Question 1

Because of deficiencies associated with the payback method,it is seldom used in corporate financial analysis today.

Accepted Answer

A) True 
 B)False  False

Question 2

A project's opportunity cost of capital is:

Accepted Answer

A)  the return that shareholders could expect to earn by investing in the financial markets. 
B)  the return earned by investing in the project. 
C)  equal to the average return on all company projects. 
D)  designed to be less than the project's IRR. 
A)  the return that shareholders could expect to earn by investing in the financial markets. 
B)  the return earned by investing in the project. 
C)  equal to the average return on all company projects. 
D)  designed to be less than the project's IRR. A

Question 3

A firm plans to use the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

Accepted Answer

A)  Select the project with the higher profitability index 
B)  Select the project with the lower profitability index 
C)  Without capital rationing, both projects can be selected 
D)  Without capital rationing, the NPV method must be used instead 
A)  Select the project with the higher profitability index 
B)  Select the project with the lower profitability index 
C)  Without capital rationing, both projects can be selected 
D)  Without capital rationing, the NPV method must be used instead D

Question 4

You can continue to use your less efficient machine at a cost of $8,000 annually.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.If the new machine lasts 5 years and the cost of capital is 15%,you should:

Accepted Answer

A)  buy the new machine and save $600 in equivalent annual costs. 
B)  buy the new machine and save $388 in equivalent annual costs. 
C)  keep the old machine and save $388 in equivalent annual costs. 
D)  keep the old machine and save $580 in equivalent annual costs. 
A)  buy the new machine and save $600 in equivalent annual costs. 
B)  buy the new machine and save $388 in equivalent annual costs. 
C)  keep the old machine and save $388 in equivalent annual costs. 
D)  keep the old machine and save $580 in equivalent annual costs.

Question 5

When choosing among mutually exclusive projects with similar lives,the choice is easy using the NPV rule.As long as at least one project has positive NPV,simply choose the project with the highest NPV.

Accepted Answer

A) True 
 B)False

Question 6

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years,how much did the project cost?

Accepted Answer

A)  $44,617.07 
B)  $52,208.18 
C)  $41,909.29 
D)  $49,082.11 
A)  $44,617.07 
B)  $52,208.18 
C)  $41,909.29 
D)  $49,082.11

Question 7

When a project's internal rate of return equals its opportunity cost of capital,then the:

Accepted Answer

A)  project should be rejected. 
B)  project has no cash inflows. 
C)  net present value will be positive. 
D)  net present value will be zero. 
A)  project should be rejected. 
B)  project has no cash inflows. 
C)  net present value will be positive. 
D)  net present value will be zero.

Question 8

The investment timing problem arises when:

Accepted Answer

A)  cash flows may occur at the beginning or end of each time period. 
B)  there is a choice between using the payback or NPV rules. 
C)  the project has a positive initial cash flow. 
D)  investment can occur now or at some future point. 
A)  cash flows may occur at the beginning or end of each time period. 
B)  there is a choice between using the payback or NPV rules. 
C)  the project has a positive initial cash flow. 
D)  investment can occur now or at some future point.

Question 9

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

Accepted Answer

A) True 
 B)False

Question 10

If a project's NPV is calculated to be negative what should a project manner do?

Accepted Answer

A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D)  The project should be rejected. 
A)  The discount rate should be decreased. 
B)  The profitability index should be calculated. 
C)  The present value of the project cost should be determined. 
D)  The project should be rejected.

Question 11

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

Accepted Answer

A)  0.57% 
B)  1.21% 
C)  5.69% 
D)  12.10% 
A)  0.57% 
B)  1.21% 
C)  5.69% 
D)  12.10%

Question 12

Soft capital rationing is imposed upon a firm by _____,while hard capital rationing is imposed by _____.

Accepted Answer

A)  management; the capital market. 
B)  the capital market; management. 
C)  the government; the capital market. 
D)  the capital market; the government. 
A)  management; the capital market. 
B)  the capital market; management. 
C)  the government; the capital market. 
D)  the capital market; the government.

Question 13

Which one of the following should be assumed about a project that requires a $100,000 investment at time zero,then returns $20,000 annually for 5 years?

Accepted Answer

A)  The NPV is negative. 
B)  The NPV is zero. 
C)  The profitability index is 1.0. 
D)  The IRR is negative. 
A)  The NPV is negative. 
B)  The NPV is zero. 
C)  The profitability index is 1.0. 
D)  The IRR is negative.

Question 14

For mutually exclusive projects,the project with the higher IRR is the correct selection.

Accepted Answer

A) True 
 B)False

Question 15

You are analyzing a project that is equivalent to borrowing money.This project's:

Accepted Answer

A)  NPV graph rises as discount rates decrease. 
B)  initial cash flow is an outflow of funds. 
C)  value increases when the cost of capital increases. 
D)  acceptance requires its IRR to exceed the cost of capital. 
A)  NPV graph rises as discount rates decrease. 
B)  initial cash flow is an outflow of funds. 
C)  value increases when the cost of capital increases. 
D)  acceptance requires its IRR to exceed the cost of capital.

Question 16

Given a particular set of project cash flows,which one of the following statements must be correct?

Accepted Answer

A)  There can be only one NPV for the project. 
B)  There can be only one IRR for the project. 
C)  There can be more than one IRR for the project. 
D)  There can be up to two profitability indexes for any project. 
A)  There can be only one NPV for the project. 
B)  There can be only one IRR for the project. 
C)  There can be more than one IRR for the project. 
D)  There can be up to two profitability indexes for any project.

Question 17

What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

Accepted Answer

A)  $29,494 
B)  $30,000 
C)  $39,256 
D)  $52,250 
A)  $29,494 
B)  $30,000 
C)  $39,256 
D)  $52,250

Question 18

If a project has multiple IRRs,the lowest one is incorrect.

Accepted Answer

A) True 
 B)False

Question 19

The payback rule always makes shareholders better off.

Accepted Answer

A) True 
 B)False

Question 20

Soft capital rationing:

Accepted Answer

A)  is costly to shareholders. 
B)  is used to evaluate mutually exclusive projects. 
C)  should be costless to the shareholders of the firm. 
D)  solves the problem of investment timing. 
A)  is costly to shareholders. 
B)  is used to evaluate mutually exclusive projects. 
C)  should be costless to the shareholders of the firm. 
D)  solves the problem of investment timing.

Exam 8: Net Present Value and Other Investment Criteria

Because of deficiencies associated with the payback method,it is seldom used in corporate financial analysis today.

A project's opportunity cost of capital is:

A firm plans to use the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

You can continue to use your less efficient machine at a cost of $8,000 annually.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.If the new machine lasts 5 years and the cost of capital is 15%,you should:

When choosing among mutually exclusive projects with similar lives,the choice is easy using the NPV rule.As long as at least one project has positive NPV,simply choose the project with the highest NPV.

If a project's IRR is 13% and the project provides annual cash flows of $15,000 for 4 years,how much did the project cost?

When a project's internal rate of return equals its opportunity cost of capital,then the:

The investment timing problem arises when:

Unlike using IRR,selecting projects according to their NPV will always lead to a correct accept-reject decision.

If a project's NPV is calculated to be negative what should a project manner do?

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for 6 years?

Soft capital rationing is imposed upon a firm by _____,while hard capital rationing is imposed by _____.

Which one of the following should be assumed about a project that requires a $100,000 investment at time zero,then returns $20,000 annually for 5 years?

For mutually exclusive projects,the project with the higher IRR is the correct selection.

You are analyzing a project that is equivalent to borrowing money.This project's:

Given a particular set of project cash flows,which one of the following statements must be correct?

What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 10%.

If a project has multiple IRRs,the lowest one is incorrect.

The payback rule always makes shareholders better off.

Soft capital rationing:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters

Soft capital rationing is imposed upon a firm by _,while hard capital rationing is imposed by _.