Question 1

Which one of the following statements is correct in relation to independent projects?

Accepted Answer

A) The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. 
B) A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. 
C) A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. 
D) The net present value profile is upsloping for projects with both investing and financing type cash flows. 
E) Projects with financing type cash flows are acceptable only when the internal rate of return is negative. 
A) The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. 
B) A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. 
C) A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. 
D) The net present value profile is upsloping for projects with both investing and financing type cash flows. 
E) Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

Question 2

A project has a net present value of zero. Which one of the following best describes this project?

Accepted Answer

A) The project has a zero percent rate of return. 
B) The project requires no initial cash investment. 
C) The project has no cash flows. 
D) The summation of all of the project's cash flows is zero. 
E) The project's cash inflows equal its cash outflows in current dollar terms. 
A) The project has a zero percent rate of return. 
B) The project requires no initial cash investment. 
C) The project has no cash flows. 
D) The summation of all of the project's cash flows is zero. 
E) The project's cash inflows equal its cash outflows in current dollar terms.

Question 3

An investment project has an installed cost of $518,297. The cash flows over the 4-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is zero percent?

Accepted Answer

A) $47,306 
B) $72,418 
C) $91,110 
D) $128,415 
E) $169,193 
A) $47,306 
B) $72,418 
C) $91,110 
D) $128,415 
E) $169,193

Question 4

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

Accepted Answer

A) Project A only 
B) Project B only 
C) Both A and B 
D) Neither A nor B 
E) Answer cannot be determined based on the information given. 
A) Project A only 
B) Project B only 
C) Both A and B 
D) Neither A nor B 
E) Answer cannot be determined based on the information given.

Question 5

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return?

Accepted Answer

A) 10.70 percent 
B) 15.63 percent 
C) 18.87 percent 
D) 21.39 percent 
E) 23.05 percent 
A) 10.70 percent 
B) 15.63 percent 
C) 18.87 percent 
D) 21.39 percent 
E) 23.05 percent

Question 6

Which one of the following statements related to the internal rate of return (IRR) is correct?

Accepted Answer

A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C) The IRR is equal to the required return when the net present value is equal to zero. 
D) Financing type projects should be accepted if the IRR exceeds the required return. 
E) The average accounting return is a better method of analysis than the IRR from a financial point of view. 
A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C) The IRR is equal to the required return when the net present value is equal to zero. 
D) Financing type projects should be accepted if the IRR exceeds the required return. 
E) The average accounting return is a better method of analysis than the IRR from a financial point of view.

Question 7

Which one of the following correctly applies to the average accounting rate of return?

Accepted Answer

A) It considers the time value of money. 
B) It measures net income as a percentage of the sales generated by a project. 
C) It is the best method of analyzing mutually exclusive projects from a financial point of view. 
D) It is the primary methodology used in analyzing independent projects. 
E) It can be compared to the return on assets ratio. 
A) It considers the time value of money. 
B) It measures net income as a percentage of the sales generated by a project. 
C) It is the best method of analyzing mutually exclusive projects from a financial point of view. 
D) It is the primary methodology used in analyzing independent projects. 
E) It can be compared to the return on assets ratio.

Question 8

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

Accepted Answer

The NPV and PI both consider the time va

Question 9

Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
IV. arbitrary cutoff point

Accepted Answer

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

Question 10

Which of the following statements related to the internal rate of return (IRR) are correct?
I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

Accepted Answer

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

Question 11

The profitability index is most closely related to which one of the following?

Accepted Answer

A) payback 
B) discounted payback 
C) average accounting return 
D) net present value 
E) modified internal rate of return 
A) payback 
B) discounted payback 
C) average accounting return 
D) net present value 
E) modified internal rate of return

Question 12

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Accepted Answer

A) initial cost of each project 
B) timing of the cash inflows 
C) total cash inflows of each project 
D) required rate of return 
E) length of each project's life 
A) initial cost of each project 
B) timing of the cash inflows 
C) total cash inflows of each project 
D) required rate of return 
E) length of each project's life

Question 13

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
I. positive net present value
II. profitability index greater than zero
III. internal rate of return greater than the required rate
IV. positive internal rate of return

Accepted Answer

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

Question 14

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Accepted Answer

A) have two net present value profiles. 
B) have operational ambiguity. 
C) create a mutually exclusive investment decision. 
D) produce multiple economies of scale. 
E) have multiple rates of return. 
A) have two net present value profiles. 
B) have operational ambiguity. 
C) create a mutually exclusive investment decision. 
D) produce multiple economies of scale. 
E) have multiple rates of return.

Question 15

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.   Should you accept or reject these projects based on IRR analysis?

Accepted Answer

A) accept Project A and reject Project B 
B) reject Project A and accept Project B 
C) accept both Projects A and B 
D) reject both Projects A and B 
E) You cannot make this decision based on internal rate of return analysis. 
A) accept Project A and reject Project B 
B) reject Project A and accept Project B 
C) accept both Projects A and B 
D) reject both Projects A and B 
E) You cannot make this decision based on internal rate of return analysis.

Question 16

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Accepted Answer

A) 13.17 percent 
B) 13.33 percent 
C) 14.32 percent 
D) 14.96 percent 
E) 15.20 percent 
A) 13.17 percent 
B) 13.33 percent 
C) 14.32 percent 
D) 14.96 percent 
E) 15.20 percent

Question 17

A project has average net income of $5,600 a year over its 6-year life. The initial cost of the project is $98,000 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 minimum average accounting return of 11.5 percent. The firm should _____ the project because the AAR is _____ percent.

Accepted Answer

A) accept; 5.71 
B) accept; 9.90 
C) accept; 11.43 
D) reject; 5.71 
E) reject; 11.43 
A) accept; 5.71 
B) accept; 9.90 
C) accept; 11.43 
D) reject; 5.71 
E) reject; 11.43

Question 18

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Accepted Answer

A) reduction in the cash outflow at time zero 
B) cash inflow in the final year of the project 
C) cash inflow for the year following the final year of the project 
D) cash inflow prorated over the life of the project 
E) not included in the net present value 
A) reduction in the cash outflow at time zero 
B) cash inflow in the final year of the project 
C) cash inflow for the year following the final year of the project 
D) cash inflow prorated over the life of the project 
E) not included in the net present value

Question 19

An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period?

Accepted Answer

A) 3.36 years 
B) 5.28 years 
C) 6.72 years 
D) 8.13 years 
E) never 
A) 3.36 years 
B) 5.28 years 
C) 6.72 years 
D) 8.13 years 
E) never

Question 20

Blue Water Systems is analyzing a project with the following cash flows. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 14 percent? Why or why not?

Accepted Answer

A) Yes; The MIRR is 13.48 percent. 
B) Yes; The MIRR is 17.85 percent. 
C) Yes; The MIRR is 21.23 percent. 
D) No; The MIRR is 5.73 percent. 
E) No; The MIRR is 17.85 percent. 
A) Yes; The MIRR is 13.48 percent. 
B) Yes; The MIRR is 17.85 percent. 
C) Yes; The MIRR is 21.23 percent. 
D) No; The MIRR is 5.73 percent. 
E) No; The MIRR is 17.85 percent.

Exam 9: Net Present Value and Other Investment Criteria

Which one of the following statements is correct in relation to independent projects?

A project has a net present value of zero. Which one of the following best describes this project?

An investment project has an installed cost of $518,297. The cash flows over the 4-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is zero percent?

Which one of the following statements related to the internal rate of return (IRR) is correct?

Which one of the following correctly applies to the average accounting rate of return?

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

Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point

The profitability index is most closely related to which one of the following?

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on IRR analysis?

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period?

Blue Water Systems is analyzing a project with the following cash flows. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 14 percent? Why or why not?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Risk Management: An Introduction to Financial Engineering

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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