Question 1

Briefly discuss capital rationing.

Accepted Answer

There are two types of capital rationing

Question 2

Given the following cash flows for project Z: C0 = -1,000,C1 = 600,C2 = 720,and C3 = 2,000,calculate the discounted payback period for the project at a discount rate of 20%.

Accepted Answer

A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years 
A) 1 year 
B) 2 years 
C) 3 years 
D) >3 years

Question 3

The cost of a new machine is $250,000.The machine has a five-year life and no salvage value.If the cash flow each year is equal to 25% of the cost of the machine,calculate the payback period for the project:

Accepted Answer

A) 2.0 years 
B) 2.5 years 
C) 3.0 years 
D) 4.0 years 
A) 2.0 years 
B) 2.5 years 
C) 3.0 years 
D) 4.0 years

Question 4

The payback rule ignores all cash flows after the cutoff date.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Soft rationing may be used to control managerial behavior.

Accepted Answer

A) True 
 B)False

Question 7

The benefit-cost ratio is equal to the profitability index plus one.

Accepted Answer

A) True 
 B)False

Question 8

The profitability index is the ratio of the:

Accepted Answer

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

Question 9

The payback period rule:

Accepted Answer

A) varies the cut-off point with the interest rate. 
B) determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
C) requires an arbitrary choice of a cut-off point. 
D) both A and C. 
A) varies the cut-off point with the interest rate. 
B) determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
C) requires an arbitrary choice of a cut-off point. 
D) both A and C.

Question 10

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?
i.payback period; II)discounted payback period; III)net present value (NPV); IV)internal rate of return

Accepted Answer

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

Question 11

Decommissioning and clean-up costs for any project is always insignificant and should typically be ignored.

Accepted Answer

A) True 
 B)False

Question 12

Mass 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 cash flow of $3.0 million each year for three years.At the end of the fourth year,there will be a $1.0 million disposal cost.Calculate the MIRR for the project if the cost of capital is 12%.

Accepted Answer

A) 17.8% 
B) 15.3% 
C) 23.8% 
A) 17.8% 
B) 15.3% 
C) 23.8%

Question 13

The denominator of the profitability index is the present value of the investment.

Accepted Answer

A) True 
 B)False

Question 14

Internal rate of return (IRR)method is also called the:

Accepted Answer

A) discounted payback period method. 
B) discounted cash-flow (DCF)rate of return method. 
C) modified internal rate of return (MIRR)method. 
D) book rate of return method. 
A) discounted payback period method. 
B) discounted cash-flow (DCF)rate of return method. 
C) modified internal rate of return (MIRR)method. 
D) book rate of return method.

Question 15

The survey of CFOs indicates that the NPV method is always,or almost always,used for evaluating investment projects by approximately:

Accepted Answer

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

Question 16

The quickest way to calculate the internal rate of return (IRR)of a project is by:

Accepted Answer

A) trial and error method. 
B) using the graphical method. 
C) using a financial calculator. 
D) doubling the opportunity cost of capital. 
A) trial and error method. 
B) using the graphical method. 
C) using a financial calculator. 
D) doubling the opportunity cost of capital.

Question 17

Driscoll 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 IRR for the project.

Accepted Answer

A) 14.5% 
B) 18.6% 
C) 20.2% 
D) 23.4% 
A) 14.5% 
B) 18.6% 
C) 20.2% 
D) 23.4%

Question 18

Which of the following investment rules may not use all possible cash flows in its calculations?

Accepted Answer

A) NPV 
B) payback period 
C) IRR 
D) profitability index 
A) NPV 
B) payback period 
C) IRR 
D) profitability index

Question 19

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

Accepted Answer

There are several disadvantages to the I

Question 20

Which of the following investment rules does NOT use the time value of money concept?

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index 
A) Net present value 
B) Internal rate of return 
C) The payback period 
D) Profitability index

Exam 5: Net Present Value and Other Investment Criteria

Briefly discuss capital rationing.

Given the following cash flows for project Z: C0 = -1,000,C1 = 600,C2 = 720,and C3 = 2,000,calculate the discounted payback period for the project at a discount rate of 20%.

The cost of a new machine is $250,000.The machine has a five-year life and no salvage value.If the cash flow each year is equal to 25% of the cost of the machine,calculate the payback period for the project:

The payback rule ignores all cash flows after the cutoff date.

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

Soft rationing may be used to control managerial behavior.

The benefit-cost ratio is equal to the profitability index plus one.

The profitability index is the ratio of the:

The payback period rule:

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept? i.payback period; II)discounted payback period; III)net present value (NPV); IV)internal rate of return

Decommissioning and clean-up costs for any project is always insignificant and should typically be ignored.

The denominator of the profitability index is the present value of the investment.

Internal rate of return (IRR)method is also called the:

The survey of CFOs indicates that the NPV method is always,or almost always,used for evaluating investment projects by approximately:

The quickest way to calculate the internal rate of return (IRR)of a project is by:

Driscoll 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 IRR for the project.

Which of the following investment rules may not use all possible cash flows in its calculations?

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

Which of the following investment rules does NOT use the time value of money concept?

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

Given the following cash flows for project Z: C₀ = -1,000,C₁ = 600,C₂ = 720,and C₃ = 2,000,calculate the discounted payback period for the project at a discount rate of 20%.