Question 1

Which of the following is NOT a true statement?

Accepted Answer

A)  The payback rule ignores the time value of money. 
B)  The discounted payback rule requires a cutoff hurdle be set. 
C)  The proﬁtability index is closely related to the payback period. 
D)  The AAR is based on accounting data. 
E)  There may be multiple IRRs for an independent project. 
A)  The payback rule ignores the time value of money. 
B)  The discounted payback rule requires a cutoff hurdle be set. 
C)  The proﬁtability index is closely related to the payback period. 
D)  The AAR is based on accounting data. 
E)  There may be multiple IRRs for an independent project.

Question 2

Without using formulas, provide a deﬁnition of mutually exclusive investment decisions.

Accepted Answer

A situation whereby a choice h

Question 3

The internal rate of return method of analysis may produce multiple rates of return for a single
project.

Accepted Answer

A) True 
 B)False

Question 4

If the required return is 12%, what is the discounted payback period of the following cash ﬂows?

Accepted Answer

A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  The project does not pay back on a discounted basis. 
A)  2 years 
B)  3 years 
C)  4 years 
D)  5 years 
E)  The project does not pay back on a discounted basis.

Question 5

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the ﬁrm to stamp out auto
Fenders. The equipment costs $250,000. The project is expected to produce after-tax cash ﬂows of
$60,000 the ﬁrst year, and increase by $10,000 annually; the after-tax cash ﬂow in year 5 will reach
$100,000. Liquidation of the equipment will net the ﬁrm $10,000 in cash at the end of ﬁve years,
Making the total cash ﬂow in year ﬁve $110,000.
Assuming a required return is 15%, what is the project's proﬁtability index?

Accepted Answer

A)  0.98 
B)  1.01 
C)  1.06 
D)  1.12 
E)  1.28 
A)  0.98 
B)  1.01 
C)  1.06 
D)  1.12 
E)  1.28

Question 6

You are considering an investment with the following cash ﬂows. Your required return is 10%, you require a payback of three years and a discounted payback of four years. If your objective is to
Maximize your wealth, should you take this investment?

Accepted Answer

A)  Yes, because the payback is 2.5 years. 
B)  Yes, because the discounted payback is four years. 
C)  Yes, because both the payback and the discounted payback are less than two years. 
D)  No, because the NPV is negative. 
E)  No, because the project has a large negative cash ﬂow at the end of its life. 
A)  Yes, because the payback is 2.5 years. 
B)  Yes, because the discounted payback is four years. 
C)  Yes, because both the payback and the discounted payback are less than two years. 
D)  No, because the NPV is negative. 
E)  No, because the project has a large negative cash ﬂow at the end of its life.

Question 7

The _______________ produces a ranking of all projects.

Accepted Answer

A)  Modiﬁed internal rate of return method. 
B)  Proﬁtability index. 
C)  Payback period method. 
D)  Discounted cash ﬂow method. 
E)  IRR. 
A)  Modiﬁed internal rate of return method. 
B)  Proﬁtability index. 
C)  Payback period method. 
D)  Discounted cash ﬂow method. 
E)  IRR.

Question 8

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 15%. What is the project's PI? Should it be accepted?

Accepted Answer

A)  0.88; yes 
B)  0.88; no 
C)  1.00; indifferent 
D)  1.04; yes 
E)  1.04; no 
A)  0.88; yes 
B)  0.88; no 
C)  1.00; indifferent 
D)  1.04; yes 
E)  1.04; no

Question 9

Calculate the IRR 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)  4.53% 
B)  6.53% 
C)  8.53% 
D)  10.53% 
E)  12.53% 
A)  4.53% 
B)  6.53% 
C)  8.53% 
D)  10.53% 
E)  12.53%

Question 10

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the ﬁrm to stamp out auto
Fenders. The equipment costs $250,000. The project is expected to produce after-tax cash ﬂows of
$60,000 the ﬁrst year, and increase by $10,000 annually; the after-tax cash ﬂow in year 5 will reach
$100,000. Liquidation of the equipment will net the ﬁrm $10,000 in cash at the end of ﬁve years,
Making the total cash ﬂow in year ﬁve $110,000.
What is the payback period for the proposed investment?

