Question 1

The internal rate of return tends to be:

Accepted Answer

A) ignored by most financial analysts. 
B) extremely accurate even when cash flow estimates are faulty. 
C) easier for managers to comprehend than the net present value. 
D) utilized in project analysis only when multiple net present values apply. 
E) used primarily to differentiate between mutually exclusive projects. 
A) ignored by most financial analysts. 
B) extremely accurate even when cash flow estimates are faulty. 
C) easier for managers to comprehend than the net present value. 
D) utilized in project analysis only when multiple net present values apply. 
E) used primarily to differentiate between mutually exclusive projects.

Question 2

A project produces annual net income of $9,500,$12,500,and $15,500 over the three years of its life,respectively.The initial cost of the project is $260,400.This cost is depreciated straight-line to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 7%?

Accepted Answer

A) 4.80% 
B) 7.32% 
C) 8.97% 
D) 9.60% 
E) 10.27% 
A) 4.80% 
B) 7.32% 
C) 8.97% 
D) 9.60% 
E) 10.27%

Question 3

You are considering two mutually exclusive projects with the following cash flows.Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

Accepted Answer

A) Yes; Select A at 8% and B at 11%. 
B) Yes; Select B at 8% and A at 11%. 
C) Yes; Select A at 8% and select neither at 11%. 
D) No; Regardless of the required rate, project A always has the higher NPV. 
E) No; Regardless of the required rate, project B always has the higher NPV. 
A) Yes; Select A at 8% and B at 11%. 
B) Yes; Select B at 8% and A at 11%. 
C) Yes; Select A at 8% and select neither at 11%. 
D) No; Regardless of the required rate, project A always has the higher NPV. 
E) No; Regardless of the required rate, project B always has the higher NPV.

Question 4

Jack is considering adding toys to his general store.He estimates that the cost of inventory will be $4,200.The remodeling expenses and shelving costs are estimated at $1,500.Toy sales are expected to produce net cash inflows of $1,300,$1,600,$1,700,and $1,750 over the next four years,respectively.Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

A) Yes; because the payback period is 2.94 years 
B) Yes; because the payback period is 2.02 years 
C) Yes; because the payback period is 3.63 years 
D) No; because the payback period is 2.02 years 
E) No; because the payback period is 3.63 years 
A) Yes; because the payback period is 2.94 years 
B) Yes; because the payback period is 2.02 years 
C) Yes; because the payback period is 3.63 years 
D) No; because the payback period is 2.02 years 
E) No; because the payback period is 3.63 years

Question 5

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

Question 6

Based on the internal rate of return of ____ for this project,you should _____ the project.

Accepted Answer

A) 10%; accept 
B) 17.26%; accept 
C) 18.40%; accept 
D) 19.50%; accept 
E) 9.80%; reject 
A) 10%; accept 
B) 17.26%; accept 
C) 18.40%; accept 
D) 19.50%; accept 
E) 9.80%; reject

Question 7

The internal rate of return is:

Accepted Answer

A) more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) a better methodology than net present value when dealing with unconventional cash flows. 
D) dependent upon the interest rates offered in the marketplace. 
E) cumbersome to compute without the use of either a financial calculator or a computer. 
A) more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) a better methodology than net present value when dealing with unconventional cash flows. 
D) dependent upon the interest rates offered in the marketplace. 
E) cumbersome to compute without the use of either a financial calculator or a computer.

Question 8

The discounted payback rule may cause:

Accepted Answer

A) the most liquid projects to be rejected in favor of less liquid projects. 
B) some positive net present value projects to be rejected. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) projects with negative net present values to be accepted. 
E) Both B and D 
A) the most liquid projects to be rejected in favor of less liquid projects. 
B) some positive net present value projects to be rejected. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) projects with negative net present values to be accepted. 
E) Both B and D

Question 9

The payback period rule:

Accepted Answer

A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B) determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the interest rate. 
E) Both A and D. 
A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B) determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the interest rate. 
E) Both A and D.

Question 10

Payback is frequently used to analyze independent projects because:

Accepted Answer

A) it is easy and quick to calculate. 
B) all relevant cash flows are included in the analysis. 
C) it considers the time value of money. 
D) it is the most desirable of all the available analytical methods from a financial perspective. 
E) it produces better decisions than those made using either NPV or IRR. 
A) it is easy and quick to calculate. 
B) all relevant cash flows are included in the analysis. 
C) it considers the time value of money. 
D) it is the most desirable of all the available analytical methods from a financial perspective. 
E) it produces better decisions than those made using either NPV or IRR.

Question 11

An investment cost $8,000 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) $2,000; 25.4130% 
D) Can not answer without one or the other value as input 
E) None of the above 
A) $0; 15.2382% 
B) $3.33; 27.2242% 
C) $2,000; 25.4130% 
D) Can not answer without one or the other value as input 
E) None of the above

Question 12

The difference between the present value of an investment and its cost is the:

Accepted Answer

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

Question 13

The Walker Landscaping Company can purchase a piece of equipment for $3,600.The asset has a two-year life,will produce a cash flow of $600 in the first year and $4,200 in the second year.The interest rate is 15%.Calculate the project's payback assuming steady cash flows.Also calculate the project's IRR.Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback = 1.714 year

Question 14

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,800.What is the discounted payback period?

Accepted Answer

A) 3.11 years 
B) 3.18 years 
C) 3.82 years 
D) 4.18 years 
E) Never 
A) 3.11 years 
B) 3.18 years 
C) 3.82 years 
D) 4.18 years 
E) Never

Question 15

Analysis using the profitability index:

Accepted Answer

A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital structure decisions. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply. 
A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital structure decisions. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply.

Question 16

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

Accepted Answer

A) .86; reject 
B) 1.00; accept 
C) 1.14; accept 
D) 1.07; accept 
E) 1.04; accept 
A) .86; reject 
B) 1.00; accept 
C) 1.14; accept 
D) 1.07; accept 
E) 1.04; accept

Question 17

If a project has a net present value equal to zero,then:
I.the present value of the cash inflows exceeds the initial cost of the project.
II.the project produces a rate of return that just equals the rate required to accept the project.
III.the project is expected to produce only the minimally required cash inflows.
IV.any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Accepted Answer

A) II and III only 
B) II and IV only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, and III only 
A) II and III only 
B) II and IV only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, and III only

Question 18

A $35 investment produces $38.50 at the end of the year with no risk.Which of the following is true?

Accepted Answer

A) NPV is positive if the interest rate is less than 10%. 
B) NPV is negative if the interest rate is less than 10%. 
C) NPV is zero if the interest rate is equal to 10%. 
D) Both A and C. 
E) None of the above. 
A) NPV is positive if the interest rate is less than 10%. 
B) NPV is negative if the interest rate is less than 10%. 
C) NPV is zero if the interest rate is equal to 10%. 
D) Both A and C. 
E) None of the above.

Question 19

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 the above. 
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 the above.

Question 20

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

The internal rate of return tends to be:

You are considering two mutually exclusive projects with the following cash flows.Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

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:

Based on the internal rate of return of for this project,you should _ the project.

The internal rate of return is:

The discounted payback rule may cause:

The payback period rule:

Payback is frequently used to analyze independent projects because:

An investment cost $8,000 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 difference between the present value of an investment and its cost is the:

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,800.What is the discounted payback period?

Analysis using the profitability index:

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

A $35 investment produces $38.50 at the end of the year with no risk.Which of the following is true?

Accepting positive NPV projects benefits the stockholders because:

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

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

The internal rate of return tends to be:

You are considering two mutually exclusive projects with the following cash flows.Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

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:

Based on the internal rate of return of ____ for this project,you should _____ the project.

The internal rate of return is:

The discounted payback rule may cause:

The payback period rule:

Payback is frequently used to analyze independent projects because:

An investment cost $8,000 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 difference between the present value of an investment and its cost is the:

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,800.What is the discounted payback period?

Analysis using the profitability index:

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

A $35 investment produces $38.50 at the end of the year with no risk.Which of the following is true?

Accepting positive NPV projects benefits the stockholders because:

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

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 internal rate of return of for this project,you should _ the project.

An investment cost $8,000 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.

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