Question 1

All of the following are strengths of payback EXCEPT:

Accepted Answer

A) its benchmark is not determined by a relevant external constraint. 
B) it incorporates the time value of money. 
C) it uses a conservative reinvestment rate. 
D) none of these. 
A) its benchmark is not determined by a relevant external constraint. 
B) it incorporates the time value of money. 
C) it uses a conservative reinvestment rate. 
D) none of these.

Question 2

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Accepted Answer

A) Payback 
B) Internal rate of return 
C) Net present value 
D) Profitability index 
A) Payback 
B) Internal rate of return 
C) Net present value 
D) Profitability index

Question 3

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

Accepted Answer

A) The project has only one negative cash flow. 
B) The project's MIRR is less than 15 percent but greater than 10 percent. 
C) The project's discounted payback is less than the project's payback. 
D) The project's NPV > 0. 
A) The project has only one negative cash flow. 
B) The project's MIRR is less than 15 percent but greater than 10 percent. 
C) The project's discounted payback is less than the project's payback. 
D) The project's NPV > 0.

Question 4

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Accepted Answer

A) Independent projects that are evaluated at a high cost of capital. 
B) Mutually exclusive projects that are evaluated at a low cost of capital. 
C) Any projects that exhibit differences in scale or timing. 
D) Mutually exclusive projects that exhibit differences in scale or timing. 
A) Independent projects that are evaluated at a high cost of capital. 
B) Mutually exclusive projects that are evaluated at a low cost of capital. 
C) Any projects that exhibit differences in scale or timing. 
D) Mutually exclusive projects that exhibit differences in scale or timing.

Question 5

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000
\end{array}$$ Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 6

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Cash } & - 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 \
 \text { Flow } & & & & & & & \
\hline
\end{array}$$

Accepted Answer

A) PI = 6.94 percent; reject the project 
B) PI = -7.52 percent; reject the project 
C) PI = -4.21 percent; reject the project 
D) PI = 5.33 percent; accept the project 
A) PI = 6.94 percent; reject the project 
B) PI = -7.52 percent; reject the project 
C) PI = -4.21 percent; reject the project 
D) PI = 5.33 percent; accept the project

Question 7

The least-used capital budgeting technique in industry is:

Accepted Answer

A) NPV. 
B) IRR. 
C) P\payback. 
D) MIRR. 
A) NPV. 
B) IRR. 
C) P\payback. 
D) MIRR.

Question 8

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. $$\begin{array} { l l l l l l l } 
\text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flow: } & - 100 & 75 & 100 & 300 & 75 & 200
\end{array}$$

Accepted Answer

A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept 
A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept

Question 9

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000
\end{array}$$ Use the PI decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) -1.21 percent, reject 
B) 1.08 percent, accept 
C) 1.21 percent, accept 
D) 121 percent, accept 
A) -1.21 percent, reject 
B) 1.08 percent, accept 
C) 1.21 percent, accept 
D) 121 percent, accept

Question 10

A disadvantage of the payback statistic is that:

Accepted Answer

A) it does not reflect the time value of money. 
B) it does not give an indication of the project's riskiness. 
C) it does not consider cash flows beyond the payback period. 
D) All of these are disadvantages of payback. 
A) it does not reflect the time value of money. 
B) it does not give an indication of the project's riskiness. 
C) it does not consider cash flows beyond the payback period. 
D) All of these are disadvantages of payback.

