Question 1

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

Accepted Answer

A)  yes; because the IRR exceeds the required return by about 0.39%. 
B)  yes; because the IRR is less than the required return by about 3.9%. 
C)  yes; because the IRR is positive. 
D)  no; because the IRR exceeds the required return by about 3.9%. 
E)  no; because the IRR is 9.89%. 
A)  yes; because the IRR exceeds the required return by about 0.39%. 
B)  yes; because the IRR is less than the required return by about 3.9%. 
C)  yes; because the IRR is positive. 
D)  no; because the IRR exceeds the required return by about 3.9%. 
E)  no; because the IRR is 9.89%.

Question 2

An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.

Accepted Answer

A)  -$634.89; 12.60% 
B)  $0; 15.2382% 
C)  $4,000; 0% 
D)  Can not answer without one or the other value as input. 
E)  None of these. 
A)  -$634.89; 12.60% 
B)  $0; 15.2382% 
C)  $4,000; 0% 
D)  Can not answer without one or the other value as input. 
E)  None of these.

Question 3

You are analyzing two mutually exclusive projects and have developed the following information. What is the incremental IRR?

Accepted Answer

A)  11.11% 
B)  13.01% 
C)  14.91% 
D)  16.75% 
E)  17.90% 
A)  11.11% 
B)  13.01% 
C)  14.91% 
D)  16.75% 
E)  17.90%

Question 4

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%.

Accepted Answer

A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02 
A)  $218.68 
B)  $370.16 
C)  $768.20 
D)  $1,249.65 
E)  $1,371.02

Question 5

A mutually exclusive project is a project whose:

Accepted Answer

A)  acceptance or rejection has no effect on other projects. 
B)  NPV is always negative. 
C)  IRR is always negative. 
D)  acceptance or rejection affects other projects. 
E)  cash flow pattern exhibits more than one sign changE. 
A)  acceptance or rejection has no effect on other projects. 
B)  NPV is always negative. 
C)  IRR is always negative. 
D)  acceptance or rejection affects other projects. 
E)  cash flow pattern exhibits more than one sign changE.

Question 6

Analysis using the profitability index:

Accepted Answer

A)  frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B)  is useful as a decision tool when investment funds are limited. 
C)  cannot be used to aid capital rationing. 
D)  utilizes the same basic variables as those used in the average accounting return. 
E)  produces results which typically are difficult to comprehend or apply. 
A)  frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B)  is useful as a decision tool when investment funds are limited. 
C)  cannot be used to aid capital rationing. 
D)  utilizes the same basic variables as those used in the average accounting return. 
E)  produces results which typically are difficult to comprehend or apply.

Question 7

You are considering an investment with the following cash flows. If the required rate of return for this investment is 13.5%,should you accept it based solely on the internal rate of return rule? Why or why not?

Accepted Answer

A)  Yes; because the IRR exceeds the required return. 
B)  Yes; because the IRR is a positive rate of return. 
C)  No; because the IRR is less than the required return. 
D)  No; because the IRR is a negative rate of return. 
E)  You can not apply the IRR rule in this case because there are multiple IRRs. 
A)  Yes; because the IRR exceeds the required return. 
B)  Yes; because the IRR is a positive rate of return. 
C)  No; because the IRR is less than the required return. 
D)  No; because the IRR is a negative rate of return. 
E)  You can not apply the IRR rule in this case because there are multiple IRRs.

Question 8

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.

Accepted Answer

A)  3 
B)  3.2 
C)  3.75 
D)  4 
E)  5 
A)  3 
B)  3.2 
C)  3.75 
D)  4 
E)  5

Question 9

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

Accepted Answer

A)  external rate of return. 
B)  internal rate of return. 
C)  average accounting return. 
D)  profitability index. 
E)  equalizer. 
A)  external rate of return. 
B)  internal rate of return. 
C)  average accounting return. 
D)  profitability index. 
E)  equalizer.

Question 10

When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:

Accepted Answer

A)  independent. 
B)  marginally profitable. 
C)  mutually exclusive. 
D)  acceptable. 
E)  internally profitablE. 
A)  independent. 
B)  marginally profitable. 
C)  mutually exclusive. 
D)  acceptable. 
E)  internally profitablE.

Question 11

The internal rate of return is:

Accepted Answer

A)  more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B)  equivalent to the discount rate that makes the net present value equal to one. 
C)  difficult to compute without the use of either a financial calculator or a computer. 
D)  dependent upon the interest rates offered in the marketplace. 
E)  a better methodology than net present value when dealing with unconventional cash flows. 
A)  more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B)  equivalent to the discount rate that makes the net present value equal to one. 
C)  difficult to compute without the use of either a financial calculator or a computer. 
D)  dependent upon the interest rates offered in the marketplace. 
E)  a better methodology than net present value when dealing with unconventional cash flows.

Question 12

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

Accepted Answer

A)  greater than one. 
B)  greater than the cutoff point. 
C)  less than the cutoff point. 
D)  positive. 
E)  None of these. 
A)  greater than one. 
B)  greater than the cutoff point. 
C)  less than the cutoff point. 
D)  positive. 
E)  None of these.

Question 13

Net present value:

Accepted Answer

A)  cannot be used when deciding between two mutually exclusive projects. 
B)  is more useful to decision makers than the internal rate of return when comparing different sized projects. 
C)  is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. 
D)  is not an as widely used tool as payback and discounted payback. 
E)  is very similar in its methodology to the average accounting return. 
A)  cannot be used when deciding between two mutually exclusive projects. 
B)  is more useful to decision makers than the internal rate of return when comparing different sized projects. 
C)  is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. 
D)  is not an as widely used tool as payback and discounted payback. 
E)  is very similar in its methodology to the average accounting return.

Question 14

The payback period rule:

Accepted Answer

A)  determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B)  determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. 
C)  requires an arbitrary choice of a cutoff point. 
D)  varies the cutoff point with the interest rate. 
E)  Both determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule; and varies the cutoff point with the interest ratE. 
A)  determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B)  determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. 
C)  requires an arbitrary choice of a cutoff point. 
D)  varies the cutoff point with the interest rate. 
E)  Both determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule; and varies the cutoff point with the interest ratE.

Question 15

Modified internal rate of return:

Accepted Answer

A)  handles the multiple IRR problem by combining cash flows until only one change in sign change remains. 
B)  requires the use of a discount rate. 
C)  does not require the use of a discount rate. 
D)  Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and requires the use of a discount rate. 
E)  Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and does not require the use of a discount ratE. 
A)  handles the multiple IRR problem by combining cash flows until only one change in sign change remains. 
B)  requires the use of a discount rate. 
C)  does not require the use of a discount rate. 
D)  Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and requires the use of a discount rate. 
E)  Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and does not require the use of a discount ratE.

Question 16

The Walker Landscaping Company can purchase a piece of equipment for $3,600. The asset has a two-year life,and will produce a cash flow of $600 in the first year and $4,200 in the second year. The interest rate is 15%. Calculate the project's payback assuming steady cash flows. Also calculate the project's IRR. Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback = 1.714 year

Question 17

In actual practice,managers may use the: I. IRR because the results are easy to communicate and understand.
II) payback because of its simplicity.
III) net present value because it is considered by many to be the best method of analysis.

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III 
E)  None of these. 
A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III 
E)  None of these.

Question 18

The difference between the present value of an investment and its cost is the:

Accepted Answer

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

Question 19

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 on the net present value method of analysis and given the information in the problem,you should:

Accepted Answer

A)  accept both project A and project B. 
B)  accept project A and reject project B. 
C)  accept project B and reject project A. 
D)  reject both project A and project B. 
E)  accept whichever one you want as they represent equal opportunities. 
A)  accept both project A and project B. 
B)  accept project A and reject project B. 
C)  accept project B and reject project A. 
D)  reject both project A and project B. 
E)  accept whichever one you want as they represent equal opportunities.

Question 20

If a project has a net present value equal to zero,then: I. the present value of the cash inflows exceeds the initial cost of the project.
II) the project produces a rate of return that just equals the rate required to accept the project.
III) the project is expected to produce only the minimally required cash inflows.
IV) any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Accepted Answer

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

Exam 5: Net Present Value and Other Investment Rules

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.

You are analyzing two mutually exclusive projects and have developed the following information. What is the incremental IRR?

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%.

A mutually exclusive project is a project whose:

Analysis using the profitability index:

You are considering an investment with the following cash flows. If the required rate of return for this investment is 13.5%,should you accept it based solely on the internal rate of return rule? Why or why not?

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:

The internal rate of return is:

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

Net present value:

The payback period rule:

Modified internal rate of return:

In actual practice,managers may use the: I. IRR because the results are easy to communicate and understand. II) payback because of its simplicity. III) net present value because it is considered by many to be the best method of analysis.

The difference between the present value of an investment and its cost is the:

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

An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is and the IRR is for the project.