Question 1

A Project's payback period is the length of time necessary to generate an NPV of zero.

Accepted Answer

A) True 
 B)False

Question 2

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent,you should:

Accepted Answer

A)  buy the new machine and save $600 in equivalent annual costs 
B)  buy the new machine and save $388 in equivalent annual costs 
C)  keep the old machine and save $388 in equivalent annual costs 
D)  keep the old machine and save $580 in equivalent annual costs 
A)  buy the new machine and save $600 in equivalent annual costs 
B)  buy the new machine and save $388 in equivalent annual costs 
C)  keep the old machine and save $388 in equivalent annual costs 
D)  keep the old machine and save $580 in equivalent annual costs

Question 3

PariCorporation is planning a 20 year project with an initial investment of $10 million.The project will have $50,000 cash outflows per year in years 1-4; $300,000 cash inflows in years 5-15,and $15,000 cash inflows in years 16-20.Determine the projects rate of return.

Accepted Answer

A)  -10.57% 
B)  -9.81% 
C)  -5.51% 
D)  10.92% 
A)  -10.57% 
B)  -9.81% 
C)  -5.51% 
D)  10.92%

Question 4

The appropriate discount rate for a firm is:

Accepted Answer

A)  the bank rate. 
B)  its opportunity cost of capital. 
C)  the prime rate. 
D)  its depreciation rate. 
A)  the bank rate. 
B)  its opportunity cost of capital. 
C)  the prime rate. 
D)  its depreciation rate.

Question 5

A project's Profitability Index is .85 and its investment value of $250,000.Given this information,determine its NPV.

Accepted Answer

A)  $12,500 
B)  -$5,000 
C)  -$12,500 
D)  -$37,500 
A)  $12,500 
B)  -$5,000 
C)  -$12,500 
D)  -$37,500

Question 6

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12 percent for each project.

Accepted Answer

A)  "A" has a small, but negative, NPV 
B)  "B" has a positive NPV when discounted at 10 percent 
C)  "C's" cost of capital exceeds its rate of return 
D)  "D" has a zero NPV when discounted at 14 percent 
A)  "A" has a small, but negative, NPV 
B)  "B" has a positive NPV when discounted at 10 percent 
C)  "C's" cost of capital exceeds its rate of return 
D)  "D" has a zero NPV when discounted at 14 percent

Question 7

When calculating IRR with a trial and error process,one would raise discount rates in order to reach a zero NPV.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following best illustrates the problem imposed by capital rationing?

Accepted Answer

A)  accepting projects with the highest NPVs first. 
B)  accepting projects with the highest IRRs first. 
C)  bypassing projects that have positive NPVs. 
D)  bypassing projects that have positive IRRs. 
A)  accepting projects with the highest NPVs first. 
B)  accepting projects with the highest IRRs first. 
C)  bypassing projects that have positive NPVs. 
D)  bypassing projects that have positive IRRs.

Question 9

The NPV of an investment made today is $10,000.If postponed for one year,the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

Accepted Answer

A)  postpone; the NPV increases by a positive amount. 
B)  postpone; the NPV will be larger. 
C)  invest now; NPV does not grow at a sufficient rate. 
D)  invest now; always accept positive NPV projects. 
A)  postpone; the NPV increases by a positive amount. 
B)  postpone; the NPV will be larger. 
C)  invest now; NPV does not grow at a sufficient rate. 
D)  invest now; always accept positive NPV projects.

Question 10

If the NPV of a project is greater than 0,then its profitability index is:

Accepted Answer

A)  greater than 1. 
B)  greater than 0. 
C)  less than 1. 
D)  None of the choices. 
A)  greater than 1. 
B)  greater than 0. 
C)  less than 1. 
D)  None of the choices.

Question 11

Which of the following changes will increase the NPV of a project?

Accepted Answer

A)  a decrease in the discount rate. 
B)  a decrease in the size of the cash inflows. 
C)  an increase in the initial cost of the project. 
D)  a decrease in the number of cash inflows. 
A)  a decrease in the discount rate. 
B)  a decrease in the size of the cash inflows. 
C)  an increase in the initial cost of the project. 
D)  a decrease in the number of cash inflows.

Question 12

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years,how much did the project cost?

