Question 1

An advantage of the average accounting return method of analysis is its:

Accepted Answer

A)  use of easily obtained information. 
B)  inclusion of time value of money considerations. 
C)  use of a cutoff rate as a benchmark. 
D)  use of pretax income in its computation. 
E)  use of real, versus nominal, average income. 
A)  use of easily obtained information. 
B)  inclusion of time value of money considerations. 
C)  use of a cutoff rate as a benchmark. 
D)  use of pretax income in its computation. 
E)  use of real, versus nominal, average income.

Question 2

A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project?

Accepted Answer

A)  Accept the project because the PI is .97 
B)  Reject the project because the PI is .97 
C)  Accept the project because the PI is 1.03 
D)  Reject the project because the PI is 1.01 
E)  Reject the project because the PI is 1.03 
A)  Accept the project because the PI is .97 
B)  Reject the project because the PI is .97 
C)  Accept the project because the PI is 1.03 
D)  Reject the project because the PI is 1.01 
E)  Reject the project because the PI is 1.03

Question 3

The relevant discount rate is 14 percent for a project with cash flows of -$9,200, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index?

Accepted Answer

A)  .96 
B)  .99 
C)  .93 
D)  1.04 
E)  1.08 
A)  .96 
B)  .99 
C)  .93 
D)  1.04 
E)  1.08

Question 4

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Accepted Answer

A)  Reduction in the cash outflow at Time 0 
B)  Cash inflow in the final year of the project 
C)  Cash inflow for the year following the final year of the project 
D)  Cash inflow prorated over the life of the project 
E)  Excluded from the net present value calculation 
A)  Reduction in the cash outflow at Time 0 
B)  Cash inflow in the final year of the project 
C)  Cash inflow for the year following the final year of the project 
D)  Cash inflow prorated over the life of the project 
E)  Excluded from the net present value calculation

Question 5

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

Accepted Answer

A)  Project tract 
B)  Projected risk profile 
C)  NPV profile 
D)  NPV route 
E)  Present value sequence 
A)  Project tract 
B)  Projected risk profile 
C)  NPV profile 
D)  NPV route 
E)  Present value sequence

Question 6

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Accepted Answer

A)  Initial cost of each project 
B)  Timing of the cash inflows 
C)  Total cash inflows of each project 
D)  Net present value 
E)  Length of each project's life 
A)  Initial cost of each project 
B)  Timing of the cash inflows 
C)  Total cash inflows of each project 
D)  Net present value 
E)  Length of each project's life

Question 7

Which one of these statements related to discounted payback is correct?

Accepted Answer

A)  Payback is a better method of analysis than discounted payback. 
B)  Discounted payback is used more frequently in business than payback. 
C)  Discounted payback does not require a cutoff point. 
D)  Discounted payback is biased towards short-term projects. 
E)  The discounted payback period increases as the discount rate decreases. 
A)  Payback is a better method of analysis than discounted payback. 
B)  Discounted payback is used more frequently in business than payback. 
C)  Discounted payback does not require a cutoff point. 
D)  Discounted payback is biased towards short-term projects. 
E)  The discounted payback period increases as the discount rate decreases.

Question 8

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Accepted Answer

A)  independent. 
B)  interdependent. 
C)  mutually exclusive. 
D)  economically scaled. 
E)  operationally distinct. 
A)  independent. 
B)  interdependent. 
C)  mutually exclusive. 
D)  economically scaled. 
E)  operationally distinct.

Question 9

The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR?

Accepted Answer

A)  12.62 percent 
B)  13.41 percent 
C)  14.48 percent 
D)  13.22 percent 
E)  14.56 percent 
A)  12.62 percent 
B)  13.41 percent 
C)  14.48 percent 
D)  13.22 percent 
E)  14.56 percent

Question 10

Which of the following are advantages of the payback method of project analysis?

Accepted Answer

A)  Considers time value of money, liquidity bias 
B)  Liquidity bias, arbitrary cutoff point 
C)  Liquidity bias, ease of use 
D)  Ignores time value of money, ease of use 
E)  Ease of use, arbitrary cutoff point 
A)  Considers time value of money, liquidity bias 
B)  Liquidity bias, arbitrary cutoff point 
C)  Liquidity bias, ease of use 
D)  Ignores time value of money, ease of use 
E)  Ease of use, arbitrary cutoff point

Question 11

A project has cash flows of -$161,900, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent for this project, you should ________ the project.

