Question 1

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?

Accepted Answer

A)  3.15 years 
B)  3.38 years 
C)  3.45 years 
D)  3.60 years 
E)  4.05 years 
A)  3.15 years 
B)  3.38 years 
C)  3.45 years 
D)  3.60 years 
E)  4.05 years B

Question 2

The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not?

Accepted Answer

At some K,NPV = $0; by definition,when NPV = 0,K = IRR.
Problems occur with IRR due to conflicts with mutually exclusive projects,timing and size problems,multiple sign changes. NPV always the best choice

Question 3

The internal rate of return for a project will increase if:

Accepted Answer

A)  the initial cost of the project can be reduced. 
B)  the total amount of the cash inflows is reduced. 
C)  each cash inflow is moved such that it occurs one year later than originally projected. 
D)  the required rate of return is reduced. 
E)  the salvage value of the project is omitted from the analysis. 
A)  the initial cost of the project can be reduced. 
B)  the total amount of the cash inflows is reduced. 
C)  each cash inflow is moved such that it occurs one year later than originally projected. 
D)  the required rate of return is reduced. 
E)  the salvage value of the project is omitted from the analysis. A

Question 4

Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

A)  Yes; because the payback period is 2.94 years. 
B)  Yes; because the payback period is 2.02 years. 
C)  Yes; because the payback period is 3.80 years. 
D)  No; because the payback period is 2.02 years. 
E)  No; because the payback period is 3.80 years. 
A)  Yes; because the payback period is 2.94 years. 
B)  Yes; because the payback period is 2.02 years. 
C)  Yes; because the payback period is 3.80 years. 
D)  No; because the payback period is 2.02 years. 
E)  No; because the payback period is 3.80 years.

Question 5

Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Ginny should _______ this project because the discounted payback period is ______.

Accepted Answer

A)  accept; 2.03 years 
B)  accept; 2.97 years 
C)  accept; 3.97 years 
D)  reject; 3.03 years 
E)  reject; 3.97 years 
A)  accept; 2.03 years 
B)  accept; 2.97 years 
C)  accept; 3.97 years 
D)  reject; 3.03 years 
E)  reject; 3.97 years

Question 6

You are analyzing a project and have prepared the following data:   Required payback period 2.5 years
Required return 8.50%
Based on the payback period of _______ for this project,you should _______ the project.

Accepted Answer

A)  1.87 years; accept 
B)  2.87 years; accept 
C)  2.87 years; reject 
D)  3.13 years; reject 
E)  3.87 years; reject 
A)  1.87 years; accept 
B)  2.87 years; accept 
C)  2.87 years; reject 
D)  3.13 years; reject 
E)  3.87 years; reject

Question 7

Which of the following statement is true?

Accepted Answer

A)  One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B)  One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C)  Payback accounts for time value of money. 
D)  There will always be one IRR regardless of cash flows. 
E)  Return on equity is the ratio of total assets to total net incomE. 
A)  One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B)  One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C)  Payback accounts for time value of money. 
D)  There will always be one IRR regardless of cash flows. 
E)  Return on equity is the ratio of total assets to total net incomE.

Question 8

Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?

Accepted Answer

A)  Yes; because the PI is 1.008. 
B)  Yes; because the PI is .992. 
C)  Yes; because the PI is .999. 
D)  No; because the PI is 1.008. 
E)  No; because the PI is .992. 
A)  Yes; because the PI is 1.008. 
B)  Yes; because the PI is .992. 
C)  Yes; because the PI is .999. 
D)  No; because the PI is 1.008. 
E)  No; because the PI is .992.

Question 9

The discounted payback rule states that you should accept projects:

Accepted Answer

A)  which have a discounted payback period that is greater than some pre-specified period of time. 
B)  if the discounted payback is positive and rejected if it is negative. 
C)  only if the discounted payback period equals some pre-specified period of time. 
D)  if the discounted payback period is less than some pre-specified period of time. 
E)  only if the discounted payback period is equal to zero. 
A)  which have a discounted payback period that is greater than some pre-specified period of time. 
B)  if the discounted payback is positive and rejected if it is negative. 
C)  only if the discounted payback period equals some pre-specified period of time. 
D)  if the discounted payback period is less than some pre-specified period of time. 
E)  only if the discounted payback period is equal to zero.

Question 10

The primary reason that company projects with positive net present values are considered acceptable is that:

Accepted Answer

A)  they create value for the owners of the firm. 
B)  the project's rate of return exceeds the rate of inflation. 
C)  they return the initial cash outlay within three years or less. 
D)  the required cash inflows exceed the actual cash inflows. 
E)  the investment's cost exceeds the present value of the cash inflows. 
A)  they create value for the owners of the firm. 
B)  the project's rate of return exceeds the rate of inflation. 
C)  they return the initial cash outlay within three years or less. 
D)  the required cash inflows exceed the actual cash inflows. 
E)  the investment's cost exceeds the present value of the cash inflows.