Accepted Answer

A)  $44,617 
B)  $52,200 
C)  $60,000 
D)  $72,747 
A)  $44,617 
B)  $52,200 
C)  $60,000 
D)  $72,747

Question 13

Because of deficiencies associated with the payback method,it is seldom used in corporate financial analysis today.

Accepted Answer

A) True 
 B)False

Question 14

Jamieson is considering a 5-year,$250,000 project with annual cash flows of $90,000.If the company's required return is 10%,determine its discounted payback.

Accepted Answer

A)  3.27years 
B)  3.43 years 
C)  3.79 years 
D)  4.01 years 
A)  3.27years 
B)  3.43 years 
C)  3.79 years 
D)  4.01 years

Question 15

If two projects offer the same,positive NPV,then:

Accepted Answer

A)  they also have the same IRR. 
B)  they have the same payback period. 
C)  they are mutually exclusive projects. 
D)  they add the same amount to the value of the firm. 
A)  they also have the same IRR. 
B)  they have the same payback period. 
C)  they are mutually exclusive projects. 
D)  they add the same amount to the value of the firm.

Question 16

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

Accepted Answer

A)  $3,397.57 
B)  $4,473.44 
C)  $16,100.00 
D)  $35,000.00 
A)  $3,397.57 
B)  $4,473.44 
C)  $16,100.00 
D)  $35,000.00

Question 17

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000,is expected to last for 10 years,and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent,should the project be accepted?

Accepted Answer

NPV = $44,503(PVIFA_14%,10)

Question 18

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

Accepted Answer

A)  select the lowest IRR to be conservative. 
B)  select the highest IRR to maximize the benefits. 
C)  any or all of the IRRs are justified to use. 
D)  evaluate the project according to NPV. 
A)  select the lowest IRR to be conservative. 
B)  select the highest IRR to maximize the benefits. 
C)  any or all of the IRRs are justified to use. 
D)  evaluate the project according to NPV.

Question 19

If a Project's expected rate of return exceeds its opportunity cost of capital,one would expect:

Accepted Answer

A)  the profitability index to exceed 1.0. 
B)  the opportunity cost of capital to be too low. 
C)  the IRR to exceed the opportunity cost of capital. 
D)  the NPV to be zero. 
A)  the profitability index to exceed 1.0. 
B)  the opportunity cost of capital to be too low. 
C)  the IRR to exceed the opportunity cost of capital. 
D)  the NPV to be zero.

Question 20

If projects A and B are independent,which of the following is true?

Accepted Answer

A)  Value (A + 
B)  > value (
A)  + value (
B)  
B)  Value (A + 
B)   value (
A)  
A)  Value (A + 
B)  > value (
A)  + value (
B)  
B)  Value (A + 
B)   value (
A)

Exam 8: Net Present Value and Other Investment Criteria

A Project's payback period is the length of time necessary to generate an NPV of zero.

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent,you should:

PariCorporation is planning a 20 year project with an initial investment of $10 million.The project will have $50,000 cash outflows per year in years 1-4; $300,000 cash inflows in years 5-15,and $15,000 cash inflows in years 16-20.Determine the projects rate of return.

The appropriate discount rate for a firm is:

A project's Profitability Index is .85 and its investment value of $250,000.Given this information,determine its NPV.

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12 percent for each project.

When calculating IRR with a trial and error process,one would raise discount rates in order to reach a zero NPV.

Which of the following best illustrates the problem imposed by capital rationing?

The NPV of an investment made today is $10,000.If postponed for one year,the NPV at that time will increase by $1,000.Which of the following is correct if the opportunity cost of the investment is 12 percent?

If the NPV of a project is greater than 0,then its profitability index is:

Which of the following changes will increase the NPV of a project?

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years,how much did the project cost?

Because of deficiencies associated with the payback method,it is seldom used in corporate financial analysis today.

Jamieson is considering a 5-year,$250,000 project with annual cash flows of $90,000.If the company's required return is 10%,determine its discounted payback.

If two projects offer the same,positive NPV,then:

What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the opportunity cost of capital is 14 percent?

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000,is expected to last for 10 years,and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent,should the project be accepted?

What is the decision rule in the case of sign changes that produce multiple IRRs for a project?

If a Project's expected rate of return exceeds its opportunity cost of capital,one would expect:

If projects A and B are independent,which of the following is true?

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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