Question 11

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Cash } & - 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 \
 \text { Flow } & & & & & & &\
\hline
\end{array}$$

Accepted Answer

A) NPV = $1,766.55; accept the project 
B) NPV = -$892.19; reject the project 
C) NPV = $1,288.94; accept the project 
D) NPV = -$3,577.90; reject the project 
A) NPV = $1,766.55; accept the project 
B) NPV = -$892.19; reject the project 
C) NPV = $1,288.94; accept the project 
D) NPV = -$3,577.90; reject the project

Question 12

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and three and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \begin{array} { l } 
\text { Cash } \
\text { Flow }
\end{array} & - 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 \
\hline
\end{array}$$

Accepted Answer

A) Payback = 4.90 years; reject 
B) Payback = 4.40 years; reject 
C) Payback = 5.80 years; reject 
D) Payback > 6.00 years; reject 
A) Payback = 4.90 years; reject 
B) Payback = 4.40 years; reject 
C) Payback = 5.80 years; reject 
D) Payback > 6.00 years; reject

Question 13

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Accepted Answer

A) time value of money. 
B) market rates of return. 
C) cash flows that occur after payback. 
D) cash flows that occur during payback. 
A) time value of money. 
B) market rates of return. 
C) cash flows that occur after payback. 
D) cash flows that occur during payback.

Question 14

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000
\end{array}$$ Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) $9,704.31, reject 
B) $84,140.71, accept 
C) $134,704.31, accept 
D) $150,868.83, accept 
A) $9,704.31, reject 
B) $84,140.71, accept 
C) $134,704.31, accept 
D) $150,868.83, accept

Question 15

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000
\end{array}$$ Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 16

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent.Project Y $$\begin{array} { | r | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 \
\hline \text { Cash Flow } & - \$ 8,000 & \$ 3,350 & \$ 4,180 & \$ 1,520 & \$ 2,000 \
\hline
\end{array}$$

Accepted Answer

A) $894.37 
B) $993.97 
C) $964.72 
D) $1,008.03 
A) $894.37 
B) $993.97 
C) $964.72 
D) $1,008.03

Question 17

Which of the following best describes the NPV profile?

Accepted Answer

A) A graph of a project's NPV as a function of possible IRRs. 
B) A graph of a project's NPV over time. 
C) A graph of a project's NPV as a function of possible capital costs. 
D) None of these statements are correct. 
A) A graph of a project's NPV as a function of possible IRRs. 
B) A graph of a project's NPV over time. 
C) A graph of a project's NPV as a function of possible capital costs. 
D) None of these statements are correct.

Question 18

Which of the following statements is correct regarding the NPV profile?

Accepted Answer

A) The IRR appears as the intersection of the NPV profile with the x-axis. 
B) The IRR appears at the crossover point or where the two profiles intersect. 
C) NPV profiles for independent projects with normal cash flows will intersect. 
D) All of these statements are correct. 
A) The IRR appears as the intersection of the NPV profile with the x-axis. 
B) The IRR appears at the crossover point or where the two profiles intersect. 
C) NPV profiles for independent projects with normal cash flows will intersect. 
D) All of these statements are correct.

Question 19

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Accepted Answer

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

Question 20

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Accepted Answer

A) PI. 
B) IRR. 
C) NPV. 
D) MIRR. 
A) PI. 
B) IRR. 
C) NPV. 
D) MIRR.

All of the following are strengths of payback EXCEPT:

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

The least-used capital budgeting technique in industry is:

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. Time: 0 1 2 3 4 5 Cash flow: -100 75 100 300 75 200

A disadvantage of the payback statistic is that:

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent.Project Y Time 0 1 2 3 4 Cash Flow -\ 8,000 \ 3,350 \ 4,180 \ 1,520 \ 2,000

Which of the following best describes the NPV profile?

Which of the following statements is correct regarding the NPV profile?

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Filters

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

All of the following are strengths of payback EXCEPT:

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

The least-used capital budgeting technique in industry is:

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. Time: 0 1 2 3 4 5 Cash flow: -100 75 100 300 75 200

A disadvantage of the payback statistic is that:

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 10 percent.Project Y Time 0 1 2 3 4 Cash Flow -\ 8,000 \ 3,350 \ 4,180 \ 1,520 \ 2,000

Which of the following best describes the NPV profile?

Which of the following statements is correct regarding the NPV profile?

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Filters