Question 1

A post-completion audit of investment projects is important because:

Accepted Answer

A) wasted expenditure may be avoided if internal control systems are in place. 
B) approval of an investment proposal is required before expenditure can take place. 
C) accountants need to understand the capital expenditure process when auditing it. 
D) it provides valuable information to enable implementation of improvements in the project's operating performance. 
A) wasted expenditure may be avoided if internal control systems are in place. 
B) approval of an investment proposal is required before expenditure can take place. 
C) accountants need to understand the capital expenditure process when auditing it. 
D) it provides valuable information to enable implementation of improvements in the project's operating performance.

Question 2

The payback period method of project evaluation provides a simple way of controlling for the risk of a project.

Accepted Answer

A) True 
 B)False

Question 3

Any difference in the magnitude or timing of the cash flows derived from investment projects may cause a difference in the ranking of investment projects using the internal rate of return and net present value methods.

Accepted Answer

A) True 
 B)False

Question 4

For mutually exclusive projects,the internal rate of return and the net present value give consistent accept/reject decisions if:

Accepted Answer

A) the net present value profiles for both projects do not intersect. 
B) the required rate of return is less than the discount rate,which causes the net present value profiles of the two projects to intersect. 
C) the investment projects have equal lives. 
D) the investment projects have identical cash flows in the final year. 
A) the net present value profiles for both projects do not intersect. 
B) the required rate of return is less than the discount rate,which causes the net present value profiles of the two projects to intersect. 
C) the investment projects have equal lives. 
D) the investment projects have identical cash flows in the final year.

Question 5

Using the benefit-cost ratio the decision rule is to accept projects with a benefit-cost ratio:

Accepted Answer

A) equal to 1. 
B) less than 1. 
C) greater than the opportunity cost. 
D) greater than 1. 
A) equal to 1. 
B) less than 1. 
C) greater than the opportunity cost. 
D) greater than 1.

Question 6

Project X has a cost of $53 847 and its expected net cash flows are $12 000 p.a.for the next eight years.What is the project's internal rate of return?

Accepted Answer

A) 13% 
B) 12% 
C) 15% 
D) 9.5% 
A) 13% 
B) 12% 
C) 15% 
D) 9.5%

Question 7

A company has the opportunity to invest in two projects,both of which have a positive net present value.They will accept both projects if they are ____________ investments.

Accepted Answer

The answer of A company has the opportunity to invest...

Question 8

Which statement about the selection of mutually exclusive projects using the benefit-cost ratio method is true?

Accepted Answer

A) The benefit-cost ratio selects the project with the lowest ratio. 
B) The benefit-cost ratio may rank projects differently from the net present value method. 
C) The benefit-cost ratio may select a project,even though it may have a negative net present value. 
D) The benefit-cost ratio will not select a project with a ratio greater than 1. 
A) The benefit-cost ratio selects the project with the lowest ratio. 
B) The benefit-cost ratio may rank projects differently from the net present value method. 
C) The benefit-cost ratio may select a project,even though it may have a negative net present value. 
D) The benefit-cost ratio will not select a project with a ratio greater than 1.

Question 9

Using the EVA,one should invest only if the increase in earnings is sufficient to cover the:

Accepted Answer

A) net cash flow. 
B) value of the investment in year t. 
C) required rate of return. 
D) value of the investment in year t + 1. 
A) net cash flow. 
B) value of the investment in year t. 
C) required rate of return. 
D) value of the investment in year t + 1.

Question 10

Which of the following statements about EVA is false?

Accepted Answer

A) EVA can be improved by increasing earnings. 
B) EVA can be improved by reducing the capital used. 
C) EVA ranks projects with the same outlay,life and total earnings equally,even though their patterns of earnings may be different. 
D) EVA can be improved either by increasing earnings or by reducing the capital used. 
A) EVA can be improved by increasing earnings. 
B) EVA can be improved by reducing the capital used. 
C) EVA ranks projects with the same outlay,life and total earnings equally,even though their patterns of earnings may be different. 
D) EVA can be improved either by increasing earnings or by reducing the capital used.

Question 11

Using the benefit-cost ratio,the decision rule is to accept all projects with a positive benefit-cost ratio.

Accepted Answer

A) True 
 B)False

Question 12

Consider the following projections:  
What is the internal rate of return of a project (A minus B):

Accepted Answer

A) 8.9% 
B) 3.5% 
C) 17.29% 
D) 5.01% 
A) 8.9% 
B) 3.5% 
C) 17.29% 
D) 5.01%

Question 13

If net cash flows have been estimated on an after-tax basis,then:

Accepted Answer

A) the opportunity cost of capital is not appropriate. 
B) they should be discounted by the after-tax required rate of return. 
C) they should be discounted by the before-tax required rate of return. 
D) tax cash flows should be added back and net cash flows should be discounted by the before-tax required rate of return. 
A) the opportunity cost of capital is not appropriate. 
B) they should be discounted by the after-tax required rate of return. 
C) they should be discounted by the before-tax required rate of return. 
D) tax cash flows should be added back and net cash flows should be discounted by the before-tax required rate of return.

Question 14

The net present value method differs from the internal rate of return method in that:

Accepted Answer

A) the net present value method discounts cash flows using the risk-free rate of return and the internal rate of return method does not. 
B) the internal rate of return method finds the rate of return that results in a zero net present value. 
C) both methods yield similar conclusions for mutually exclusive projects. 
D) the net present value method discounts cash flows by the required rate of return,whereas the internal rate of return method does not take into account the time value of money. 
A) the net present value method discounts cash flows using the risk-free rate of return and the internal rate of return method does not. 
B) the internal rate of return method finds the rate of return that results in a zero net present value. 
C) both methods yield similar conclusions for mutually exclusive projects. 
D) the net present value method discounts cash flows by the required rate of return,whereas the internal rate of return method does not take into account the time value of money.

Question 15

Benefit-cost ratio is also known as:

Accepted Answer

A) benefit-cost index. 
B) total profit index. 
C) profitability index. 
D) discounted cash flow index. 
A) benefit-cost index. 
B) total profit index. 
C) profitability index. 
D) discounted cash flow index.

Question 16

The net present value for a project with a relatively long life is more sensitive to changes in the required rate of return than the net present value for a project with a relatively short life because:

Accepted Answer

A) the internal rate of return is greater the longer the term of a project. 
B) interest is compounded over time. 
C) a change in the discount rate has a much greater impact on more distant cash flows. 
D) distant cash flows are more uncertain. 
A) the internal rate of return is greater the longer the term of a project. 
B) interest is compounded over time. 
C) a change in the discount rate has a much greater impact on more distant cash flows. 
D) distant cash flows are more uncertain.

Question 17

What should the project manager do if it is determined that the net present value is negative but the internal rate of return is less than the required rate of return?

Accepted Answer

A) Decrease the required rate of return. 
B) Reject the project. 
C) Increase the required rate of return. 
D) Calculate the profitability index. 
A) Decrease the required rate of return. 
B) Reject the project. 
C) Increase the required rate of return. 
D) Calculate the profitability index.

Question 18

A necessary condition for multiple internal rates of return is that one or more of the net cash flows in the later years of a project's life must:

Accepted Answer

A) be positive. 
B) be negative. 
C) exceed the required rate of return. 
D) be greater than the initial outlay. 
A) be positive. 
B) be negative. 
C) exceed the required rate of return. 
D) be greater than the initial outlay.

Question 19

Which of the following statements is true?

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 is less than the required rate of return when the net present value is positive. 
D) None of the given options is true. 
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 is less than the required rate of return when the net present value is positive. 
D) None of the given options is true.

Question 20

The following three investments projects are independent.If the required rate of return is 12% p.a. ,which projects are acceptable using both the NPV and IRR methods?

Accepted Answer

The answer of The following three investments projects are independent.If...

Exam 5: Project Evaluation: Principles and Methods

A post-completion audit of investment projects is important because:

The payback period method of project evaluation provides a simple way of controlling for the risk of a project.

Any difference in the magnitude or timing of the cash flows derived from investment projects may cause a difference in the ranking of investment projects using the internal rate of return and net present value methods.

For mutually exclusive projects,the internal rate of return and the net present value give consistent accept/reject decisions if:

Using the benefit-cost ratio the decision rule is to accept projects with a benefit-cost ratio:

Project X has a cost of $53 847 and its expected net cash flows are $12 000 p.a.for the next eight years.What is the project's internal rate of return?

A company has the opportunity to invest in two projects,both of which have a positive net present value.They will accept both projects if they are ____________ investments.

Which statement about the selection of mutually exclusive projects using the benefit-cost ratio method is true?

Using the EVA,one should invest only if the increase in earnings is sufficient to cover the:

Which of the following statements about EVA is false?

Using the benefit-cost ratio,the decision rule is to accept all projects with a positive benefit-cost ratio.

Consider the following projections: What is the internal rate of return of a project (A minus B):

If net cash flows have been estimated on an after-tax basis,then:

The net present value method differs from the internal rate of return method in that:

Benefit-cost ratio is also known as:

The net present value for a project with a relatively long life is more sensitive to changes in the required rate of return than the net present value for a project with a relatively short life because:

What should the project manager do if it is determined that the net present value is negative but the internal rate of return is less than the required rate of return?

A necessary condition for multiple internal rates of return is that one or more of the net cash flows in the later years of a project's life must:

Which of the following statements is true?

The following three investments projects are independent.If the required rate of return is 12% p.a. ,which projects are acceptable using both the NPV and IRR methods?

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