Accepted Answer

A)  9.67; accept 
B)  10.41; reject 
C)  11.67; accept 
D)  10.41; accept 
E)  9.67; reject 
A)  9.67; accept 
B)  10.41; reject 
C)  11.67; accept 
D)  10.41; accept 
E)  9.67; reject

Question 12

The internal rate of return is:

Accepted Answer

A)  the discount rate that makes the net present value of a project equal to the initial cash outlay. 
B)  equivalent to the discount rate that makes the net present value equal to one. 
C)  tedious to compute without the use of either a financial calculator or a computer. 
D)  highly dependent upon the current interest rates offered in the marketplace. 
E)  a better methodology than net present value when dealing with unconventional cash flows. 
A)  the discount rate that makes the net present value of a project equal to the initial cash outlay. 
B)  equivalent to the discount rate that makes the net present value equal to one. 
C)  tedious to compute without the use of either a financial calculator or a computer. 
D)  highly dependent upon the current interest rates offered in the marketplace. 
E)  a better methodology than net present value when dealing with unconventional cash flows.

Question 13

A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of ________ percent for this project, you should ________ the project.

Accepted Answer

A)  7.91; accept 
B)  8.03; reject 
C)  6.67; reject 
D)  7.91; reject 
E)  8.03; accept 
A)  7.91; accept 
B)  8.03; reject 
C)  6.67; reject 
D)  7.91; reject 
E)  8.03; accept

Question 14

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

Accepted Answer

A)  PI greater than 1.0 
B)  AAR lower than the required rate 
C)  Payback period that exceeds the requirement 
D)  Required discount rate greater than the IRR 
E)  Discounted payback period less than the payback period 
A)  PI greater than 1.0 
B)  AAR lower than the required rate 
C)  Payback period that exceeds the requirement 
D)  Required discount rate greater than the IRR 
E)  Discounted payback period less than the payback period

Question 15

The internal rate of return is defined as the:

Accepted Answer

A)  maximum rate of return a firm expects to earn on a project. 
B)  rate of return a project will generate if the project is financed solely with internal funds. 
C)  discount rate that equates the net cash inflows of a project to zero. 
D)  discount rate which causes the net present value of a project to equal zero. 
E)  discount rate that causes the profitability index for a project to equal zero. 
A)  maximum rate of return a firm expects to earn on a project. 
B)  rate of return a project will generate if the project is financed solely with internal funds. 
C)  discount rate that equates the net cash inflows of a project to zero. 
D)  discount rate which causes the net present value of a project to equal zero. 
E)  discount rate that causes the profitability index for a project to equal zero.

Question 16

A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent, you should ________ the project.

Accepted Answer

A)  14.67; accept 
B)  13.96; accept 
C)  14.67; reject 
D)  17.91; reject 
E)  18.46; reject 
A)  14.67; accept 
B)  13.96; accept 
C)  14.67; reject 
D)  17.91; reject 
E)  18.46; reject

Question 17

HH Companies has identified two mutually exclusive projects. Project A has cash flows of -$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $38,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects?

Accepted Answer

A)  6.34 percent 
B)  −1.72 percent 
C)  9.41 percent 
D)  −4.38 percent 
E)  8.28 percent 
A)  6.34 percent 
B)  −1.72 percent 
C)  9.41 percent 
D)  −4.38 percent 
E)  8.28 percent

Question 18

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

Accepted Answer

A)  $186.95 
B)  -$108.19 
C)  $219.41 
D)  $229.09 
E)  $311.16 
A)  $186.95 
B)  -$108.19 
C)  $219.41 
D)  $229.09 
E)  $311.16

Question 19

You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:

Accepted Answer

A)  accept both projects. 
B)  accept Project A and reject Project B. 
C)  accept Project B and reject Project A. 
D)  reject both projects. 
E)  accept either one of the projects, but not both. 
A)  accept both projects. 
B)  accept Project A and reject Project B. 
C)  accept Project B and reject Project A. 
D)  reject both projects. 
E)  accept either one of the projects, but not both.

Question 20

The net present value of a project will increase if:

Accepted Answer

A)  the required rate of return increases. 
B)  the initial capital requirement increases. 
C)  some of the cash inflows are deferred until a later year. 
D)  the aftertax salvage value of the fixed assets increases. 
E)  the final cash inflow decreases. 
A)  the required rate of return increases. 
B)  the initial capital requirement increases. 
C)  some of the cash inflows are deferred until a later year. 
D)  the aftertax salvage value of the fixed assets increases. 
E)  the final cash inflow decreases.

Exam 9: Net Present Value and Other Investment Criteria

An advantage of the average accounting return method of analysis is its:

The relevant discount rate is 14 percent for a project with cash flows of -$9,200, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Which one of these statements related to discounted payback is correct?

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR?

Which of the following are advantages of the payback method of project analysis?

A project has cash flows of -$161,900, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent for this project, you should ________ the project.

The internal rate of return is:

A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of ________ percent for this project, you should ________ the project.

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

The internal rate of return is defined as the:

A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent, you should ________ the project.

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

The net present value of a project will increase if:

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

Leasing

Filters

A project has cash flows of -$161,900, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of percent for this project, you should the project.

A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of percent for this project, you should the project.

A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of percent, you should the project.