Question 1

How does the net present value method of analysis help managers adhere to the primary objective
of creating shareholder wealth?

Accepted Answer

The net present value rule states that p

Question 2

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inﬂows to be $40,000 annually for seven years, after
Which he plans to scrap the equipment and retire to the beaches of Jamaica.
Assume the required return is 17%. What is the project's IRR? Should it be accepted?

Accepted Answer

A)  12.2%; yes 
B)  12.2%; no 
C)  16.3%; yes 
D)  16.3%; no 
E)  17.0%; indifferent 
A)  12.2%; yes 
B)  12.2%; no 
C)  16.3%; yes 
D)  16.3%; no 
E)  17.0%; indifferent

Question 3

By deﬁnition, the net present value is equal to zero when the discount rate is equal to the:

Accepted Answer

A)  Average account rate of return. 
B)  Rate used in the discounted payback formula. 
C)  Proﬁtability index rate. 
D)  Internal rate of return. 
E)  Crossover rate. 
A)  Average account rate of return. 
B)  Rate used in the discounted payback formula. 
C)  Proﬁtability index rate. 
D)  Internal rate of return. 
E)  Crossover rate.

Question 4

A project has an initial cash outlay of $29,500. Cash inﬂows are estimated at $1,200, $6,900, $7,800, $9,500, and $4,800 for years 1 through 5, respectively. What is the net present value of this
Project given a 7% discount rate?

Accepted Answer

A)  ($5,677.15) 
B)  ($5,314.82) 
C)  ($2,618.03) 
D)  $700.00 
E)  $1,806.33 
A)  ($5,677.15) 
B)  ($5,314.82) 
C)  ($2,618.03) 
D)  $700.00 
E)  $1,806.33

Question 5

A project has an initial investment of $95,000. Its four year cash inﬂows are estimated to be $21,000 in year 1, $23,000 in year 2, $25,000 in year 3, and $27,000 in year 4. If the rate of return
Is 8%, calculate the project's Proﬁtability Index.

Accepted Answer

A)  1.83 
B)  1.53 
C)  1.03 
D)  0.83 
E)  0.53 
A)  1.83 
B)  1.53 
C)  1.03 
D)  0.83 
E)  0.53

Question 6

Monika's Café wants to expand its dining area and is considering two alternatives. Alternative 1 converts the existing dining area into a buffet line and then builds a new dining area. Alternative 2
Builds a new dining area and remodels the current dining area so that one expansive area is
Created. This is an example of:

Accepted Answer

A)  A crossover point. 
B)  Mutually exclusive projects. 
C)  Negatively correlated projects. 
D)  Independent projects. 
E)  Multiple IRR projects. 
A)  A crossover point. 
B)  Mutually exclusive projects. 
C)  Negatively correlated projects. 
D)  Independent projects. 
E)  Multiple IRR projects.

Question 7

Two projects which each _____ is an example of mutually exclusive projects.

Accepted Answer

A)  Require an initial investment of $1.5 million. 
B)  Must occur during the same period of time. 
C)  Must start up in the same ﬁscal year. 
D)  Require the total use of the same limited economic resource. 
E)  Have differing internal rates of return. 
A)  Require an initial investment of $1.5 million. 
B)  Must occur during the same period of time. 
C)  Must start up in the same ﬁscal year. 
D)  Require the total use of the same limited economic resource. 
E)  Have differing internal rates of return.

Question 8

Which one of the following is the primary advantage of the payback method of analysis?

Accepted Answer

A)  Easy to compute. 
B)  Inclusion of time value of money considerations. 
C)  Liquidity bias. 
D)  Arbitrary cut-off point. 
E)  Current market rate of return considerations. 
A)  Easy to compute. 
B)  Inclusion of time value of money considerations. 
C)  Liquidity bias. 
D)  Arbitrary cut-off point. 
E)  Current market rate of return considerations.

