Question 1

The internal rate of return is:

Accepted Answer

A) the discount rate that makes the net present value of a project equal to the initial cash outlay. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) tedious to compute without the use of either a financial calculator or a computer. 
D) highly dependent upon the current interest rates offered in the marketplace. 
E) a better methodology than net present value when dealing with unconventional cash flows. 
A) the discount rate that makes the net present value of a project equal to the initial cash outlay. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) tedious to compute without the use of either a financial calculator or a computer. 
D) highly dependent upon the current interest rates offered in the marketplace. 
E) a better methodology than net present value when dealing with unconventional cash flows.

Question 2

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives.   Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:

Accepted Answer

A) both projects. 
B) project B because it has the shortest payback period. 
C) project B and reject project A based on their net present values. 
D) project A and reject project B based on their average accounting returns. 
E) neither project. 
A) both projects. 
B) project B because it has the shortest payback period. 
C) project B and reject project A based on their net present values. 
D) project A and reject project B based on their average accounting returns. 
E) neither project.

Question 3

Applying the discounted payback decision rule to all projects may cause:

Accepted Answer

A) some positive net present value projects to be rejected. 
B) the most liquid projects to be rejected in favor of the less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) a firm to become more long-term focused. 
E) some projects to be accepted which would otherwise be rejected under the payback rule. 
A) some positive net present value projects to be rejected. 
B) the most liquid projects to be rejected in favor of the less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) a firm to become more long-term focused. 
E) some projects to be accepted which would otherwise be rejected under the payback rule.

Question 4

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 net present value 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 net present value 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 net present value analysis.

Question 5

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I. exclusion of time value of money considerations
II. need of a cutoff rate
III. easily obtainable information for computation
IV. based on accounting values

Accepted Answer

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

Question 6

A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.

Accepted Answer

A) $5,684.22; reject 
B) $7,264.95; accept 
C) $7,264.95; reject 
D) $9,616.93; accept 
E) $9,616.93; reject 
A) $5,684.22; reject 
B) $7,264.95; accept 
C) $7,264.95; reject 
D) $9,616.93; accept 
E) $9,616.93; reject

Question 7

How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?

Accepted Answer

The NPV rule states that a project shoul

Question 8

Cool Water Drinks is considering a proposed project with the following cash flows. Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Accepted Answer

A) Yes; The MIRR is 8.81 percent. 
B) Yes; The MIRR is 9.23 percent. 
C) No; The MIRR is 8.81 percent. 
D) No; The MIRR is 9.06 percent. 
E) No; The MIRR is 9.23 percent. 
A) Yes; The MIRR is 8.81 percent. 
B) Yes; The MIRR is 9.23 percent. 
C) No; The MIRR is 8.81 percent. 
D) No; The MIRR is 9.06 percent. 
E) No; The MIRR is 9.23 percent.

Question 9

Hungry Hoagie's has identified the following two mutually exclusive projects:   At what rate would you be indifferent between these two projects?

Accepted Answer

A) 17.34 percent 
B) 17.72 percent 
C) 19.41 percent 
D) 19.69 percent 
E) 20.28 percent 
A) 17.34 percent 
B) 17.72 percent 
C) 19.41 percent 
D) 19.69 percent 
E) 20.28 percent

Question 10

J&J Enterprises is considering an investment that will cost $318,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted? Why or why not?

Accepted Answer

A) accept; The discounted payback period is 2.18 years. 
B) accept; The discounted payback period is 2.32 years. 
C) accept; The discounted payback period is 2.98 years. 
D) reject; The discounted payback period is 2.18 years. 
E) reject; The project never pays back on a discounted basis. 
A) accept; The discounted payback period is 2.18 years. 
B) accept; The discounted payback period is 2.32 years. 
C) accept; The discounted payback period is 2.98 years. 
D) reject; The discounted payback period is 2.18 years. 
E) reject; The project never pays back on a discounted basis.

Question 11

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

Accepted Answer

A) The internal rate of return decision may contradict the net present value decision. 
B) Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. 
C) The payback decision rule could override the net present value decision rule should cash availability be limited. 
D) The profitability index rule cannot be applied in this situation. 
E) The projects cannot be accepted unless the average accounting return decision ruling is positive. 
A) The internal rate of return decision may contradict the net present value decision. 
B) Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. 
C) The payback decision rule could override the net present value decision rule should cash availability be limited. 
D) The profitability index rule cannot be applied in this situation. 
E) The projects cannot be accepted unless the average accounting return decision ruling is positive.

Question 12

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years. The profit margin is estimated at 6 percent. The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project. The firm has a required accounting return of 11 percent. This project should be _____ because the AAR is _____ percent.

Accepted Answer

A) rejected; 10.03 
B) rejected; 10.25 
C) rejected; 11.60 
D) accepted; 10.25 
E) accepted; 11.60 
A) rejected; 10.03 
B) rejected; 10.25 
C) rejected; 11.60 
D) accepted; 10.25 
E) accepted; 11.60

The internal rate of return is:

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:

Applying the discounted payback decision rule to all projects may cause:

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values

A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _ and the firm should _ the project.

How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?

Cool Water Drinks is considering a proposed project with the following cash flows. Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Hungry Hoagie's has identified the following two mutually exclusive projects: At what rate would you be indifferent between these two projects?

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

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

Filters

Exam 9: Net Present Value and Other Investment Criteria

The internal rate of return is:

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:

Applying the discounted payback decision rule to all projects may cause:

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values

A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.

How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?

Cool Water Drinks is considering a proposed project with the following cash flows. Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Hungry Hoagie's has identified the following two mutually exclusive projects: At what rate would you be indifferent between these two projects?

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

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

Filters

A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _ and the firm should _ the project.