Question 1

The discounted payback technique will never accept a negative-NPV project.

Accepted Answer

A) True 
 B)False

Question 2

Story Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years.Calculate the NPV at 12%.

Accepted Answer

A) $2.4 million 
B) $1.2 million 
C) $0.80 million 
D) $0.20 million 
A) $2.4 million 
B) $1.2 million 
C) $0.80 million 
D) $0.20 million

Question 3

Which investment analysis technique is used the least by CFOs?

Accepted Answer

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

Question 4

The profitability index is always less than 1.0.

Accepted Answer

A) True 
 B)False

Question 5

Dry-Sand Company is considering investing in a new project.The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax)cash flows for three years.However,at the end of the fourth year,the project will generate -$500,000 of after-tax cash flow due to dismantling costs.Calculate the MIRR (modified internal rate of return)for the project if the cost of capital is 15%.

Accepted Answer

A) 8.1% 
B) 12.6% 
C) 28.2% 
A) 8.1% 
B) 12.6% 
C) 28.2%

Question 6

The main advantage of the payback rule is:

Accepted Answer

A) adjusts for uncertainty of early cash flows. 
B) simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project. 
A) adjusts for uncertainty of early cash flows. 
B) simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project.

Question 7

How does modified internal rate of return (MIRR)differ from IRR?

Accepted Answer

A) MIRR does not consider cash flows occurring after the cutoff date. 
B) MIRR uses NPV.IRR does not. 
C) MIRR calculates the PV of cash inflows and then divides by the PV of the investment. 
D) MIRR reduces the number of sign changes in a cash-flow sequence. 
A) MIRR does not consider cash flows occurring after the cutoff date. 
B) MIRR uses NPV.IRR does not. 
C) MIRR calculates the PV of cash inflows and then divides by the PV of the investment. 
D) MIRR reduces the number of sign changes in a cash-flow sequence.

Question 8

If an investment project (normal project)has an IRR equal to the cost of capital,the NPV for that project is:

Accepted Answer

A) positive. 
B) negative. 
C) zero. 
D) unable to determine. 
A) positive. 
B) negative. 
C) zero. 
D) unable to determine.

Question 9

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately:

Accepted Answer

A) 12% of firms. 
B) 20% of firms. 
C) 75% of firms. 
D) 57% of firms. 
A) 12% of firms. 
B) 20% of firms. 
C) 75% of firms. 
D) 57% of firms.

Question 10

The following are some of the shortcomings of the IRR method except:

Accepted Answer

A) IRR is conceptually easy to communicate. 
B) Projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) It is very cumbersome to evaluate mutually exclusive projects using the IRR method. 
A) IRR is conceptually easy to communicate. 
B) Projects can have multiple IRRs. 
C) IRR cannot distinguish between a borrowing project and a lending project. 
D) It is very cumbersome to evaluate mutually exclusive projects using the IRR method.

Question 11

Discuss some of the disadvantages of the payback rule.

Accepted Answer

The disadvantages are that it

Question 12

When calculating a weighted average profitability index,should you apply an index of zero to leftover money?

Accepted Answer

The NPV of money that is not invested is

Question 13

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 14

The profitability index of a positive NPV project is always positive.

Accepted Answer

A) True 
 B)False

Question 15

The IRR is defined as:

Accepted Answer

A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate 
A) the discount rate that makes a project's NPV equal to zero. 
B) the difference between the cost of capital and the present value of the cash flows. 
C) the discount rate used in the NPV method. 
D) the discount rate

Question 16

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years.Calculate the NPV for the project if the cost of capital is 15%.

Accepted Answer

A) $169,935 
B) $1,200,000 
C) $339,870 
D) $125,846 
A) $169,935 
B) $1,200,000 
C) $339,870 
D) $125,846

Question 17

A project's internal rate of return depends on its level of risk.

Accepted Answer

A) True 
 B)False

Question 18

There can never be more than one value of the IRR for any sequence of cash flows.

Accepted Answer

A) True 
 B)False

Question 19

One can use the profitability index most usefully for which situation?

Accepted Answer

A) when capital rationing exists 
B) evaluation of exceptionally long-term projects 
C) evaluation of non-normal projects 
D) when a project has unusually high cash-flow uncertainty 
A) when capital rationing exists 
B) evaluation of exceptionally long-term projects 
C) evaluation of non-normal projects 
D) when a project has unusually high cash-flow uncertainty

Question 20

A project's "book value" represents,essentially,the market valuation of the project.

Accepted Answer

A) True 
 B)False

Exam 5: Net Present Value and Other Investment Criteria

The discounted payback technique will never accept a negative-NPV project.

Story Company is investing in a giant crane.It is expected to cost $6.0 million in initial investment,and it is expected to generate an end-of-year after-tax cash flow of $3.0 million each year for three years.Calculate the NPV at 12%.

Which investment analysis technique is used the least by CFOs?

The profitability index is always less than 1.0.

The main advantage of the payback rule is:

How does modified internal rate of return (MIRR)differ from IRR?

If an investment project (normal project)has an IRR equal to the cost of capital,the NPV for that project is:

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately:

The following are some of the shortcomings of the IRR method except:

Discuss some of the disadvantages of the payback rule.

When calculating a weighted average profitability index,should you apply an index of zero to leftover money?

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

The profitability index of a positive NPV project is always positive.

The IRR is defined as:

Music Company is considering investing in a new project.The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years.Calculate the NPV for the project if the cost of capital is 15%.

A project's internal rate of return depends on its level of risk.

There can never be more than one value of the IRR for any sequence of cash flows.

One can use the profitability index most usefully for which situation?

A project's "book value" represents,essentially,the market valuation of the project.

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

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