Accepted Answer

A)  2.0 years 
B)  2.4 years 
C)  3.0 years 
D)  3.4 years 
E)  The investment doesn't pay back 
A)  2.0 years 
B)  2.4 years 
C)  3.0 years 
D)  3.4 years 
E)  The investment doesn't pay back

Question 11

Which capital investment evaluation technique is described by the following characteristics? (1) Closely related to NPV; (2) Easy to understand and communicate; (3) May lead to incorrect
Decisions when comparing mutually exclusive investments; (4) May be useful when the available
Investment funds are limited.

Accepted Answer

A)  NPV 
B)  IRR 
C)  AAR 
D)  Payback period 
E)  PI 
A)  NPV 
B)  IRR 
C)  AAR 
D)  Payback period 
E)  PI

Question 12

Complete the following decision rule: A project should be accepted if its ______ exceeds the ﬁrm's required rate of return.

Accepted Answer

A)  IRR 
B)  NPV 
C)  payback 
D)  discounted payback 
E)  AAR 
A)  IRR 
B)  NPV 
C)  payback 
D)  discounted payback 
E)  AAR

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The AAR is based on cash ﬂows and market values.

Accepted Answer

A) True 
 B)False

Question 15

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.
What is the project's payback period?

Accepted Answer

A)  1.5 years 
B)  2.0 years 
C)  3.3 years 
D)  4.0 years 
E)  4.3 years 
A)  1.5 years 
B)  2.0 years 
C)  3.3 years 
D)  4.0 years 
E)  4.3 years

Question 16

The principle that an investment should be accepted if the difference between the investment's market value and its cost is positive and rejected if the difference is negative is referred to as the:

Accepted Answer

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

Question 17

The Commodore Co. is trying to decide between the following two mutually exclusive projects:   The only requirement the company has is that any project that is accepted must produce a minimum rate of return of 11%. What should the company do and why?

Accepted Answer

A)  Both projects should be accepted because their payback periods are only about 2 years. 
B)  Both projects should be accepted because they have IRRs of 22.87% and 28.45%, which exceed the 11% requirement. 
C)  Both projects should be accepted because they both have positive NPVs. 
D)  Project I should be accepted because it has an NPV of $3,908.58. Project II cannot also be accepted. 
E)  Project II should be accepted because it has an IRR of 28.45%, which is greater than Project I's IRR. 
A)  Both projects should be accepted because their payback periods are only about 2 years. 
B)  Both projects should be accepted because they have IRRs of 22.87% and 28.45%, which exceed the 11% requirement. 
C)  Both projects should be accepted because they both have positive NPVs. 
D)  Project I should be accepted because it has an NPV of $3,908.58. Project II cannot also be accepted. 
E)  Project II should be accepted because it has an IRR of 28.45%, which is greater than Project I's IRR.

Question 18

When comparing the payback and discounted payback, both methods are biased towards liquidity.

Accepted Answer

A) True 
 B)False

Question 19

What is the proﬁtability index for an investment with the following cash ﬂows given a 15 percent required return?

Accepted Answer

A)  0.88 
B)  0.94 
C)  1.03 
D)  1.07 
E)  1.12 
A)  0.88 
B)  0.94 
C)  1.03 
D)  1.07 
E)  1.12

Question 20

The length of time required for an investment to generate cash ﬂows suﬃcient to recover the initial cost of the investment is called the:

Accepted Answer

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

Exam 9: Net Present Value and Other Investment Criteria

Which of the following is NOT a true statement?

Without using formulas, provide a deﬁnition of mutually exclusive investment decisions.

The internal rate of return method of analysis may produce multiple rates of return for a single project.

If the required return is 12%, what is the discounted payback period of the following cash ﬂows?

You are considering an investment with the following cash ﬂows. Your required return is 10%, you require a payback of three years and a discounted payback of four years. If your objective is to Maximize your wealth, should you take this investment?

The _______________ produces a ranking of all projects.

Calculate the IRR 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%.

Complete the following decision rule: A project should be accepted if its ______ exceeds the ﬁrm's required rate of return.

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

The AAR is based on cash ﬂows and market values.

The principle that an investment should be accepted if the difference between the investment's market value and its cost is positive and rejected if the difference is negative is referred to as the:

The Commodore Co. is trying to decide between the following two mutually exclusive projects: The only requirement the company has is that any project that is accepted must produce a minimum rate of return of 11%. What should the company do and why?

When comparing the payback and discounted payback, both methods are biased towards liquidity.

What is the proﬁtability index for an investment with the following cash ﬂows given a 15 percent required return?

The length of time required for an investment to generate cash ﬂows suﬃcient to recover the initial cost of the investment 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