Question 1

The benchmark for the profitability index (PI) is the:

Accepted Answer

A) cost of capital. 
B) managers' maximum number of years. 
C) zero or anything larger than zero. 
D) zero or anything less than zero. 
A) cost of capital. 
B) managers' maximum number of years. 
C) zero or anything larger than zero. 
D) zero or anything less than zero.

Question 2

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 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) 2.45 years, accept 
B) 2.83 years, accept 
C) 3.45 years, accept 
D) 3.83 years, reject 
A) 2.45 years, accept 
B) 2.83 years, accept 
C) 3.45 years, accept 
D) 3.83 years, reject

Question 3

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

Accepted Answer

A) NPV. 
B) profitability index. 
C) MIRR. 
D) discounted payback. 
A) NPV. 
B) profitability index. 
C) MIRR. 
D) discounted payback.

Question 4

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.Project Q $$\begin{array} { | r | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - \$ 1,000 & \$ 250 & \$ 180 & \$ 420 & \$ 300 & \$ 100 \
\hline
\end{array}$$

Accepted Answer

A) The project's PI is -8.70 percent and the project should be rejected. 
B) The project's PI is -11.70 percent and the project should be rejected. 
C) The project's PI is 3.70 percent and the project should be accepted. 
D) The project's PI is 5.70 percent and the project should be accepted. 
A) The project's PI is -8.70 percent and the project should be rejected. 
B) The project's PI is -11.70 percent and the project should be rejected. 
C) The project's PI is 3.70 percent and the project should be accepted. 
D) The project's PI is 5.70 percent and the project should be accepted.

Question 5

How many possible IRRs could you find for the following set of cash flows? $$\begin{array} { | r | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 \
\hline \text { Cash Flow } & - \$ 10,000 & \$ 5,350 & \$ 4,180 & \$ 1,520 & \$ 2,000 \
\hline
\end{array}$$

Accepted Answer

A) 1 
B) 2 
C) 3 
D) Unable to determine unless we have the cost of capital. 
A) 1 
B) 2 
C) 3 
D) Unable to determine unless we have the cost of capital.

Question 6

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. $$\begin{array} { l l l l l l l } 
\text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flow: } & - 75 & - 75 & 0 & 100 & 75 & 50
\end{array}$$

Accepted Answer

A) 10 percent, accept 
B) 10 percent, reject 
C) 13.26 percent, accept 
D) 13.26 percent, reject 
A) 10 percent, accept 
B) 10 percent, reject 
C) 13.26 percent, accept 
D) 13.26 percent, reject

Question 7

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 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 1,000 & 300 & 400 & 700 \
\text { Project B Cash Flow } & - 500 & 200 & 400 & 300
\end{array}$$ Use the 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 8

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.Project Z $$\begin{array} { | r | l | l | l | l | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - \$ 1,000 & \$ 350 & \$ 380 & \$ 420 & \$ 300 & \$ 100 \
\hline
\end{array}$$

Accepted Answer

A) The project's PI is 8.48 percent and the project should be accepted. 
B) The project's PI is 8.48 percent and the project should be rejected. 
C) The project's PI is 16.48 percent and the project should be accepted. 
D) The project's PI is 21.48 percent and the project should be accepted. 
A) The project's PI is 8.48 percent and the project should be accepted. 
B) The project's PI is 8.48 percent and the project should be rejected. 
C) The project's PI is 16.48 percent and the project should be accepted. 
D) The project's PI is 21.48 percent and the project should be accepted.

Question 9

A graph of a project's ________ is a function of cost of capital.

Accepted Answer

A) internal rate of return 
B) net present value 
C) modified internal rate of return 
D) all choices are a function of cost of capital 
A) internal rate of return 
B) net present value 
C) modified internal rate of return 
D) all choices are a function of cost of capital

Question 10

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 PI 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 11

Which of these describe groups or pairs of projects where you can accept one but not all?

Accepted Answer

A) Dependent 
B) Independent 
C) Mutually exclusive 
D) Mutually dependent 
A) Dependent 
B) Independent 
C) Mutually exclusive 
D) Mutually dependent

Question 12

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000
\end{array}$$ 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 13

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000
\end{array}$$ Use the MIRR 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 14

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

Accepted Answer

A) 4.88 years 
B) 4.48 years 
C) 5.88 years 
D) 5.48 years 
A) 4.88 years 
B) 4.48 years 
C) 5.88 years 
D) 5.48 years

Question 15

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

Accepted Answer

A) 33.26 percent 
B) 34.98 percent 
C) 35.93 percent 
D) 36.72 percent 
A) 33.26 percent 
B) 34.98 percent 
C) 35.93 percent 
D) 36.72 percent

Question 16

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Accepted Answer

A) The discounted payback will be greater than zero. 
B) It will have a PI and NPV of zero. 
C) The NPV and IRR will yield the same decision. 
D) The IRR will just equal the cost of capital. 
A) The discounted payback will be greater than zero. 
B) It will have a PI and NPV of zero. 
C) The NPV and IRR will yield the same decision. 
D) The IRR will just equal the cost of capital.

Question 17

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. $$\begin{array} { l l l l l l l } 
\text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash flow: } & - 75 & - 75 & 0 & 100 & 75 & 50
\end{array}$$

Accepted Answer

A) 10 percent, reject 
B) 14.22 percent, accept 
C) 13.26 percent, accept 
D) 18.96 percent, accept 
A) 10 percent, reject 
B) 14.22 percent, accept 
C) 13.26 percent, accept 
D) 18.96 percent, accept

Question 18

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. $$\begin{array} { l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 \
\text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000
\end{array}$$ 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 19

The net present value decision technique uses a statistic denominated in:

Accepted Answer

A) years. 
B) currency. 
C) a percentage. 
D) time lines. 
A) years. 
B) currency. 
C) a percentage. 
D) time lines.

Question 20

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 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) 1.23 years, accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject 
A) 1.23 years, accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject

The benchmark for the profitability index (PI) is the:

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.Project Q Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 250 \ 180 \ 420 \ 300 \ 100

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -\ 10,000 \ 5,350 \ 4,180 \ 1,520 \ 2,000

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.Project Z Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 350 \ 380 \ 420 \ 300 \ 100

A graph of a project's ________ is a function of cost of capital.

Which of these describe groups or pairs of projects where you can accept one but not all?

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

The net present value decision technique uses a statistic denominated in:

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

The benchmark for the profitability index (PI) is the:

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.Project Q Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 250 \ 180 \ 420 \ 300 \ 100

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -\ 10,000 \ 5,350 \ 4,180 \ 1,520 \ 2,000

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.Project Z Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 350 \ 380 \ 420 \ 300 \ 100

A graph of a project's ________ is a function of cost of capital.

Which of these describe groups or pairs of projects where you can accept one but not all?

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

The net present value decision technique uses a statistic denominated in:

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