Question 9

An increasing emphasis by ﬁnancial executives on accounting values rather than ﬁnancial values
may have contributed to the change in the primary methods used by chief ﬁnancial oﬃcers to
evaluate projects over the past forty years.

Accepted Answer

A) True 
 B)False

Question 10

Under the payback method of analysis:

Accepted Answer

A)  The initial cash outlay is ignored. 
B)  The cash ﬂow in year 3 is ignored if the required payback period is 4 years. 
C)  A project's initial cost is discounted. 
D)  The cash ﬂow in year 2 is valued just as highly as the cash ﬂow in year 1 as long as the required payback period is 3 years or more. 
E)  A project will be acceptable whenever the payback period exceeds the pre-speciﬁed number of years. 
A)  The initial cash outlay is ignored. 
B)  The cash ﬂow in year 3 is ignored if the required payback period is 4 years. 
C)  A project's initial cost is discounted. 
D)  The cash ﬂow in year 2 is valued just as highly as the cash ﬂow in year 1 as long as the required payback period is 3 years or more. 
E)  A project will be acceptable whenever the payback period exceeds the pre-speciﬁed number of years.

Question 11

Which of the following is considered to be a redeeming feature of average accounting return analysis?

Accepted Answer

A)  It incorporates time value of money. 
B)  Estimation of the appropriate cutoff rate is straightforward and easy. 
C)  Calculation relies on net income and not cash ﬂows or asset values. 
D)  Calculation relies on book values and not market values or cash ﬂows. 
E)  It is relatively easy to calculate. 
A)  It incorporates time value of money. 
B)  Estimation of the appropriate cutoff rate is straightforward and easy. 
C)  Calculation relies on net income and not cash ﬂows or asset values. 
D)  Calculation relies on book values and not market values or cash ﬂows. 
E)  It is relatively easy to calculate.

Question 12

The crossover point is useful when trying to determine:

Accepted Answer

A)  Whether you should accept or reject an independent project. 
B)  Whether two independent projects are acceptable. 
C)  Which one of two mutually exclusive projects should be accepted. 
D)  The rate of return which should be applied to an independent project. 
E)  The rate of return which should be applied to a mutually exclusive project. 
A)  Whether you should accept or reject an independent project. 
B)  Whether two independent projects are acceptable. 
C)  Which one of two mutually exclusive projects should be accepted. 
D)  The rate of return which should be applied to an independent project. 
E)  The rate of return which should be applied to a mutually exclusive project.

Question 13

A ﬁrm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash ﬂows occurring in the distant future, and avoid projects that require a large
Amount of research and development expenses. This ﬁrm may be justiﬁed in using the
____________ to evaluate its projects.

Accepted Answer

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

Question 14

Net present value:

Accepted Answer

A)  Cannot be used when deciding between two mutually exclusive projects. 
B)  Is more useful to decision makers than the internal rate of return when comparing different sized projects. 
C)  Is easy to explain to non-ﬁnancial managers and thus is the primary method of analysis used by the lowest levels of management. 
D)  Is computed the same as present value when using excel spreadsheets to analyze a project. 
E)  Is very similar in its methodology to the average accounting return. 
A)  Cannot be used when deciding between two mutually exclusive projects. 
B)  Is more useful to decision makers than the internal rate of return when comparing different sized projects. 
C)  Is easy to explain to non-ﬁnancial managers and thus is the primary method of analysis used by the lowest levels of management. 
D)  Is computed the same as present value when using excel spreadsheets to analyze a project. 
E)  Is very similar in its methodology to the average accounting return.

Question 15

A project should be accepted when the:

Accepted Answer

A)  Proﬁtability index is less than 1.0. 
B)  AAR is less than the targeted AAR. 
C)  Net present value is negative. 
D)  IRR exceeds the required rate. 
E)  Payback period is greater than the prescribed number of years. 
A)  Proﬁtability index is less than 1.0. 
B)  AAR is less than the targeted AAR. 
C)  Net present value is negative. 
D)  IRR exceeds the required rate. 
E)  Payback period is greater than the prescribed number of years.

