Question 1

Which of the following statements is false?

Accepted Answer

A) The internal rate of return is the discount rate that results in a zero net present value for the project. 
B) The internal rate of return represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life. 
C) The internal rate of return represents the rate of interest that recovers the initial investment outlay. 
D) The internal rate of return is the discount rate that results in a zero net present value for the project.It also represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life. 
A) The internal rate of return is the discount rate that results in a zero net present value for the project. 
B) The internal rate of return represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life. 
C) The internal rate of return represents the rate of interest that recovers the initial investment outlay. 
D) The internal rate of return is the discount rate that results in a zero net present value for the project.It also represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life. C

Question 2

A firm may choose a project with a rapid payback period rather than one with a larger net present value because:

Accepted Answer

A) it may have a poor cash position and limited access to outside finance. 
B) no reason is necessary,as it would never happen. 
C) the payback period is a superior means of evaluating projects. 
D) the required rate of return may not be readily determinable. 
A) it may have a poor cash position and limited access to outside finance. 
B) no reason is necessary,as it would never happen. 
C) the payback period is a superior means of evaluating projects. 
D) the required rate of return may not be readily determinable. A

Question 3

Real options are of greater value than 'now-or-never' prospects as they provide management with _________.

Accepted Answer

flexibility

Question 4

A major shortcoming in the use of accounting rate of return as a method of project evaluation is that it ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 5

For independent projects,which of the following statements is true?

Accepted Answer

A) The internal rate of return and net present value methods lead to the same reject/accept decision. 
B) The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is greater than the required rate of return. 
C) The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is less than the required rate of return. 
D) The internal rate of return and net present value methods do not lead to the same reject/accept decision if there are multiple internal rates of return. 
A) The internal rate of return and net present value methods lead to the same reject/accept decision. 
B) The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is greater than the required rate of return. 
C) The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is less than the required rate of return. 
D) The internal rate of return and net present value methods do not lead to the same reject/accept decision if there are multiple internal rates of return.

Question 6

The benefit-cost ratio is also known as the profitability index.

Accepted Answer

A) True 
 B)False

Question 7

The acceptance criterion for independent projects is to choose the project with:

Accepted Answer

A) the highest net present value. 
B) the highest internal rate of return for mutually exclusive projects. 
C) the lowest internal rate of return for independent projects. 
D) the lowest net present value. 
A) the highest net present value. 
B) the highest internal rate of return for mutually exclusive projects. 
C) the lowest internal rate of return for independent projects. 
D) the lowest net present value.

Question 8

The number of internal rates of return is limited to the:

Accepted Answer

A) number of investments being evaluated. 
B) number of sign reversals in the cash flow stream. 
C) direction of sign reversals in the cash flow stream. 
D) none of the given options. 
A) number of investments being evaluated. 
B) number of sign reversals in the cash flow stream. 
C) direction of sign reversals in the cash flow stream. 
D) none of the given options.

Question 9

Project B has a cost of $23 956 and its expected net cash flows are $6000 p.a.for the next five years.If the required rate of return is 10%,what is the net present value of the project?

Accepted Answer

A) $12 674.60 
B) $1211.80 
C) ($1950.77) 
D) ($1211.80) 
A) $12 674.60 
B) $1211.80 
C) ($1950.77) 
D) ($1211.80)

Question 10

Which of the following statements about the internal rate of return method is false?

Accepted Answer

A) The internal rate of return is equal to the required rate of return when the net present value is equal to zero. 
B) The internal rate of return is greater than the required rate of return when the net present value is negative. 
C) The internal rate of return represents the expected rate of return on a project. 
D) The internal rate of return is the discount rate that forces the present value of a project's inflows to equal its outflows. 
A) The internal rate of return is equal to the required rate of return when the net present value is equal to zero. 
B) The internal rate of return is greater than the required rate of return when the net present value is negative. 
C) The internal rate of return represents the expected rate of return on a project. 
D) The internal rate of return is the discount rate that forces the present value of a project's inflows to equal its outflows.

Question 11

Which of the following statements about the net present value method of selecting projects is true?

Accepted Answer

A) If projects are independent,then the project with the highest net present value (providing it is greater than zero)is accepted. 
B) If the projects are mutually exclusive,then all projects with a net present value greater than zero are accepted. 
C) For two mutually exclusive projects,the net present value and internal rate of return methods select different projects if the required rate of return is greater than the discount rate at which the two net present value profiles intersect. 
D) If a project's cash flows are positive after discounting them by the required rate of return,then it may be accepted if there are no better alternatives. 
A) If projects are independent,then the project with the highest net present value (providing it is greater than zero)is accepted. 
B) If the projects are mutually exclusive,then all projects with a net present value greater than zero are accepted. 
C) For two mutually exclusive projects,the net present value and internal rate of return methods select different projects if the required rate of return is greater than the discount rate at which the two net present value profiles intersect. 
D) If a project's cash flows are positive after discounting them by the required rate of return,then it may be accepted if there are no better alternatives.

