Question 1

A project would be acceptable if

Accepted Answer

A)  the payback is greater than the discounted equivalent annual annuity. 
B)  the equivalent annual annuity is greater than or equal to the firm's discount rate. 
C)  the profitability index is greater than the net present value. 
D)  the net present value is positive. 
A)  the payback is greater than the discounted equivalent annual annuity. 
B)  the equivalent annual annuity is greater than or equal to the firm's discount rate. 
C)  the profitability index is greater than the net present value. 
D)  the net present value is positive.

Question 2

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The profitability index for Project A is

Accepted Answer

A)  1.27. 
B)  1.22. 
C)  1.17. 
D)  1.12. 
A)  1.27. 
B)  1.22. 
C)  1.17. 
D)  1.12.

Question 3

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

Accepted Answer

A) True 
 B)False

Question 4

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows:
 
If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?

Accepted Answer

A)  accept plan A 
B)  accept plan B 
C)  accept plan C 
D)  accept Plans A, B and C 
A)  accept plan A 
B)  accept plan B 
C)  accept plan C 
D)  accept Plans A, B and C

Question 5

A significant disadvantage of the internal rate of return is that it

Accepted Answer

A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  can result in multiple rates of return (more than one IRR). 
D)  is expressed as a percentage. 
A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  can result in multiple rates of return (more than one IRR). 
D)  is expressed as a percentage.

Question 6

If the net present value of a project is zero,then the profitability index will equal one.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements about the internal rate of return (IRR)is true?

Accepted Answer

A)  It has the most conservative and realistic reinvestment assumption. 
B)  It never gives conflicting answers. 
C)  It fully considers the time value of money. 
D)  It is greater than the modified internal rate of return if the discount rate is higher than the IRR. 
A)  It has the most conservative and realistic reinvestment assumption. 
B)  It never gives conflicting answers. 
C)  It fully considers the time value of money. 
D)  It is greater than the modified internal rate of return if the discount rate is higher than the IRR.

Question 8

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

Accepted Answer

A) True 
 B)False

Question 9

Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

Accepted Answer

A) True 
 B)False

Question 10

An independent project should be accepted if it

Accepted Answer

A)  produces a net present value that is greater than or equal to zero. 
B)  produces a net present value that is greater than the equivalent IRR. 
C)  has only one sign reversal. 
D)  produces a profitability index greater than or equal to zero. 
A)  produces a net present value that is greater than or equal to zero. 
B)  produces a net present value that is greater than the equivalent IRR. 
C)  has only one sign reversal. 
D)  produces a profitability index greater than or equal to zero.

Question 11

The Internal Rate of Return (to nearest whole percent)is

Accepted Answer

A)  10%. 
B)  18%. 
C)  20%. 
D)  24%. 
A)  10%. 
B)  18%. 
C)  20%. 
D)  24%.

Question 12

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the payback period of this project?

Accepted Answer

A)  4.00 years 
B)  3.09 years 
C)  2.91 years 
D)  2.50 years 
A)  4.00 years 
B)  3.09 years 
C)  2.91 years 
D)  2.50 years

Question 13

What is the internal rate of return's assumption about how cash flows are reinvested?

Accepted Answer

A)  They are reinvested at the firm's discount rate. 
B)  They are reinvested at the required rate of return. 
C)  They are reinvested at the project's internal rate of return. 
D)  They are only reinvested at the end of the project. 
A)  They are reinvested at the firm's discount rate. 
B)  They are reinvested at the required rate of return. 
C)  They are reinvested at the project's internal rate of return. 
D)  They are only reinvested at the end of the project.

Question 14

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

Accepted Answer

A) True 
 B)False

Question 15

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project B is

Accepted Answer

A)  29.74%. 
B)  30.79%. 
C)  35.27%. 
D)  36.77%. 
A)  29.74%. 
B)  30.79%. 
C)  35.27%. 
D)  36.77%.

Question 16

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

Accepted Answer

A)  the firm's discount rate; the internal rate of return 
B)  the internal rate of return; the internal rate of return 
C)  the internal rate of return; the firm's discount rate 
D)  Neither criteria assumes reinvestment of future cash flows. 
A)  the firm's discount rate; the internal rate of return 
B)  the internal rate of return; the internal rate of return 
C)  the internal rate of return; the firm's discount rate 
D)  Neither criteria assumes reinvestment of future cash flows.

Question 17

Arguments against using the net present value and internal rate of return methods include that

Accepted Answer

A)  they fail to use accounting profits. 
B)  they require detailed long-term forecasts of the incremental benefits and costs. 
C)  they fail to consider how the investment project is to be financed. 
D)  they fail to use the cash flow of the project. 
A)  they fail to use accounting profits. 
B)  they require detailed long-term forecasts of the incremental benefits and costs. 
C)  they fail to consider how the investment project is to be financed. 
D)  they fail to use the cash flow of the project.

Question 18

A project that requires an initial investment of $340,000 is expected to have an after-tax cash flow of $70,000 per year for the first two years,$90,000 per year for the next two years,and $150,000 for the fifth year? Assume the required return for this project is 10%.
a.What is the NPV of the project%?
b.What is the IRR of the project?
c.What is the MIRR of the project?
d.What is the PI of the project?
e.What decision would you make regarding this project if the required rate of return is 10%?
f.What is the equivalent annual annuity using a 10% required rate of return?

Accepted Answer

a.NPV = $3,715.34
b. IRR = 10.38%
c.MIRR

Question 19

A project requires an initial investment of $389,600.The project generates free cash flow of $540,000 at the end of year 4.What is the internal rate of return for the project?

Accepted Answer

A)  138.6% 
B)  38.6% 
C)  8.5% 
D)  6.9% 
A)  138.6% 
B)  38.6% 
C)  8.5% 
D)  6.9%

Question 20

NPV is the most theoretically correct capital budgeting decision tool examined in the text.

Accepted Answer

A) True 
 B)False

A project would be acceptable if

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows: If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?

A significant disadvantage of the internal rate of return is that it

If the net present value of a project is zero,then the profitability index will equal one.

Which of the following statements about the internal rate of return (IRR)is true?

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

An independent project should be accepted if it

The Internal Rate of Return (to nearest whole percent)is

What is the internal rate of return's assumption about how cash flows are reinvested?

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .

Arguments against using the net present value and internal rate of return methods include that

A project requires an initial investment of $389,600.The project generates free cash flow of $540,000 at the end of year 4.What is the internal rate of return for the project?

NPV is the most theoretically correct capital budgeting decision tool examined in the text.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 10: Capital-Budgeting Techniques and Practice

A project would be acceptable if

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows: If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?

A significant disadvantage of the internal rate of return is that it

If the net present value of a project is zero,then the profitability index will equal one.

Which of the following statements about the internal rate of return (IRR)is true?

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

An independent project should be accepted if it

The Internal Rate of Return (to nearest whole percent)is

What is the internal rate of return's assumption about how cash flows are reinvested?

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

Arguments against using the net present value and internal rate of return methods include that

A project requires an initial investment of $389,600.The project generates free cash flow of $540,000 at the end of year 4.What is the internal rate of return for the project?

NPV is the most theoretically correct capital budgeting decision tool examined in the text.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .