Question 1

If there is a conflict between mutually exclusive projects due to the IRR,one should:

Accepted Answer

A)  drop the two projects immediately. 
B)  spend more money on gathering information. 
C)  depend on the NPV as it will always provide the most value. 
D)  depend on the payback because it does not suffer from these same problems. 
E)  None of these. 
A)  drop the two projects immediately. 
B)  spend more money on gathering information. 
C)  depend on the NPV as it will always provide the most value. 
D)  depend on the payback because it does not suffer from these same problems. 
E)  None of these.

Question 2

Which one of the following statements concerning net present value (NPV) is correct?

Accepted Answer

A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be accepted only if the NPV is equal to the initial cash flow. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E)  Any project that has positive cash flows for every time period after the initial investment should be accepted. 
A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be accepted only if the NPV is equal to the initial cash flow. 
C)  An investment should be accepted if the NPV is positive and rejected if it is negative. 
D)  An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E)  Any project that has positive cash flows for every time period after the initial investment should be accepted.

Question 3

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 profitability index (PI) and the information provided 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)  disregard the PI method in this case. 
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)  disregard the PI method in this case.

Question 4

A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true?

Accepted Answer

A)  NPV is positive if the required return is less than 10%. 
B)  NPV is negative if the required return is less than 10%. 
C)  NPV is zero if the required return is equal to 10%. 
D)  Both NPV is positive if the required return is less than 10%; and NPV is zero if the required return is equal to 10%. 
E)  None of these. 
A)  NPV is positive if the required return is less than 10%. 
B)  NPV is negative if the required return is less than 10%. 
C)  NPV is zero if the required return is equal to 10%. 
D)  Both NPV is positive if the required return is less than 10%; and NPV is zero if the required return is equal to 10%. 
E)  None of these.

Question 5

Which one of the following statements is correct concerning the payback period?

Accepted Answer

A)  An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 
B)  An investment should be accepted if the payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. 
E)  An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount ratE. 
A)  An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 
B)  An investment should be accepted if the payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. 
E)  An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount ratE.

Question 6

You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index,what is your recommendation concerning these projects?

Accepted Answer

A)  You should accept both projects since both of their PIs are positive. 
B)  You should accept project A since it has the higher PI. 
C)  You should accept both projects since both of their PIs are greater than 1. 
D)  You should only accept project B since it has the largest PI and the PI exceeds 1. 
E)  Neither project is acceptablE. Because the projects are independent and their PIs exceed 1.0, both projects should be accepted. 
A)  You should accept both projects since both of their PIs are positive. 
B)  You should accept project A since it has the higher PI. 
C)  You should accept both projects since both of their PIs are greater than 1. 
D)  You should only accept project B since it has the largest PI and the PI exceeds 1. 
E)  Neither project is acceptablE. Because the projects are independent and their PIs exceed 1.0, both projects should be accepted.

Question 7

It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

Accepted Answer

A)  .83 years 
B)  1.14 years 
C)  1.83 years 
D)  2.14 years 
E)  2.83 years 
A)  .83 years 
B)  1.14 years 
C)  1.83 years 
D)  2.14 years 
E)  2.83 years

Question 8

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

Accepted Answer

A)  project B because it has the shortest payback period. 
B)  both projects as they both have positive net present values. 
C)  project A and reject project B based on their net present values. 
D)  project B and reject project A based on other criteria not mentioned in the problem. 
E)  project B and reject project A based on both the payback period and the average accounting return. 
A)  project B because it has the shortest payback period. 
B)  both projects as they both have positive net present values. 
C)  project A and reject project B based on their net present values. 
D)  project B and reject project A based on other criteria not mentioned in the problem. 
E)  project B and reject project A based on both the payback period and the average accounting return.

Question 9

The internal rate of return may be defined as:

Accepted Answer

A)  the discount rate that makes the NPV equal to zero. 
B)  the difference between the market rate of interest and the NPV. 
C)  the market rate of interest less the risk-free rate. 
D)  the project acceptance rate set by management. 
E)  None of these. 
A)  the discount rate that makes the NPV equal to zero. 
B)  the difference between the market rate of interest and the NPV. 
C)  the market rate of interest less the risk-free rate. 
D)  the project acceptance rate set by management. 
E)  None of these.

Question 10

A situation in which accepting one investment prevents the acceptance of another investment is called the:

Accepted Answer

A)  net present value profile. 
B)  operational ambiguity decision. 
C)  mutually exclusive investment decision. 
D)  issues of scale problem. 
E)  multiple choices of operations decision. 
A)  net present value profile. 
B)  operational ambiguity decision. 
C)  mutually exclusive investment decision. 
D)  issues of scale problem. 
E)  multiple choices of operations decision.

Question 11

A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five,the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75%?