Question 16

You are considering two independent projects, both of which have been assigned a discount rate of 8 percent. Based on the proﬁtability index, what is your recommendation concerning these
Projects?

Accepted Answer

A)  You should accept both projects since both of their PIs are positive. 
B)  You should accept project A since it has the higher PI. 
C)  You should accept both projects since both of their PIs are greater than 1. 
D)  You should only accept project B since it has the largest PI and the PI exceeds 1. 
E)  Neither project is acceptable. 
A)  You should accept both projects since both of their PIs are positive. 
B)  You should accept project A since it has the higher PI. 
C)  You should accept both projects since both of their PIs are greater than 1. 
D)  You should only accept project B since it has the largest PI and the PI exceeds 1. 
E)  Neither project is acceptable.

Question 17

Calculate the payback 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)  4 
B)  5 
C)  6 
D)  7 
E)  8 
A)  4 
B)  5 
C)  6 
D)  7 
E)  8

Question 18

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 internal rate of return (IRR) is _____ percent.

Accepted Answer

A)  A; 13.22 
B)  A; 14.67 
C)  B; 13.92 
D)  B; 17.79 
E)  The IRR should not be used to determine which of these projects should be accepted. 
A)  A; 13.22 
B)  A; 14.67 
C)  B; 13.92 
D)  B; 17.79 
E)  The IRR should not be used to determine which of these projects should be accepted.

Question 19

What is the IRR of an investment that costs $77,500 and pays $27,500 a year for four years?

Accepted Answer

A)  16% 
B)  18% 
C)  20% 
D)  22% 
E)  24% 
A)  16% 
B)  18% 
C)  20% 
D)  22% 
E)  24%

Question 20

An NPV of zero implies that an investment's ____________.

Accepted Answer

A)  Cost exceeds the present value of its cash inﬂows. 
B)  Cost is equal to the present value of its cash inﬂows. 
C)  IRR is greater than the ﬁrm's required rate of return. 
D)  Present value of cash inﬂows are positive. 
E)  Present value of cash inﬂows exceed the investment's cost. 
A)  Cost exceeds the present value of its cash inﬂows. 
B)  Cost is equal to the present value of its cash inﬂows. 
C)  IRR is greater than the ﬁrm's required rate of return. 
D)  Present value of cash inﬂows are positive. 
E)  Present value of cash inﬂows exceed the investment's cost.

Exam 9: Net Present Value and Other Investment Criteria

How does the net present value method of analysis help managers adhere to the primary objective of creating shareholder wealth?

By deﬁnition, the net present value is equal to zero when the discount rate is equal to the:

A project has an initial cash outlay of $29,500. Cash inﬂows are estimated at $1,200, $6,900, $7,800, $9,500, and $4,800 for years 1 through 5, respectively. What is the net present value of this Project given a 7% discount rate?

A project has an initial investment of $95,000. Its four year cash inﬂows are estimated to be $21,000 in year 1, $23,000 in year 2, $25,000 in year 3, and $27,000 in year 4. If the rate of return Is 8%, calculate the project's Proﬁtability Index.

Two projects which each _____ is an example of mutually exclusive projects.

Which one of the following is the primary advantage of the payback method of analysis?

An increasing emphasis by ﬁnancial executives on accounting values rather than ﬁnancial values may have contributed to the change in the primary methods used by chief ﬁnancial oﬃcers to evaluate projects over the past forty years.

Under the payback method of analysis:

Which of the following is considered to be a redeeming feature of average accounting return analysis?

The crossover point is useful when trying to determine:

Net present value:

A project should be accepted when the:

You are considering two independent projects, both of which have been assigned a discount rate of 8 percent. Based on the proﬁtability index, what is your recommendation concerning these Projects?

Calculate the payback 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%.

What is the IRR of an investment that costs $77,500 and pays $27,500 a year for four years?

An NPV of zero implies that an investment's ____________.

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