Question 1

Based on the payback period of ____ for this project,you should _____ the project.

Accepted Answer

A) 2.0 years; reject 
B) 2.5 years; accept 
C) 2.5 years; reject 
D) 3.0 years; reject 
E) 3.0 years; accept 
A) 2.0 years; reject 
B) 2.5 years; accept 
C) 2.5 years; reject 
D) 3.0 years; reject 
E) 3.0 years; accept

Question 2

All else constant,the net present value of a typical investment project increases when:

Accepted Answer

A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project. 
A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project.

Question 3

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

Accepted Answer

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

Question 4

The shortcoming(s)of the average accounting return (AAR)method is (are):

Accepted Answer

A) the use of net income instead of cash flows. 
B) the pattern of income flows has no impact on the AAR. 
C) there is no clear-cut decision rule. 
D) All of the above. 
E) None of the above. 
A) the use of net income instead of cash flows. 
B) the pattern of income flows has no impact on the AAR. 
C) there is no clear-cut decision rule. 
D) All of the above. 
E) None of the above.

Question 5

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

Accepted Answer

The NPV and PI are basically the same ca

Question 6

An investment is acceptable if its average accounting return (AAR):

Accepted Answer

A) is less than a target AAR. 
B) exceeds a target AAR. 
C) exceeds the firm's return on equity (RO
E) . 
D) is less than the firm's return on assets (RO
A) . 
E) is equal to zero. 
A) is less than a target AAR. 
B) exceeds a target AAR. 
C) exceeds the firm's return on equity (RO
E) . 
D) is less than the firm's return on assets (RO
A) . 
E) is equal to zero.

Question 7

Net present value:

Accepted Answer

A) cannot be used when deciding between two mutually exclusive projects. 
B) is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. 
C) is more useful to decision makers than the internal rate of return when comparing different sized projects. 
D) is very similar in its methodology to the average accounting return. 
E) is not as widely used a tool as payback and discounted payback. 
A) cannot be used when deciding between two mutually exclusive projects. 
B) is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. 
C) is more useful to decision makers than the internal rate of return when comparing different sized projects. 
D) is very similar in its methodology to the average accounting return. 
E) is not as widely used a tool as payback and discounted payback.

Question 8

Based upon the internal rate of return (IRR)and the information provided in the problem,you should:

Accepted Answer

A) accept both project A and project B. 
B) reject both project A and project B. 
C) accept project A and reject project B. 
D) accept project B and reject project A. 
E) ignore the IRR rule and use another method of analysis. 
A) accept both project A and project B. 
B) reject both project A and project B. 
C) accept project A and reject project B. 
D) accept project B and reject project A. 
E) ignore the IRR rule and use another method of analysis.

Question 9

Graham and Harvey (2001)found that ___ and ___ were the two most popular capital budgeting methods.

Accepted Answer

A) Internal Rate of Return; Payback Period 
B) Internal Rate of Return; Net Present Value 
C) Net Present Value; Payback Period 
D) Modified Internal Rate of Return; Internal Rate of Return 
E) Modified Internal Rate of Return; Net Present Value 
A) Internal Rate of Return; Payback Period 
B) Internal Rate of Return; Net Present Value 
C) Net Present Value; Payback Period 
D) Modified Internal Rate of Return; Internal Rate of Return 
E) Modified Internal Rate of Return; Net Present Value

Question 10

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

Accepted Answer

A) multiple rates of return 
B) scale 
C) mutually exclusive investment decision 
D) operational ambiguity 
E) net present value profiling 
A) multiple rates of return 
B) scale 
C) mutually exclusive investment decision 
D) operational ambiguity 
E) net present value profiling

Question 11

Based on the profitability index of _____ for this project,you should _____ the project.

Accepted Answer

A) .97; accept 
B) 1.05; accept 
C) 1.16; accept 
D) .97; reject 
E) 1.05; reject 
A) .97; accept 
B) 1.05; accept 
C) 1.16; accept 
D) .97; reject 
E) 1.05; reject

Question 12

An investment is acceptable if its IRR:

Accepted Answer

A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%. 
A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%.

Question 13

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

Accepted Answer

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

Question 14

A project has average net income of $2,100 a year over its 4-year life.The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimal average accounting return of 8.5%.The firm should _____ the project based on the AAR of ____.

Accepted Answer

A) accept; 6.46%. 
B) accept; 9.69%. 
C) accept; 12.92%. 
D) reject; 6.46%. 
E) reject; 12.92%. 
A) accept; 6.46%. 
B) accept; 9.69%. 
C) accept; 12.92%. 
D) reject; 6.46%. 
E) reject; 12.92%.

Question 15

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

Accepted Answer

A) how decisions concerning mutually exclusive projects are derived. 
B) how the incremental IRR varies with changes in the discount rate. 
C) how the payback period and the initial cash outflow of a project are related. 
D) how the duration of a project affects the decision as to which project to accept. 
E) how the profitability index and the net present value are related. 
A) how decisions concerning mutually exclusive projects are derived. 
B) how the incremental IRR varies with changes in the discount rate. 
C) how the payback period and the initial cash outflow of a project are related. 
D) how the duration of a project affects the decision as to which project to accept. 
E) how the profitability index and the net present value are related.

Question 16

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 greater 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 less 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 greater 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 less 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 17

Ginny Trueblood is considering an investment which will cost her $120,000.The investment produces no cash flows for the first year.In the second year the cash inflow is $35,000.This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently.Ginny requires a 10% rate of return and has a required discounted payback period of three years.Ginny should _____ this project because the discounted payback period is ____.

Accepted Answer

A) accept; 2.03 years 
B) accept; 2.97 years 
C) accept; 3.97 years 
D) reject; 3.03 years 
E) reject; 3.97 years 
A) accept; 2.03 years 
B) accept; 2.97 years 
C) accept; 3.97 years 
D) reject; 3.03 years 
E) reject; 3.97 years

Question 18

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 payback.Also,calculate the project's IRR.Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback - 2.63 years.
IRR = 10

Question 19

Academic theory states that net present value is the best capital budgeting model.Why is this the case?

Accepted Answer

Net present value considers the time val

Question 20

You would like to invest in the following project.   Victoria,your boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:

Accepted Answer

A) accept the project because it returns almost $1.22 for every $1 invested. 
B) accept the project because it has a positive PI. 
C) accept the project because the NPV is $2,851. 
D) reject the project because the PI is 1.05. 
E) reject the project because the IRR exceeds 10%. 
A) accept the project because it returns almost $1.22 for every $1 invested. 
B) accept the project because it has a positive PI. 
C) accept the project because the NPV is $2,851. 
D) reject the project because the PI is 1.05. 
E) reject the project because the IRR exceeds 10%.

Based on the payback period of for this project,you should _ the project.

All else constant,the net present value of a typical investment project increases when:

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

The shortcoming(s)of the average accounting return (AAR)method is (are):

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

An investment is acceptable if its average accounting return (AAR):

Net present value:

Based upon the internal rate of return (IRR)and the information provided in the problem,you should:

Graham and Harvey (2001)found that _ and _ were the two most popular capital budgeting methods.

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

Based on the profitability index of _ for this project,you should _ the project.

An investment is acceptable if its IRR:

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

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

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

Academic theory states that net present value is the best capital budgeting model.Why is this the case?

You would like to invest in the following project. Victoria,your boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:

Introduction to Corporate Finance

Financial Statements Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Interest Rate and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividend and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Filters

Exam 7: Net Present Value and Other Investment Rules

Based on the payback period of ____ for this project,you should _____ the project.

All else constant,the net present value of a typical investment project increases when:

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

The shortcoming(s)of the average accounting return (AAR)method is (are):

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

An investment is acceptable if its average accounting return (AAR):

Net present value:

Based upon the internal rate of return (IRR)and the information provided in the problem,you should:

Graham and Harvey (2001)found that ___ and ___ were the two most popular capital budgeting methods.

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

Based on the profitability index of _____ for this project,you should _____ the project.

An investment is acceptable if its IRR:

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

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

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

Academic theory states that net present value is the best capital budgeting model.Why is this the case?

You would like to invest in the following project. Victoria,your boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:

Introduction to Corporate Finance

Financial Statements Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Interest Rate and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividend and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Filters

Based on the payback period of for this project,you should _ the project.

Graham and Harvey (2001)found that _ and _ were the two most popular capital budgeting methods.

Based on the profitability index of _ for this project,you should _ the project.