Accepted Answer

A)  -$5,474.76 
B)  -$1,011.40 
C)  -$935.56 
D)  $1,011.40 
E)  $5,474.76 
A)  -$5,474.76 
B)  -$1,011.40 
C)  -$935.56 
D)  $1,011.40 
E)  $5,474.76

Question 12

All else equal,the payback period for a project will decrease whenever the:

Accepted Answer

A)  initial cost increases. 
B)  required return for a project increases. 
C)  assigned discount rate decreases. 
D)  cash inflows are moved earlier in time. 
E)  duration of a project is lengthened. 
A)  initial cost increases. 
B)  required return for a project increases. 
C)  assigned discount rate decreases. 
D)  cash inflows are moved earlier in time. 
E)  duration of a project is lengthened.

Question 13

The internal rate of return tends to be:

Accepted Answer

A)  easier for managers to comprehend than the net present value. 
B)  extremely accurate even when cash flow estimates are faulty. 
C)  ignored by most financial analysts. 
D)  used primarily to differentiate between mutually exclusive projects. 
E)  utilized in project analysis only when multiple net present values apply. 
A)  easier for managers to comprehend than the net present value. 
B)  extremely accurate even when cash flow estimates are faulty. 
C)  ignored by most financial analysts. 
D)  used primarily to differentiate between mutually exclusive projects. 
E)  utilized in project analysis only when multiple net present values apply.

Question 14

The profitability index is closely related to:

Accepted Answer

A)  payback. 
B)  discounted payback. 
C)  average accounting return. 
D)  net present value. 
E)  internal rate of return. 
A)  payback. 
B)  discounted payback. 
C)  average accounting return. 
D)  net present value. 
E)  internal rate of return.

Question 15

The problem of multiple IRRs can occur when:

Accepted Answer

A)  there is only one sign change in the cash flows. 
B)  the first cash flow is always positive. 
C)  the cash flows decline over the life of the project. 
D)  there is more than one sign change in the cash flows. 
E)  None of these. 
A)  there is only one sign change in the cash flows. 
B)  the first cash flow is always positive. 
C)  the cash flows decline over the life of the project. 
D)  there is more than one sign change in the cash flows. 
E)  None of these.

Question 16

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Accepted Answer

A)  the discount rate and scale problems. 
B)  timing and scale problems. 
C)  the discount rate and timing problems. 
D)  scale and reversing flow problems. 
E)  timing and reversing flow problems. 
A)  the discount rate and scale problems. 
B)  timing and scale problems. 
C)  the discount rate and timing problems. 
D)  scale and reversing flow problems. 
E)  timing and reversing flow problems.

Question 17

An investment project has the cash flow stream of $-3250,$80,$200,$75,and $90. The cost of capital is 12%. What is the discounted payback period?

Accepted Answer

A)  1.24 years 
B)  1.85 years 
C)  2.24 years 
D)  2.85 years 
E)  3.05 years 
A)  1.24 years 
B)  1.85 years 
C)  2.24 years 
D)  2.85 years 
E)  3.05 years

Question 18

Given that the net present value (NPV) is generally considered to be the best method of analysis,why should you still use the other methods?

Accepted Answer

A)  The other methods help validate whether or not the results from the net present value analysis are reliable. 
B)  You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. 
C)  You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows. 
D)  The internal rate of return must always indicate acceptance since this is the best method from a financial perspective. 
E)  The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project. 
A)  The other methods help validate whether or not the results from the net present value analysis are reliable. 
B)  You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. 
C)  You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows. 
D)  The internal rate of return must always indicate acceptance since this is the best method from a financial perspective. 
E)  The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project.

Question 19

Discuss how frequently publicly traded firms use different capital budgeting tools.

Accepted Answer

Graham and Dodd (2001) surveyed CFO's of

Question 20

The payback period rule:

Accepted Answer

A)  discounts cash flows. 
B)  ignores initial cost. 
C)  always uses all possible cash flows in its calculation. 
D)  Both discounts cash flows; and always uses all possible cash flows in its calculation. 
E)  None of these. 
A)  discounts cash flows. 
B)  ignores initial cost. 
C)  always uses all possible cash flows in its calculation. 
D)  Both discounts cash flows; and always uses all possible cash flows in its calculation. 
E)  None of these.

Exam 5: Net Present Value and Other Investment Rules

If there is a conflict between mutually exclusive projects due to the IRR,one should:

Which one of the following statements concerning net present value (NPV) is correct?

A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true?

Which one of the following statements is correct concerning the payback period?

You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index,what is your recommendation concerning these projects?

It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

The internal rate of return may be defined as:

A situation in which accepting one investment prevents the acceptance of another investment is called the:

All else equal,the payback period for a project will decrease whenever the:

The internal rate of return tends to be:

The profitability index is closely related to:

The problem of multiple IRRs can occur when:

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

An investment project has the cash flow stream of $-3250,$80,$200,$75,and $90. The cost of capital is 12%. What is the discounted payback period?

Given that the net present value (NPV) is generally considered to be the best method of analysis,why should you still use the other methods?

Discuss how frequently publicly traded firms use different capital budgeting tools.

The payback period rule:

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

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