Question 1

Use the PI decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  -1.21%, reject 
B)  1.08%, accept 
C)  1.21%, accept 
D)  121%, accept 
A)  -1.21%, reject 
B)  1.08%, accept 
C)  1.21%, accept 
D)  121%, accept

Question 2

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  -10.60%, reject 
B)  10.60%, accept 
C)  -15.33%, reject 
D)  15.33%, accept 
A)  -10.60%, reject 
B)  10.60%, accept 
C)  -15.33%, reject 
D)  15.33%, accept

Question 3

A project has normal cash flows. Its IRR is 15% and its cost of capital is 10%. Which of the following statements is incorrect?

Accepted Answer

A)  The project has only one negative cash flow. 
B)  The project's MIRR is less than 15% but greater than 10%. 
C)  The project's discounted payback is less than the project's payback. 
D)  The project's NPV > 0. 
A)  The project has only one negative cash flow. 
B)  The project's MIRR is less than 15% but greater than 10%. 
C)  The project's discounted payback is less than the project's payback. 
D)  The project's NPV > 0.

Question 4

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  Payback = 4.44 years; reject 
B)  Payback = 3.44 years; accept 
C)  Payback = 3.54 years; reject 
D)  Payback = 3.24 years; reject 
A)  Payback = 4.44 years; reject 
B)  Payback = 3.44 years; accept 
C)  Payback = 3.54 years; reject 
D)  Payback = 3.24 years; reject

Question 5

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

Accepted Answer

A)  8.64% 
B)  9.02% 
C)  10.51% 
D)  11.29% 
A)  8.64% 
B)  9.02% 
C)  10.51% 
D)  11.29%

Question 6

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  IRR = 16.92%; accept the project 
B)  IRR = 7.123%; reject the project 
C)  IRR = 8.81%; reject the project 
D)  IRR = 10.59%; accept the project 
A)  IRR = 16.92%; accept the project 
B)  IRR = 7.123%; reject the project 
C)  IRR = 8.81%; reject the project 
D)  IRR = 10.59%; accept the project

Question 7

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent. Project Y

Accepted Answer

A)  $894.37 
B)  $993.97 
C)  $964.72 
D)  $1,008.03 
A)  $894.37 
B)  $993.97 
C)  $964.72 
D)  $1,008.03

Question 8

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  NPV = $1,766.55; accept the project 
B)  NPV = $892.19; accept the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = -$104.73; reject the project 
A)  NPV = $1,766.55; accept the project 
B)  NPV = $892.19; accept the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = -$104.73; reject the project

Question 9

The Net Present Value decision technique uses a statistic denominated in

Accepted Answer

A)  years. 
B)  currency. 
C)  a percentage. 
D)  time lines. 
A)  years. 
B)  currency. 
C)  a percentage. 
D)  time lines.

Question 10

Which of the following statements is correct?

Accepted Answer

A)  A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. 
B)  Discounted payback uses a more aggressive reinvestment rate assumption than payback. 
C)  Neither payback nor discounted payback uses time value of money concepts. 
D)  None of these statements is correct. 
A)  A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. 
B)  Discounted payback uses a more aggressive reinvestment rate assumption than payback. 
C)  Neither payback nor discounted payback uses time value of money concepts. 
D)  None of these statements is correct.

Question 11

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  2.45 years, accept 
B)  2.83 years, accept 
C)  3.45 years, accept 
D)  3.83 years, reject 
A)  2.45 years, accept 
B)  2.83 years, accept 
C)  3.45 years, accept 
D)  3.83 years, reject

Question 12

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________.

Accepted Answer

A)  NPV 
B)  Profitability Index 
C)  MIRR 
D)  Discounted Payback 
A)  NPV 
B)  Profitability Index 
C)  MIRR 
D)  Discounted Payback

Question 13

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A)  accept both A and B 
B)  accept neither A nor B 
C)  accept A, reject B 
D)  reject A, accept B 
A)  accept both A and B 
B)  accept neither A nor B 
C)  accept A, reject B 
D)  reject A, accept B

Question 14

Explain what a PI of 35.23% would signify.

Accepted Answer

The PI of 35.23% is telling us that the

Question 15

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

Accepted Answer

A)  payback period 
B)  discounted payback period 
C)  modified internal rate of return 
D)  net present value 
A)  payback period 
B)  discounted payback period 
C)  modified internal rate of return 
D)  net present value

Question 16

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  NPV = $1,766.55; accept the project 
B)  NPV = -$892.19; reject the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = -$3,577.90; reject the project 
A)  NPV = $1,766.55; accept the project 
B)  NPV = -$892.19; reject the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = -$3,577.90; reject the project

Question 17

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Accepted Answer

A)  Independent projects that are evaluated at a high cost of capital. 
B)  Mutually exclusive projects that are evaluated at a low cost of capital. 
C)  Any projects that exhibit differences in scale or timing. 
D)  Mutually exclusive projects that exhibit differences in scale or timing. 
A)  Independent projects that are evaluated at a high cost of capital. 
B)  Mutually exclusive projects that are evaluated at a low cost of capital. 
C)  Any projects that exhibit differences in scale or timing. 
D)  Mutually exclusive projects that exhibit differences in scale or timing.

Question 18

A company is considering two mutually exclusive projects, A and B. Project A requires an initial investment of $200, followed by cash flows of $185, $40 and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50 and $230. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10%.

Accepted Answer

A)  15.45% 
B)  15.12% 
C)  13.57% 
D)  12.71% 
A)  15.45% 
B)  15.12% 
C)  13.57% 
D)  12.71%

Question 19

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  1.23 years, accept 
B)  2.45 years, accept 
C)  2.77 years, accept 
D)  5.36 years, reject 
A)  1.23 years, accept 
B)  2.45 years, accept 
C)  2.77 years, accept 
D)  5.36 years, reject

Question 20

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years.

Accepted Answer

A)  2.49 years, accept 
B)  2.98 years, accept 
C)  3.49 years, reject 
D)  4.98 years, reject 
A)  2.49 years, accept 
B)  2.98 years, accept 
C)  3.49 years, reject 
D)  4.98 years, reject

Use the PI decision rule to evaluate this project; should it be accepted or rejected?

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A project has normal cash flows. Its IRR is 15% and its cost of capital is 10%. Which of the following statements is incorrect?

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent. Project Y

The Net Present Value decision technique uses a statistic denominated in

Which of the following statements is correct?

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________.

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Explain what a PI of 35.23% would signify.

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Use the PI decision rule to evaluate this project; should it be accepted or rejected?

Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

A project has normal cash flows. Its IRR is 15% and its cost of capital is 10%. Which of the following statements is incorrect?

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent. Project Y

The Net Present Value decision technique uses a statistic denominated in

Which of the following statements is correct?

Use the payback decision rule to evaluate this project; should it be accepted or rejected?

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as _______________________.

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Explain what a PI of 35.23% would signify.

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is 3 years.

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters