Question 1

The discounted payback rule states that you should accept projects:

Accepted Answer

A) which have a discounted payback period that is greater than some pre-specified period of time. 
B) if the discounted payback is positive and rejected if it is negative. 
C) only if the discounted payback period equals some pre-specified period of time. 
D) if the discounted payback period is less than some pre-specified period of time. 
E) only if the discounted payback period is equal to zero. 
A) which have a discounted payback period that is greater than some pre-specified period of time. 
B) if the discounted payback is positive and rejected if it is negative. 
C) only if the discounted payback period equals some pre-specified period of time. 
D) if the discounted payback period is less than some pre-specified period of time. 
E) only if the discounted payback period is equal to zero.

Question 2

A mutually exclusive project is a project whose:

Accepted Answer

A) acceptance or rejection has no effect on other projects. 
B) NPV is always negative. 
C) IRR is always negative. 
D) acceptance or rejection affects other projects. 
E) cash flow pattern exhibits more than one sign change. 
A) acceptance or rejection has no effect on other projects. 
B) NPV is always negative. 
C) IRR is always negative. 
D) acceptance or rejection affects other projects. 
E) cash flow pattern exhibits more than one sign change.

Question 3

Which of the following methods of project analysis are biased towards short-term projects?
I.internal rate of return
II.accounting rate of return
III.payback
IV.discounted payback

Accepted Answer

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

Question 4

The profitability index is the ratio of:

Accepted Answer

A) average net income to average investment. 
B) present value of cash flows to initial investment cost. 
C) net present value of cash flows to internal rate of return. 
D) net present value of cash flows to average accounting return. 
E) internal rate of return to current market interest rate. 
A) average net income to average investment. 
B) present value of cash flows to initial investment cost. 
C) net present value of cash flows to internal rate of return. 
D) net present value of cash flows to average accounting return. 
E) internal rate of return to current market interest rate.

Question 5

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 7%? Why or why not?

Accepted Answer

A) Yes; because the PI is 1.008 
B) Yes; because the PI is .992 
C) Yes; because the PI is .999 
D) No; because the PI is 1.008 
E) No; because the PI is .992 
A) Yes; because the PI is 1.008 
B) Yes; because the PI is .992 
C) Yes; because the PI is .999 
D) No; because the PI is 1.008 
E) No; because the PI is .992

Question 6

All else equal,the payback period for a project will decrease whenever the:

Accepted Answer

A) duration of a project is lengthened. 
B) cash inflows are moved earlier in time. 
C) assigned discount rate decreases. 
D) required return for a project increases. 
E) initial cost increases. 
A) duration of a project is lengthened. 
B) cash inflows are moved earlier in time. 
C) assigned discount rate decreases. 
D) required return for a project increases. 
E) initial cost increases.

Question 7

An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

Accepted Answer

A) Yes; because the IRR exceeds the required return by about 0.39% 
B) Yes; because the IRR is less than the required return by about 3.9% 
C) Yes; because the IRR is positive 
D) No; because the IRR exceeds the required return by about 3.9% 
E) No; because the IRR is 9.89% 
A) Yes; because the IRR exceeds the required return by about 0.39% 
B) Yes; because the IRR is less than the required return by about 3.9% 
C) Yes; because the IRR is positive 
D) No; because the IRR exceeds the required return by about 3.9% 
E) No; because the IRR is 9.89%

Question 8

Given the goals of firm value and shareholder wealth maximization,we have stressed the importance of net present value (NPV).And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

Accepted Answer

This is an open-ended question which all

Question 9

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

Accepted Answer

The advantages of the rule are its close

Question 10

A project has an initial cost of $40,000 and a four-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,200,$3,500,and $2,700 a year for the next four years,respectively.What is the average accounting return?

Accepted Answer

A) 3.55% 
B) 4.13% 
C) 4.28% 
D) 7.11% 
E) 12.00% 
A) 3.55% 
B) 4.13% 
C) 4.28% 
D) 7.11% 
E) 12.00%

Question 11

Consider an investment with an initial cost of $20,000 and is expected to last for 5 years.The expected cash flow in years 1 and 2 are $5,000,in years 3 and 4 are $5,500 and in year 5 is $1,000.The total cash inflow is expected to be $22,000 or an average of $4,400 per year.Compute the payback period in years.

Accepted Answer

A) 3.18 years 
B) 3.82 years 
C) 4.00 years 
D) 4.55 years 
E) None of the above. 
A) 3.18 years 
B) 3.82 years 
C) 4.00 years 
D) 4.55 years 
E) None of the above.

Question 12

Based upon the average accounting return (AAR)and the information provided in the problem,you:

Accepted Answer

A) cannot compute the AAR of either project. 
B) should accept project A because the AAR exceeds the required rate. 
C) should accept project A because the AAR is less than the required rate. 
D) should accept whichever project you prefer as they are equivalent from an AAR perspective. 
E) should accept both project A and project B. 
A) cannot compute the AAR of either project. 
B) should accept project A because the AAR exceeds the required rate. 
C) should accept project A because the AAR is less than the required rate. 
D) should accept whichever project you prefer as they are equivalent from an AAR perspective. 
E) should accept both project A and project B.

Question 13

A project will have more than one IRR if:

Accepted Answer

A) the IRR is negative. 
B) the IRR is positive. 
C) the NPV is zero. 
D) the cash flow pattern exhibits exactly one sign change. 
E) the cash flow pattern exhibits more than one sign change. 
A) the IRR is negative. 
B) the IRR is positive. 
C) the NPV is zero. 
D) the cash flow pattern exhibits exactly one sign change. 
E) the cash flow pattern exhibits more than one sign change.

Question 14

A project has an initial cost of $2,300.The cash inflows are $300,$500,$900,and $700 over the next four years,respectively.What is the payback period?

Accepted Answer

A) 2.71 years 
B) 2.98 years 
C) 3.11 years 
D) 3.86 years 
E) Never 
A) 2.71 years 
B) 2.98 years 
C) 3.11 years 
D) 3.86 years 
E) Never

Question 15

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A) Planning to build a warehouse and a retail outlet side by side 
B) Buying sufficient equipment to manufacture both desks and chairs simultaneously 
C) Using an empty warehouse for storage or renting it entirely out to another firm 
D) Using the company sales force to promote sales of both shoes and socks 
E) Buying both inventory and fixed assets using funds from the same bond issue 
A) Planning to build a warehouse and a retail outlet side by side 
B) Buying sufficient equipment to manufacture both desks and chairs simultaneously 
C) Using an empty warehouse for storage or renting it entirely out to another firm 
D) Using the company sales force to promote sales of both shoes and socks 
E) Buying both inventory and fixed assets using funds from the same bond issue

Question 16

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.

Accepted Answer

A) 3 
B) 3.2 
C) 3.75 
D) 4 
E) 5 
A) 3 
B) 3.2 
C) 3.75 
D) 4 
E) 5

The discounted payback rule states that you should accept projects:

A mutually exclusive project is a project whose:

Which of the following methods of project analysis are biased towards short-term projects? I.internal rate of return II.accounting rate of return III.payback IV.discounted payback

The profitability index is the ratio of:

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 7%? Why or why not?

All else equal,the payback period for a project will decrease whenever the:

An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

Based upon the average accounting return (AAR)and the information provided in the problem,you:

A project will have more than one IRR if:

A project has an initial cost of $2,300.The cash inflows are $300,$500,$900,and $700 over the next four years,respectively.What is the payback period?

Which one of the following is the best example of two mutually exclusive projects?

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.

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

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Exam 7: Net Present Value and Other Investment Rules

The discounted payback rule states that you should accept projects:

A mutually exclusive project is a project whose:

Which of the following methods of project analysis are biased towards short-term projects? I.internal rate of return II.accounting rate of return III.payback IV.discounted payback

The profitability index is the ratio of:

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 7%? Why or why not?

All else equal,the payback period for a project will decrease whenever the:

An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

Based upon the average accounting return (AAR)and the information provided in the problem,you:

A project will have more than one IRR if:

A project has an initial cost of $2,300.The cash inflows are $300,$500,$900,and $700 over the next four years,respectively.What is the payback period?

Which one of the following is the best example of two mutually exclusive projects?

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.

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