Question 12

Which of the following items of information is not necessary for project evaluations?

Accepted Answer

A) The initial cash outlay. 
B) The life of a project. 
C) The internal rate of return. 
D) The required rate of return. 
A) The initial cash outlay. 
B) The life of a project. 
C) The internal rate of return. 
D) The required rate of return.

Question 13

A fundamental problem with using the accounting rate of return for project evaluation is that it ignores the ________________ of the earnings stream.

Accepted Answer

The answer of A fundamental problem with using the accounting...

Question 14

The net present value method of project evaluation is preferred to the internal rate of return method because:

Accepted Answer

A) the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects. 
B) the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows. 
C) most projects are independent rather than mutually exclusive. 
D) the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects. 
A) the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects. 
B) the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows. 
C) most projects are independent rather than mutually exclusive. 
D) the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects.

Question 15

A company is to evaluate the following mutually exclusive investment proposals.The required rate of return is 10%.  Why do these methods lead to different rankings of the proposals A and B?

Accepted Answer

The answer of A company is to evaluate the following...

Question 16

What is the accounting rate of return for a project that requires an initial outlay of $15 000 and has the expectation of future earnings of $4000 p.a.for the next five years? Assume the required rate of return is 8% p.a.

Accepted Answer

A) 1.333 
B) $970.80 
C) 1.0647 
D) 1.564 
A) 1.333 
B) $970.80 
C) 1.0647 
D) 1.564

Question 17

A project that may be accepted or rejected without affecting the acceptability of another project is known as:

Accepted Answer

A) an independent project. 
B) an additional project. 
C) a mutually exclusive project. 
D) a feasible project. 
A) an independent project. 
B) an additional project. 
C) a mutually exclusive project. 
D) a feasible project.

Question 18

The assumed financial objective of a company is to:

Accepted Answer

A) maximise profits. 
B) minimise costs. 
C) maximise revenue. 
D) maximise shareholders' wealth. 
A) maximise profits. 
B) minimise costs. 
C) maximise revenue. 
D) maximise shareholders' wealth.

Question 19

If a project has an expected life of three years,requires an initial outlay of $5000,has a net present value of $2205.40 and an accounting rate of return of 40%,and promises a uniform cash flow over its life,how much depreciation is being deducted on an annual basis if the required rate of return is 12% p.a.?

Accepted Answer

A) $800 
B) $1000 
C) $550 
D) $430 
A) $800 
B) $1000 
C) $550 
D) $430

Question 20

EVA can be shown as:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Exam 5: Project Evaluation: Principles and Methods

Which of the following statements is false?

A firm may choose a project with a rapid payback period rather than one with a larger net present value because:

Real options are of greater value than 'now-or-never' prospects as they provide management with _________.

A major shortcoming in the use of accounting rate of return as a method of project evaluation is that it ignores the time value of money.

For independent projects,which of the following statements is true?

The benefit-cost ratio is also known as the profitability index.

The acceptance criterion for independent projects is to choose the project with:

The number of internal rates of return is limited to the:

Project B has a cost of $23 956 and its expected net cash flows are $6000 p.a.for the next five years.If the required rate of return is 10%,what is the net present value of the project?

Which of the following statements about the internal rate of return method is false?

Which of the following statements about the net present value method of selecting projects is true?

Which of the following items of information is not necessary for project evaluations?

A fundamental problem with using the accounting rate of return for project evaluation is that it ignores the ________________ of the earnings stream.

The net present value method of project evaluation is preferred to the internal rate of return method because:

A company is to evaluate the following mutually exclusive investment proposals.The required rate of return is 10%. Why do these methods lead to different rankings of the proposals A and B?

What is the accounting rate of return for a project that requires an initial outlay of $15 000 and has the expectation of future earnings of $4000 p.a.for the next five years? Assume the required rate of return is 8% p.a.

A project that may be accepted or rejected without affecting the acceptability of another project is known as:

The assumed financial objective of a company is to:

EVA can be shown as:

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Applying the Time Value of Money to Security Valuation

The Application of Project Evaluation Methods

Risk and Return

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Payout Policy

Principles of Capital Structure

Capital Structure Decisions

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Options and Contingent Claims

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

Filters