the three years, the cart is expected to be worthless as that is the expected life of the Heating system. What is the payback period of the hot dog cart?

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 IRR cross-over rate.

The average accounting return is deﬁned as the:

When the funds available for investment are limited and you wish to receive the greatest beneﬁt per dollar spent, you should use the _____ method of analysis to determine which one of two Projects should be accepted.

The internal rate of return (IRR) is the rate generated solely by the cash ﬂows of an investment.

When the decision to accept or reject one project does not affect the decision to accept or reject any other project, the project is said to be:

A conventional cash ﬂow is deﬁned as a series of cash ﬂows where:

Compare and contrast the advantages and disadvantages of both the payback and the discounted payback methods of analysis.

Two projects that are mutually exclusive are said to be independent.

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