Question 11

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

Accepted Answer

A)  3.05 years 
B)  3.74 years 
C)  3.81 years 
D)  3.92 years 
E)  never 
A)  3.05 years 
B)  3.74 years 
C)  3.81 years 
D)  3.92 years 
E)  never

Question 12

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

Accepted Answer

A)  net present value profiling 
B)  operational ambiguity 
C)  mutually exclusive investment decision 
D)  issues of scale 
E)  multiple rates of return 
A)  net present value profiling 
B)  operational ambiguity 
C)  mutually exclusive investment decision 
D)  issues of scale 
E)  multiple rates of return

Question 13

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.   Required rate of return 10% 13%
Required payback period 2.0 years 2.0 years
Based upon the internal rate of return (IRR) and the information provided in the problem,you should:

Accepted Answer

A)  accept both project A and project B. 
B)  reject both project A and project B. 
C)  accept project A and reject project B. 
D)  accept project B and reject project A. 
E)  ignore the IRR rule and use another method of analysis. 
A)  accept both project A and project B. 
B)  reject both project A and project B. 
C)  accept project A and reject project B. 
D)  accept project B and reject project A. 
E)  ignore the IRR rule and use another method of analysis.

Question 14

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life,will produce a cash flow of $1,200 in the first and second year,and $3,000 in the third year. The interest rate is 12%. Calculate the project's payback. Also,calculate the project's IRR. Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback - 2.63 years.
IRR = 10

Question 15

The profitability index is the ratio of:

Accepted Answer

A)  average net income to average investment. 
B)  internal rate of return to current market interest rate. 
C)  net present value of cash flows to internal rate of return. 
D)  net present value of cash flows to return on equity. 
E)  present value of cash flows to initial investment cost. 
A)  average net income to average investment. 
B)  internal rate of return to current market interest rate. 
C)  net present value of cash flows to internal rate of return. 
D)  net present value of cash flows to return on equity. 
E)  present value of cash flows to initial investment cost.

Question 16

The internal rate of return (IRR): I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II) is the rate generated solely by the cash flows of an investment.
III) is the rate that causes the net present value of a project to exactly equal zero.
IV) can effectively be used to analyze all investment scenarios.

Accepted Answer

A)  I and IV only 
B)  II and III only 
C)  I, II, and III only 
D)  II, III, and IV only 
E)  I, II, III, and IV 
A)  I and IV only 
B)  II and III only 
C)  I, II, and III only 
D)  II, III, and IV only 
E)  I, II, III, and IV

Question 17

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

Accepted Answer

A)  1 years 
B)  2 years 
C)  3 years 
D)  4 years 
E)  never 
A)  1 years 
B)  2 years 
C)  3 years 
D)  4 years 
E)  never

Question 18

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another firm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and fixed assets using funds from the same bond issuE. 
A)  Planning to build a warehouse and a retail outlet side by side. 
B)  Buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C)  Using an empty warehouse for storage or renting it entirely out to another firm. 
D)  Using the company sales force to promote sales of both shoes and socks. 
E)  Buying both inventory and fixed assets using funds from the same bond issuE.

Question 19

A project will have more than one IRR if:

Accepted Answer

A)  the IRR is positive. 
B)  the IRR is negative. 
C)  the NPV is zero. 
D)  the cash flow pattern exhibits more than one sign change. 
E)  the cash flow pattern exhibits exactly one sign changE. 
A)  the IRR is positive. 
B)  the IRR is negative. 
C)  the NPV is zero. 
D)  the cash flow pattern exhibits more than one sign change. 
E)  the cash flow pattern exhibits exactly one sign changE.

Question 20

An investment is acceptable if its IRR:

Accepted Answer

A)  is exactly equal to its net present value (NPV). 
B)  is exactly equal to zero. 
C)  is less than the required return. 
D)  exceeds the required return. 
E)  is exactly equal to 100%. 
A)  is exactly equal to its net present value (NPV). 
B)  is exactly equal to zero. 
C)  is less than the required return. 
D)  exceeds the required return. 
E)  is exactly equal to 100%.

Exam 5: Net Present Value and Other Investment Rules

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?

The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not?

The internal rate of return for a project will increase if:

You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required return 8.50% Based on the payback period of _______ for this project,you should _______ the project.

Which of the following statement is true?

Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?

The discounted payback rule states that you should accept projects:

The primary reason that company projects with positive net present values are considered acceptable is that:

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

The profitability index is the ratio of:

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

Which one of the following is the best example of two mutually exclusive projects?

A project will have more than one IRR if:

An investment is acceptable if its IRR:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required return 8.50% Based on the payback period of _ for this project,you should _ the project.