Question 1

Which one of the following indicates that a project is expected to create value for its owners?

Accepted Answer

A)  Profitability index less than 1.0 
B)  Payback period greater than the requirement 
C)  Positive net present value 
D)  Positive average accounting rate of return 
E)  Internal rate of return that is less than the requirement 
A)  Profitability index less than 1.0 
B)  Payback period greater than the requirement 
C)  Positive net present value 
D)  Positive average accounting rate of return 
E)  Internal rate of return that is less than the requirement

Question 2

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not?

Accepted Answer

A)  Yes; because the IRR is 10.75 percent 
B)  Yes; because the IRR is 12.74 percent 
C)  No; because the IRR is 10.75 percent 
D)  No; because the IRR is 12.74 percent 
E)  The answer cannot be determined as there are multiple IRRs. 
A)  Yes; because the IRR is 10.75 percent 
B)  Yes; because the IRR is 12.74 percent 
C)  No; because the IRR is 10.75 percent 
D)  No; because the IRR is 12.74 percent 
E)  The answer cannot be determined as there are multiple IRRs.

Question 3

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

Accepted Answer

A)  $4,518.47; $628.30 
B)  $4,518.47; -$321.76 
C)  $4,518.47; -$525.13 
D)  $4,722.09; $504.21 
E)  $4,722.09; -$418.05 
A)  $4,518.47; $628.30 
B)  $4,518.47; -$321.76 
C)  $4,518.47; -$525.13 
D)  $4,722.09; $504.21 
E)  $4,722.09; -$418.05

Question 4

Explain why the net present value is considered to be the best method of analyzing an investment.

Accepted Answer

The net present value consider

Question 5

You are considering the following two mutually exclusive projects. What is the crossover point?

Accepted Answer

A)  10.76 
B)  13.72 
C)  15.89 
D)  18.79 
E)  22.56 
A)  10.76 
B)  13.72 
C)  15.89 
D)  18.79 
E)  22.56

Question 6

A project has the following cash flows. What is the payback period?

Accepted Answer

A)  2.48 years 
B)  2.59 years 
C)  2.96 years 
D)  3.21 years 
E)  3.43 years 
A)  2.48 years 
B)  2.59 years 
C)  2.96 years 
D)  3.21 years 
E)  3.43 years

Question 7

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Accepted Answer

A)  Internal rate of return 
B)  Modified internal rate of return 
C)  Net present value 
D)  Profitability index 
E)  Payback 
A)  Internal rate of return 
B)  Modified internal rate of return 
C)  Net present value 
D)  Profitability index 
E)  Payback

Question 8

Which one of the following statements is correct?

Accepted Answer

A)  The internal rate of return is the most reliable method of analysis for any type of investment decision. 
B)  The payback method is biased towards short-term projects. 
C)  The modified internal rate of return is most useful when projects are mutually exclusive. 
D)  The average accounting return is the most difficult method of analysis to compute. 
E)  The net present value method is only applicable if a project has conventional cash flows. 
A)  The internal rate of return is the most reliable method of analysis for any type of investment decision. 
B)  The payback method is biased towards short-term projects. 
C)  The modified internal rate of return is most useful when projects are mutually exclusive. 
D)  The average accounting return is the most difficult method of analysis to compute. 
E)  The net present value method is only applicable if a project has conventional cash flows.

Question 9

What is the payback period for a project with the following cash flows?

Accepted Answer

A)  2.56 years 
B)  2.89 years 
C)  3.17 years 
D)  3.74 years 
E)  never 
A)  2.56 years 
B)  2.89 years 
C)  3.17 years 
D)  3.74 years 
E)  never

Question 10

Miller and Sons is evaluating a project with the following cash flows:   The company uses a 10 percent interest rate on all of its projects. What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach?

Accepted Answer

A)  8.46 percent; 7.29 percent; 8.59 percent 
B)  8.46 percent; 7.38 percent; 8.61 percent 
C)  8.54 percent; 7.29 percent; 8.61 percent 
D)  8.54 percent; 7.38 percent; 8.59 percent 
E)  8.54 percent; 8.23 percent; 8.61 percent 
A)  8.46 percent; 7.29 percent; 8.59 percent 
B)  8.46 percent; 7.38 percent; 8.61 percent 
C)  8.54 percent; 7.29 percent; 8.61 percent 
D)  8.54 percent; 7.38 percent; 8.59 percent 
E)  8.54 percent; 8.23 percent; 8.61 percent

Question 11

An investment has an initial cost of $410,000 and will generate the net income amounts shown below. This investment will be depreciated straight line to zero over the 4-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not?

Accepted Answer

A)  Yes; because the AAR is equal to 16 percent 
B)  Yes; because the AAR is greater than 16 percent 
C)  Yes; because the AAR is less than 16 percent 
D)  No; because the AAR is greater than 16 percent 
E)  No; because the AAR is less than 16 percent 
A)  Yes; because the AAR is equal to 16 percent 
B)  Yes; because the AAR is greater than 16 percent 
C)  Yes; because the AAR is less than 16 percent 
D)  No; because the AAR is greater than 16 percent 
E)  No; because the AAR is less than 16 percent

Question 12

A project has the following cash flows. What is the internal rate of return?

Accepted Answer

A)  9.75 percent 
B)  10.28 percent 
C)  10.60 percent 
D)  10.67 percent 
E)  11.23 percent 
A)  9.75 percent 
B)  10.28 percent 
C)  10.60 percent 
D)  10.67 percent 
E)  11.23 percent

Question 13

The net present value of an investment represents the difference between the investment's:

Accepted Answer

A)  cash inflows and outflows. 
B)  cost and its net profit. 
C)  cost and its market value. 
D)  cash flows and its profits. 
E)  assets and liabilities. 
A)  cash inflows and outflows. 
B)  cost and its net profit. 
C)  cost and its market value. 
D)  cash flows and its profits. 
E)  assets and liabilities.

Question 14

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

Accepted Answer

A)  Payback and net present value 
B)  Payback and internal rate of return 
C)  Internal rate of return and net present value 
D)  Net present value and profitability index 
E)  Profitability index and internal rate of return 
A)  Payback and net present value 
B)  Payback and internal rate of return 
C)  Internal rate of return and net present value 
D)  Net present value and profitability index 
E)  Profitability index and internal rate of return

Question 15

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

Accepted Answer

A)  positive. 
B)  greater than the project's initial investment. 
C)  zero. 
D)  equal to the project's net profit. 
E)  less than, or equal to, zero. 
A)  positive. 
B)  greater than the project's initial investment. 
C)  zero. 
D)  equal to the project's net profit. 
E)  less than, or equal to, zero.

Question 16

A project has the following cash flows. What is the payback period?

Accepted Answer

A)  2.38 years 
B)  2.49 years 
C)  2.60 years 
D)  3.01 years 
E)  3.33 years 
A)  2.38 years 
B)  2.49 years 
C)  2.60 years 
D)  3.01 years 
E)  3.33 years

Question 17

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year four. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent?

Accepted Answer

A)  0.96 
B)  0.99 
C)  1.04 
D)  1.09 
E)  1.12 
A)  0.96 
B)  0.99 
C)  1.04 
D)  1.09 
E)  1.12

Question 18

The profitability index reflects the value created per dollar:

Accepted Answer

A)  invested. 
B)  of sales. 
C)  of net income. 
D)  of taxable income. 
E)  of shareholders' equity. 
A)  invested. 
B)  of sales. 
C)  of net income. 
D)  of taxable income. 
E)  of shareholders' equity.

Question 19

Which one of the following defines the internal rate of return for a project?

Accepted Answer

A)  Discount rate that creates a zero cash flow from assets 
B)  Discount rate which results in a zero net present value for the project 
C)  Discount rate which results in a net present value equal to the project's initial cost 
D)  Rate of return required by the project's investors 
E)  The project's current market rate of return 
A)  Discount rate that creates a zero cash flow from assets 
B)  Discount rate which results in a zero net present value for the project 
C)  Discount rate which results in a net present value equal to the project's initial cost 
D)  Rate of return required by the project's investors 
E)  The project's current market rate of return

Question 20

You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Accepted Answer

A)  12.29 percent 
B)  14.38 percent 
C)  16.56 percent 
D)  17.44 percent 
E)  21.00 percent 
A)  12.29 percent 
B)  14.38 percent 
C)  16.56 percent 
D)  17.44 percent 
E)  21.00 percent

Which one of the following indicates that a project is expected to create value for its owners?

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

Explain why the net present value is considered to be the best method of analyzing an investment.

You are considering the following two mutually exclusive projects. What is the crossover point?

A project has the following cash flows. What is the payback period?

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Which one of the following statements is correct?

What is the payback period for a project with the following cash flows?

Miller and Sons is evaluating a project with the following cash flows: The company uses a 10 percent interest rate on all of its projects. What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach?

A project has the following cash flows. What is the internal rate of return?

The net present value of an investment represents the difference between the investment's:

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

A project has the following cash flows. What is the payback period?

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year four. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent?

The profitability index reflects the value created per dollar:

Which one of the following defines the internal rate of return for a project?

You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 8: Net Present Value and Other Investment Criteria

Which one of the following indicates that a project is expected to create value for its owners?

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?

Explain why the net present value is considered to be the best method of analyzing an investment.

You are considering the following two mutually exclusive projects. What is the crossover point?

A project has the following cash flows. What is the payback period?

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Which one of the following statements is correct?

What is the payback period for a project with the following cash flows?

Miller and Sons is evaluating a project with the following cash flows: The company uses a 10 percent interest rate on all of its projects. What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach?

A project has the following cash flows. What is the internal rate of return?

The net present value of an investment represents the difference between the investment's:

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

A project has the following cash flows. What is the payback period?

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year four. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent?

The profitability index reflects the value created per dollar:

Which one of the following defines the internal rate of return for a project?

You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters