Question 1

Why is payback often used as the sole method of analyzing a proposed small project?

Accepted Answer

A) Payback considers the time value of money. 
B) All relevant cash flows are included in the payback analysis. 
C) It is the only method where the benefits of the analysis outweigh the costs of that analysis. 
D) Payback is the most desirable of the various financial methods of analysis. 
E) Payback is focused on the long-term impact of a project. 
A) Payback considers the time value of money. 
B) All relevant cash flows are included in the payback analysis. 
C) It is the only method where the benefits of the analysis outweigh the costs of that analysis. 
D) Payback is the most desirable of the various financial methods of analysis. 
E) Payback is focused on the long-term impact of a project. C

Question 2

Boston Chicken is considering two mutually exclusive projects with the following cash flows.What is the crossover rate? If the required rate of return is lower than the crossover rate,which project should be accepted? $$\begin{array} { c c c } 
& \text { Project A } & \text { Project B } \
\frac { \text { Year } } { 0 } & \underline { \text { Cash Flow } } & \text { Cash Flow } \
1 & - \$ 50,000 & - \$ 50,000 \
2 & \$ 31,000 & \$ 42,000 \
3 & \$ 26,000 & \$ 21,000 \
& \$ 27,000 & \$ 18,000
\end{array}$$

Accepted Answer

A) 14.72 percent; A 
B) 14.72 percent; B 
C) 15.99 percent; A 
D) 15.99 percent; B 
E) 16.08 percent; B 
A) 14.72 percent; A 
B) 14.72 percent; B 
C) 15.99 percent; A 
D) 15.99 percent; B 
E) 16.08 percent; B C

Question 3

You are considering two mutually exclusive projects with the following cash flows.Which project(s)should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

Accepted Answer

A) accept project A as it always has the higher NPV 
B) accept project B as it always has the higher NPV 
C) accept A at 8.5 percent and B at 13 percent 
D) accept B at 8.5 percent and A at 13 percent 
E) accept B at 8.5 percent and neither at 13 percent 
A) accept project A as it always has the higher NPV 
B) accept project B as it always has the higher NPV 
C) accept A at 8.5 percent and B at 13 percent 
D) accept B at 8.5 percent and A at 13 percent 
E) accept B at 8.5 percent and neither at 13 percent E

Question 4

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

Accepted Answer

A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative. 
A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative.

Question 5

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Accepted Answer

A) -$3,383.25 
B) -$2,784.62 
C) -$2,481.53 
D) $52,311.08 
E) $66,416.75 
A) -$3,383.25 
B) -$2,784.62 
C) -$2,481.53 
D) $52,311.08 
E) $66,416.75

Question 6

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Accepted Answer

A) conflicts with the results of the net present value decision rule 
B) assumes the firm has sufficient funds to undertake both projects 
C) agrees with the decision that would also apply if the projects were mutually exclusive 
D) bases the accept/reject decision on the same variables as the average accounting return 
E) fails to provide useful information as the firm must reject at least one of the projects 
A) conflicts with the results of the net present value decision rule 
B) assumes the firm has sufficient funds to undertake both projects 
C) agrees with the decision that would also apply if the projects were mutually exclusive 
D) bases the accept/reject decision on the same variables as the average accounting return 
E) fails to provide useful information as the firm must reject at least one of the projects

Question 7

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

Accepted Answer

The NPV rule states that a project shoul

Question 8

Which one of the following is an advantage of the average accounting return method of analysis?

Accepted Answer

A) easy availability of information needed for the computation 
B) inclusion of time value of money considerations 
C) the use of a cutoff rate as a benchmark 
D) the use of pre-tax income in the computation 
E) use of real, versus nominal, average income 
A) easy availability of information needed for the computation 
B) inclusion of time value of money considerations 
C) the use of a cutoff rate as a benchmark 
D) the use of pre-tax income in the computation 
E) use of real, versus nominal, average income

Question 9

You are analyzing a project and have gathered the following data: $$\begin{array} { c r c } 
\frac { \text { Year } } { 0 } & \frac { \text { Cash flow } } { } & \
1 & - \$ 175,000 & \
2 & \$ 56,400 & \
3 & \$ 61,800 & \
4 & \$ 72,000 & \
\text { Required payback period } & 2.5 \text { years } \
\text { Required AAR } & 11.5 \text { percent } \
\text { Required return } & 14.5 \text { percent }
\end{array}$$ Based on the payback period of _____ years for this project,you should _____ the project.

Accepted Answer

A) 2.79; accept 
B) 3.79; accept 
C) 2.46; reject 
D) 2.79; reject 
E) 3.79; reject 
A) 2.79; accept 
B) 3.79; accept 
C) 2.46; reject 
D) 2.79; reject 
E) 3.79; reject

Question 10

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only.The required return is 8 percent.Rosa has estimated the cash flows for one gown as follows.Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR)?

Accepted Answer

A) Rosa should sell the gown for $155,000. 
B) Rose can sell the gown for as little as $153,819 and still earn her required return. 
C) The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return. 
D) The IRR decision rule cannot be applied to this project. 
E) Insufficient information is provided to make a decision based on IRR. 
A) Rosa should sell the gown for $155,000. 
B) Rose can sell the gown for as little as $153,819 and still earn her required return. 
C) The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return. 
D) The IRR decision rule cannot be applied to this project. 
E) Insufficient information is provided to make a decision based on IRR.

Question 11

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years.The profit margin is estimated at 6 percent.The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project.The firm has a required accounting return of 11 percent.This project should be _____ because the AAR is _____ percent.

Accepted Answer

A) rejected; 10.03 
B) rejected; 10.25 
C) rejected; 11.60 
D) accepted; 10.25 
E) accepted; 11.60 
A) rejected; 10.03 
B) rejected; 10.25 
C) rejected; 11.60 
D) accepted; 10.25 
E) accepted; 11.60

Question 12

Which two methods of project analysis are the most biased towards short-term projects?

Accepted Answer

A) net present value and internal rate of return 
B) internal rate of return and profitability index 
C) payback and discounted payback 
D) net present value and discounted payback 
E) discounted payback and profitability index 
A) net present value and internal rate of return 
B) internal rate of return and profitability index 
C) payback and discounted payback 
D) net present value and discounted payback 
E) discounted payback and profitability index

Question 13

Home Décor & More is considering a proposed project with the following cash flows.Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not? $$\begin{array} { c c } 
\underline { \text { Year } } & { \text { Cash Flow } } \
\hline 0 & - \$ 375,000 \
1 & 133,500 \
2 & - 35,600 \
3 & 244,700 \
4 & 271,000
\end{array}$$

Accepted Answer

A) Yes; The MIRR is 14.78 percent. 
B) Yes; The MIRR is 17.42 percent. 
C) No; The MIRR is 12.91 percent. 
D) No; The MIRR is 14.78 percent. 
E) No; The MIRR is 17.42 percent. 
A) Yes; The MIRR is 14.78 percent. 
B) Yes; The MIRR is 17.42 percent. 
C) No; The MIRR is 12.91 percent. 
D) No; The MIRR is 14.78 percent. 
E) No; The MIRR is 17.42 percent.

Question 14

A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?

Accepted Answer

A) net present value 
B) internal return 
C) payback value 
D) profitability index 
E) discounted payback 
A) net present value 
B) internal return 
C) payback value 
D) profitability index 
E) discounted payback

Question 15

A project has an initial cost of $32,000 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,300,and $1,800 a year for the next 3 years,respectively.What is the average accounting return?

Accepted Answer

A) 8.72 percent 
B) 11.04 percent 
C) 11.26 percent 
D) 14.69 percent 
E) 15.14 percent 
A) 8.72 percent 
B) 11.04 percent 
C) 11.26 percent 
D) 14.69 percent 
E) 15.14 percent

Question 16

Which two methods of project analysis were the most widely used by CEO's as of 1999?

Accepted Answer

A) net present value and payback 
B) internal rate of return and payback 
C) net present value and average accounting return 
D) internal rate of return and net present value 
E) payback and average accounting return 
A) net present value and payback 
B) internal rate of return and payback 
C) net present value and average accounting return 
D) internal rate of return and net present value 
E) payback and average accounting return

Question 17

An investment project has an installed cost of $518,297.The cash flows over the 4-year life of the investment are projected to be $287,636,$203,496,$103,802,and $92,556,respectively.What is the NPV of this project if the discount rate is zero percent?

Accepted Answer

A) $47,306 
B) $72,418 
C) $91,110 
D) $128,415 
E) $169,193 
A) $47,306 
B) $72,418 
C) $91,110 
D) $128,415 
E) $169,193

Question 18

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets.When the project ends,those assets are expected to have an aftertax salvage value of $45,000.How is the $45,000 salvage value handled when computing the net present value of the project?

Accepted Answer

A) reduction in the cash outflow at time zero 
B) cash inflow in the final year of the project 
C) cash inflow for the year following the final year of the project 
D) cash inflow prorated over the life of the project 
E) not included in the net present value 
A) reduction in the cash outflow at time zero 
B) cash inflow in the final year of the project 
C) cash inflow for the year following the final year of the project 
D) cash inflow prorated over the life of the project 
E) not included in the net present value

Question 19

An investment has the following cash flows and a required return of 13 percent.Based on IRR,should this project be accepted? Why or why not?

Accepted Answer

A) No; The IRR exceeds the required return by about 0.06 percent. 
B) No; The IRR is less than the required return by about 1.53 percent. 
C) Yes; The IRR exceeds the required return by about 0.06 percent. 
D) Yes; The IRR exceeds the required return by about 1.53 percent. 
E) Yes; The IRR is less than the required return by about 0.06 percent. 
A) No; The IRR exceeds the required return by about 0.06 percent. 
B) No; The IRR is less than the required return by about 1.53 percent. 
C) Yes; The IRR exceeds the required return by about 0.06 percent. 
D) Yes; The IRR exceeds the required return by about 1.53 percent. 
E) Yes; The IRR is less than the required return by about 0.06 percent.

Question 20

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value.   Should you accept or reject these projects based on the average accounting return?

Accepted Answer

A) accept Project A and reject Project B 
B) reject Project A and accept Project B 
C) accept both Projects A and B 
D) reject both Projects A and B 
E) You cannot make this decision based on the information provided. 
A) accept Project A and reject Project B 
B) reject Project A and accept Project B 
C) accept both Projects A and B 
D) reject both Projects A and B 
E) You cannot make this decision based on the information provided.

Exam 9: Net Present Value and Other Investment Criteria

Why is payback often used as the sole method of analyzing a proposed small project?

You are considering two mutually exclusive projects with the following cash flows.Which project(s)should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

Which one of the following is an advantage of the average accounting return method of analysis?

You are analyzing a project and have gathered the following data: 1 -\ 175,000 2 \ 56,400 3 \ 61,800 4 \ 72,000 Required payback period 2.5 years Required AAR 11.5 percent Required return 14.5 percent Based on the payback period of _____ years for this project,you should _____ the project.

Which two methods of project analysis are the most biased towards short-term projects?

A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?

Which two methods of project analysis were the most widely used by CEO's as of 1999?

An investment project has an installed cost of $518,297.The cash flows over the 4-year life of the investment are projected to be $287,636,$203,496,$103,802,and $92,556,respectively.What is the NPV of this project if the discount rate is zero percent?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets.When the project ends,those assets are expected to have an aftertax salvage value of $45,000.How is the $45,000 salvage value handled when computing the net present value of the project?

An investment has the following cash flows and a required return of 13 percent.Based on IRR,should this project be accepted? Why or why not?

Introduction to Corporate Finance

Financial Statements,Taxes,and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return,Risk,and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

You are analyzing a project and have gathered the following data: 1 -\ 175,000 2 \ 56,400 3 \ 61,800 4 \ 72,000 Required payback period 2.5 years Required AAR 11.5 percent Required return 14.5 percent Based on the payback period of _ years for this project,you should _ the project.