Question 1

Discuss some of the advantages of using the payback method.

Accepted Answer

It tells you how quickly you can recover your investment.The main advantage is that it is easy to calculate and use.

Question 2

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Accepted Answer

A) True 
 B)False  False

Question 3

The following table gives the available projects (in $millions)for a firm. $$\begin{array} { l l l l l l l l } 
\underline { \mathrm { A } } & \underline { \mathrm { B } } & \underline { \mathrm { C } } & \underline { \mathrm { D } } & \underline { \mathrm { E } } & \underline { \mathrm { F } } & \underline { \mathrm { G } } & \
5.0 & 4.0 & 5.0 & 1.0 & 2.0 & 7.0 & 8.0 & \text { Initial investment } \
1.5 & - 0.5 & 1.0 & 0.5 & 0.5 & 1.0 & 1.0 & \mathrm { NPV }
\end{array}$$
The firm has only 20 million to invest.What is the maximum NPV that the company can obtain?

Accepted Answer

A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0 
A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0 C

Question 4

Project X has the following cash flows: C0 = +2,000,C1 = -1,150,and C2 = -1,150.If the IRR of the project is 9.85% and if the cost of capital is 12%,you would:

Accepted Answer

A) accept the project. 
B) reject the project. 
A) accept the project. 
B) reject the project.

Question 5

If the NPV of project A is + $120,that of project B is -$40,and that of project C is + $40,what is the NPV of the combined project?

Accepted Answer

A) +$100 
B) -$40 
C) +$70 
D) +$120 
A) +$100 
B) -$40 
C) +$70 
D) +$120

Question 6

Briefly explain the value additivity property.

Accepted Answer

For example,the net present value (NPV)o

Question 7

The benefit-cost ratio is defined as the ratio of:

Accepted Answer

A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR. 
A) net present value cash flows to initial investment. 
B) present value of cash flows to initial investment. 
C) net present value of cash flows to IRR. 
D) present value of cash flows to IRR.

Question 8

Accounting earnings from a firm's income statement,prepared according to generally accepted accounting principles (GAAP),are typically the best data source for calculating a project's NPV.

Accepted Answer

A) True 
 B)False

Question 9

Given the following cash flows for project A: C0 = -1,000,C1 = +600,C2 = +400,and C3 = +1,500,calculate the payback period.

Accepted Answer

A) one year 
B) two years 
C) three years 
D) cannot be determined 
A) one year 
B) two years 
C) three years 
D) cannot be determined

Question 10

The payback period rule accepts all projects for which the payback period is:

Accepted Answer

A) greater than the cut-off value. 
B) less than the cut-off value. 
C) positive. 
D) an integer. 
A) greater than the cut-off value. 
B) less than the cut-off value. 
C) positive. 
D) an integer.

Question 11

The discounted payback technique discounts cash flows at the opportunity cost of capital and then calculates the payback period.

Accepted Answer

A) True 
 B)False

Question 12

The following are disadvantages of using the payback rule EXCEPT the rule:

Accepted Answer

A) ignores all cash flow after the cutoff date. 
B) does not use the time value of money. 
C) is easy to calculate and use. 
D) does not have the value additivity property. 
A) ignores all cash flow after the cutoff date. 
B) does not use the time value of money. 
C) is easy to calculate and use. 
D) does not have the value additivity property.

Question 13

The following are measures used by firms when making capital budgeting decisions EXCEPT:

Accepted Answer

A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value. 
A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value.

Question 14

Briefly explain the term soft rationing.

Accepted Answer

Management uses soft rationing to get be

Question 15

Briefly explain the term hard rationing.

Accepted Answer

A firm faces hard rationing when it cann

Question 16

Present values have the value additivity property.

Accepted Answer

A) True 
 B)False

Question 17

What are some of the advantages of using the IRR method?

Accepted Answer

The main advantage of IRR is t

Question 18

If the sign of the cash flows for a project changes two times,then the project likely has:

Accepted Answer

A) one IRR. 
B) two IRRs. 
C) three IRRs. 
D) four IRRs. 
A) one IRR. 
B) two IRRs. 
C) three IRRs. 
D) four IRRs.

Question 19

Project X has the following cash flows: C0 = +2,000,C1 = -1,300,and C2 = -1,500.If the IRR of the project is 25% and if the cost of capital is 18%,you would:

Accepted Answer

A) accept the project. 
B) reject the project. 
A) accept the project. 
B) reject the project.

Question 20

Which of the following investment rules has the value additivity property?

Accepted Answer

A) the payback period method 
B) the net present value method 
C) the book rate of return method 
D) the internal rate of return method 
A) the payback period method 
B) the net present value method 
C) the book rate of return method 
D) the internal rate of return method

Exam 5: Net Present Value and Other Investment Criteria

Discuss some of the advantages of using the payback method.

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

The following table gives the available projects (in $millions)for a firm. 5.0 4.0 5.0 1.0 2.0 7.0 8.0 Initial investment 1.5 -0.5 1.0 0.5 0.5 1.0 1.0 The firm has only 20 million to invest.What is the maximum NPV that the company can obtain?

Project X has the following cash flows: C0 = +2,000,C1 = -1,150,and C2 = -1,150.If the IRR of the project is 9.85% and if the cost of capital is 12%,you would:

If the NPV of project A is + $120,that of project B is -$40,and that of project C is + $40,what is the NPV of the combined project?

Briefly explain the value additivity property.

The benefit-cost ratio is defined as the ratio of:

Accounting earnings from a firm's income statement,prepared according to generally accepted accounting principles (GAAP),are typically the best data source for calculating a project's NPV.

Given the following cash flows for project A: C0 = -1,000,C1 = +600,C2 = +400,and C3 = +1,500,calculate the payback period.

The payback period rule accepts all projects for which the payback period is:

The discounted payback technique discounts cash flows at the opportunity cost of capital and then calculates the payback period.

The following are disadvantages of using the payback rule EXCEPT the rule:

The following are measures used by firms when making capital budgeting decisions EXCEPT:

Briefly explain the term soft rationing.

Briefly explain the term hard rationing.

Present values have the value additivity property.

What are some of the advantages of using the IRR method?

If the sign of the cash flows for a project changes two times,then the project likely has:

Project X has the following cash flows: C0 = +2,000,C1 = -1,300,and C2 = -1,500.If the IRR of the project is 25% and if the cost of capital is 18%,you would:

Which of the following investment rules has the value additivity property?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,150,and C₂ = -1,150.If the IRR of the project is 9.85% and if the cost of capital is 12%,you would:

Given the following cash flows for project A: C₀ = -1,000,C₁ = +600,C₂ = +400,and C₃ = +1,500,calculate the payback period.

Project X has the following cash flows: C₀ = +2,000,C₁ = -1,300,and C₂ = -1,500.If the IRR of the project is 25% and if the cost of capital is 18%,you would: