Question 1

For most managers,discounted cash flow analysis is in fact the dominant tool for project evaluation.

Accepted Answer

A) True 
 B)False

Question 2

When a Project's internal rate of return equals its opportunity cost of capital,then:

Accepted Answer

A)  the project should be rejected. 
B)  the project has no cash inflows. 
C)  the net present value will be positive. 
D)  the net present value will be zero. 
A)  the project should be rejected. 
B)  the project has no cash inflows. 
C)  the net present value will be positive. 
D)  the net present value will be zero.

Question 3

Because of its age,your car costs $4,000 annually in maintenance expense.You could replace it with a newer vehicle costing $8,000.Both vehicles would be expected to last four more years.If your opportunity cost is 8 percent,by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

Accepted Answer

A)  $1,250 
B)  $1,585 
C)  $2,000 
D)  $2,415 
A)  $1,250 
B)  $1,585 
C)  $2,000 
D)  $2,415

Question 4

Use of a profitability index to select projects in the absence of capital rationing:

Accepted Answer

A)  will provide the same rankings as an NPV criterion. 
B)  will maximize NPV, but not IRR. 
C)  can result in misguided selections. 
D)  is technically impossible. 
A)  will provide the same rankings as an NPV criterion. 
B)  will maximize NPV, but not IRR. 
C)  can result in misguided selections. 
D)  is technically impossible.

Question 5

The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:

Accepted Answer

A)  0.139 
B)  0.320 
C)  0.500 
D)  0.861 
A)  0.139 
B)  0.320 
C)  0.500 
D)  0.861

Question 6

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

Accepted Answer

A) True 
 B)False

Question 7

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

Accepted Answer

A)  8.69 years 
B)  14.00 years 
C)  27.51 years 
D)  An infinite number of years 
A)  8.69 years 
B)  14.00 years 
C)  27.51 years 
D)  An infinite number of years

Question 8

How is the profitability index calculated,and how can it be used to choose between projects when funds are limited?

Accepted Answer

If there is a shortage of capi

Question 9

For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.

Accepted Answer

A) True 
 B)False

Question 10

Suppose project A has an IRR of 10 percent and project B has an IRR of 20 percent.One can then conclude that:

Accepted Answer

A)  Project A is preferred to B 
B)  Project A has a negative NPV while project B has a positive NPV. 
C)  Project B has a negative NPV while project A has a positive NPV. 
D)  It is impossible to rank the two projects without further information. 
A)  Project A is preferred to B 
B)  Project A has a negative NPV while project B has a positive NPV. 
C)  Project B has a negative NPV while project A has a positive NPV. 
D)  It is impossible to rank the two projects without further information.

Question 11

When mutually exclusive projects have different lives,the project which should be selected will have the:

Accepted Answer

A)  highest IRR. 
B)  longest life. 
C)  lowest equivalent annual cost. 
D)  highest NPV, discounted at the opportunity cost of capital. 
A)  highest IRR. 
B)  longest life. 
C)  lowest equivalent annual cost. 
D)  highest NPV, discounted at the opportunity cost of capital.

Question 12

A project can have as many different internal rates of return as it has:

Accepted Answer

A)  cash inflows. 
B)  cash outflows. 
C)  periods of cash flow. 
D)  changes in the sign of the cash flows. 
A)  cash inflows. 
B)  cash outflows. 
C)  periods of cash flow. 
D)  changes in the sign of the cash flows.

Question 13

The "gold standard" of investment criteria refers to:

Accepted Answer

A)  net present value. 
B)  internal rate of return. 
C)  payback period. 
D)  profitability index. 
A)  net present value. 
B)  internal rate of return. 
C)  payback period. 
D)  profitability index.

Question 14

When projects are mutually exclusive,selection should be made according to the project with the:

Accepted Answer

A)  longer life. 
B)  larger initial size. 
C)  highest IRR. 
D)  highest NPV. 
A)  longer life. 
B)  larger initial size. 
C)  highest IRR. 
D)  highest NPV.

Question 15

Which of the following investment decision rules tends to improperly reject long-lived projects?

Accepted Answer

A)  net present value 
B)  internal rate of return 
C)  payback period 
D)  profitability index 
A)  net present value 
B)  internal rate of return 
C)  payback period 
D)  profitability index

Question 16

A company is considering a 5-year project with an initial investment of $90,000.Cash inflows will be $30,000 for the first two years and $25,000 for the next 3 years.If the company's required rate of return is 12%,determine its discounted payback.

Accepted Answer

A)  4.40years 
B)  3.60 years 
C)  3.80 years 
D)  4.00 years 
A)  4.40years 
B)  3.60 years 
C)  3.80 years 
D)  4.00 years

Question 17

The payback rule states that a project is acceptable if you get your money back within a specified period.

Accepted Answer

A) True 
 B)False

Question 18

The use of a profitability index will always provide results consistent with selecting the project with the:

Accepted Answer

A)  highest NPV. 
B)  highest IRR. 
C)  largest dollar invested per rate of return. 
D)  largest return per dollar invested. 
A)  highest NPV. 
B)  highest IRR. 
C)  largest dollar invested per rate of return. 
D)  largest return per dollar invested.

Question 19

What should occur when a Project's net present value is determined to be negative?

Accepted Answer

A)  the discount rate should be decreased. 
B)  the profitability index should be calculated. 
C)  the present value of the project cost should be determined. 
D)  the project should be rejected. 
A)  the discount rate should be decreased. 
B)  the profitability index should be calculated. 
C)  the present value of the project cost should be determined. 
D)  the project should be rejected.

Question 20

A risky dollar is worth more than a safe one.

Accepted Answer

A) True 
 B)False

Exam 8: Net Present Value and Other Investment Criteria

For most managers,discounted cash flow analysis is in fact the dominant tool for project evaluation.

When a Project's internal rate of return equals its opportunity cost of capital,then:

Use of a profitability index to select projects in the absence of capital rationing:

The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

How is the profitability index calculated,and how can it be used to choose between projects when funds are limited?

For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.

Suppose project A has an IRR of 10 percent and project B has an IRR of 20 percent.One can then conclude that:

When mutually exclusive projects have different lives,the project which should be selected will have the:

A project can have as many different internal rates of return as it has:

The "gold standard" of investment criteria refers to:

When projects are mutually exclusive,selection should be made according to the project with the:

Which of the following investment decision rules tends to improperly reject long-lived projects?

A company is considering a 5-year project with an initial investment of $90,000.Cash inflows will be $30,000 for the first two years and $25,000 for the next 3 years.If the company's required rate of return is 12%,determine its discounted payback.

The payback rule states that a project is acceptable if you get your money back within a specified period.

The use of a profitability index will always provide results consistent with selecting the project with the:

What should occur when a Project's net present value is determined to be negative?

A risky dollar is worth more than a safe one.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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