Question 1

Using internal rate of return,a conventional project should be accepted if the internal rate of return is:

Accepted Answer

A)  equal to the discount rate. 
B)  greater than the discount rate. 
C)  less than the discount rate. 
D)  negative. 
E)  positivE. 
A)  equal to the discount rate. 
B)  greater than the discount rate. 
C)  less than the discount rate. 
D)  negative. 
E)  positivE.

Question 2

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

Accepted Answer

A)  -$2,021.28; reject 
B)  -$406.19; reject 
C)  $7,978.72; accept 
D)  $9,836.74; accept 
E)  $12,684.23; accept 
A)  -$2,021.28; reject 
B)  -$406.19; reject 
C)  $7,978.72; accept 
D)  $9,836.74; accept 
E)  $12,684.23; accept

Question 3

You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis,you should compute the incremental IRR by determining:

Accepted Answer

A)  the internal rate of return for the cash flows of each project. 
B)  the net present value of each project using the internal rate of return as the discount rate. 
C)  the discount rate that equates the discounted payback periods for each project. 
D)  the discount rate that makes the net present value of each project equal to 1. 
E)  the internal rate of return for the differences in the cash flows of the two projects. 
A)  the internal rate of return for the cash flows of each project. 
B)  the net present value of each project using the internal rate of return as the discount rate. 
C)  the discount rate that equates the discounted payback periods for each project. 
D)  the discount rate that makes the net present value of each project equal to 1. 
E)  the internal rate of return for the differences in the cash flows of the two projects.

Question 4

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

Accepted Answer

A)  .97; accept 
B)  1.05; accept 
C)  1.18; accept 
D)  .97; reject 
E)  1.05; reject 
A)  .97; accept 
B)  1.05; accept 
C)  1.18; accept 
D)  .97; reject 
E)  1.05; reject

Question 5

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

Accepted Answer

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

Question 6

What is the internal rate of return on an investment with the following cash flows?

Accepted Answer

A)  5.93% 
B)  5.96% 
C)  6.04% 
D)  6.09% 
E)  6.13% 
A)  5.93% 
B)  5.96% 
C)  6.04% 
D)  6.09% 
E)  6.13%

Question 7

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Accepted Answer

A)  net present value. 
B)  internal rate of return. 
C)  average accounting return. 
D)  profitability index. 
E)  profile period. 
A)  net present value. 
B)  internal rate of return. 
C)  average accounting return. 
D)  profitability index. 
E)  profile period.

Question 8

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

Accepted Answer

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

Question 9

Which of the following does not characterize NPV?

Accepted Answer

A)  NPV does not explicitly incorporate risk into the analysis. 
B)  NPV incorporates all relevant cash flow information. 
C)  NPV uses all of the project's cash flows. 
D)  NPV discounts all future cash flows. 
E)  Using NPV will lead to decisions that maximize shareholder wealth. 
A)  NPV does not explicitly incorporate risk into the analysis. 
B)  NPV incorporates all relevant cash flow information. 
C)  NPV uses all of the project's cash flows. 
D)  NPV discounts all future cash flows. 
E)  Using NPV will lead to decisions that maximize shareholder wealth.

Question 10

No matter how many forms of investment analysis you do:

Accepted Answer

A)  the actual results from a project may vary significantly from the expected results. 
B)  the internal rate of return will always produce the most reliable results. 
C)  a project will never be accepted unless the payback period is met. 
D)  the initial costs will generally vary considerably from the estimated costs. 
E)  only the first three years of a project ever affect its final outcomE. 
A)  the actual results from a project may vary significantly from the expected results. 
B)  the internal rate of return will always produce the most reliable results. 
C)  a project will never be accepted unless the payback period is met. 
D)  the initial costs will generally vary considerably from the estimated costs. 
E)  only the first three years of a project ever affect its final outcomE.

Question 11

If a project is assigned a required rate of return equal to zero,then:

Accepted Answer

A)  the timing of the project's cash flows has no bearing on the value of the project. 
B)  the project will always be accepted. 
C)  the project will always be rejected. 
D)  whether the project is accepted or rejected will depend on the timing of the cash flows. 
E)  the project can never add value for the shareholders. 
A)  the timing of the project's cash flows has no bearing on the value of the project. 
B)  the project will always be accepted. 
C)  the project will always be rejected. 
D)  whether the project is accepted or rejected will depend on the timing of the cash flows. 
E)  the project can never add value for the shareholders.

Question 12

The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center. Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from the _______ method of analysis.

Accepted Answer

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

Question 13

An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.

Accepted Answer

A)  $0; 15.2382% 
B)  $3.33; 27.2242% 
C)  $5,000; 0% 
D)  Can not answer without one or the other value as input. 
E)  None of these. 
A)  $0; 15.2382% 
B)  $3.33; 27.2242% 
C)  $5,000; 0% 
D)  Can not answer without one or the other value as input. 
E)  None of these.

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 Discounted Payback and Profitability Index assuming end of year cash flows. Should the project be taken?
 If the Average Accounting Return was positive,how would this affect your decision?

Accepted Answer

Time 0 - Cash flows = $-4,300,Present Va

Question 15

Accepting positive NPV projects benefits the stockholders because:

Accepted Answer

A)  it is the most easily understood valuation process. 
B)  the present value of the expected cash flows are equal to the cost. 
C)  the present value of the expected cash flows are greater than the cost. 
D)  it is the most easily calculated. 
E)  None of these. 
A)  it is the most easily understood valuation process. 
B)  the present value of the expected cash flows are equal to the cost. 
C)  the present value of the expected cash flows are greater than the cost. 
D)  it is the most easily calculated. 
E)  None of these.

Question 16

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively. What is the discounted payback period if the required rate of return is 8%?

Accepted Answer

A)  2.05 years 
B)  2.13 years 
C)  2.33 years 
D)  3.00 years 
E)  never 
A)  2.05 years 
B)  2.13 years 
C)  2.33 years 
D)  3.00 years 
E)  never

Question 17

The Camel Company is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _______ and if the required rate is higher than the crossover rate then project _______ should be accepted.

Accepted Answer

A)  13.94%; A 
B)  13.94%; B 
C)  15.44%; A 
D)  15.44%; B 
E)  15.86%; A 
A)  13.94%; A 
B)  13.94%; B 
C)  15.44%; A 
D)  15.44%; B 
E)  15.86%; A

Question 18

An investment with an initial cost of $14,000 produces cash flows of $4,000 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)  2.5 
B)  2.68 
C)  4.53 
D)  4.87 
E)  Never 
A)  2.5 
B)  2.68 
C)  4.53 
D)  4.87 
E)  Never

Question 19

What is the net present value of a project with the following cash flows and a required return of 12%?

Accepted Answer

A)  -$287.22 
B)  -$177.62 
C)  $177.62 
D)  $204.36 
E)  $287.22 
A)  -$287.22 
B)  -$177.62 
C)  $177.62 
D)  $204.36 
E)  $287.22

Question 20

Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years. The expected cash flows in years 1 and 2 are $5,000,in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.

Accepted Answer

A)  3.18 years 
B)  3.82 years 
C)  4.00 years 
D)  4.55 years 
E)  None of these. 
A)  3.18 years 
B)  3.82 years 
C)  4.00 years 
D)  4.55 years 
E)  None of these.

Exam 5: Net Present Value and Other Investment Rules

Using internal rate of return,a conventional project should be accepted if the internal rate of return is:

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

You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis,you should compute the incremental IRR by determining:

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

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

What is the internal rate of return on an investment with the following cash flows?

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

Which of the following does not characterize NPV?

No matter how many forms of investment analysis you do:

If a project is assigned a required rate of return equal to zero,then:

An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is ______ and the IRR is ______ for the project.

Accepting positive NPV projects benefits the stockholders because:

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively. What is the discounted payback period if the required rate of return is 8%?

The Camel Company is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _______ and if the required rate is higher than the crossover rate then project _______ should be accepted.

An investment with an initial cost of $14,000 produces cash flows of $4,000 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.

What is the net present value of a project with the following cash flows and a required return of 12%?

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 net present value of _ for this project,you should _ the project.

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

An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is and the IRR is for the project.

The Camel Company is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _ and if the required rate is higher than the crossover rate then project _ should be accepted.