Question 1

Which of the following investment rules has the value additivity property?

Accepted Answer

A) The payback period method 
B) The net present value method 
C) The book rate of return method 
D) The internal rate of return method 
A) The payback period method 
B) The net present value method 
C) The book rate of return method 
D) The internal rate of return method

Question 2

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

Accepted Answer

A) positive. 
B) negative. 
C) zero. 
D) unable to be determined. 
A) positive. 
B) negative. 
C) zero. 
D) unable to be determined.

Question 3

If the sign of the cash flows for a project changes two times, then the project likely has

Accepted Answer

A) one IRR. 
B) two IRRs. 
C) three IRRs. 
D) four IRRs. 
A) one IRR. 
B) two IRRs. 
C) three IRRs. 
D) four IRRs.

Question 4

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 5

If the NPV of project A is + $120, that of project B is -$40, and that of project C is + $40, what is the NPV of the combined project?

Accepted Answer

A) +$100 
B) -$40 
C) +$70 
D) +$120 
A) +$100 
B) -$40 
C) +$70 
D) +$120

Question 6

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 7

Suppose a firm has $100 million in excess cash.It could

Accepted Answer

A) invest the funds in projects with positive NPVs. 
B) pay high dividends to the shareholders. 
C) buy another firm. 
D) do all of the options. 
A) invest the funds in projects with positive NPVs. 
B) pay high dividends to the shareholders. 
C) buy another firm. 
D) do all of the options.

Question 8

The profitability index of a positive NPV project is always positive.

Accepted Answer

A) True 
 B)False

Question 9

One can use the profitability index most usefully for which situation?

Accepted Answer

A) When capital rationing exists 
B) Evaluation of exceptionally long-term projects 
C) Evaluation of nonnormal projects 
D) When a project has unusually high cash flow uncertainty 
A) When capital rationing exists 
B) Evaluation of exceptionally long-term projects 
C) Evaluation of nonnormal projects 
D) When a project has unusually high cash flow uncertainty

Question 10

The net present value of a project depends upon the

Accepted Answer

A) company's choice of accounting method. 
B) manager's tastes and preferences. 
C) project's cash flows and opportunity cost of capital. 
D) company's profitability index. 
A) company's choice of accounting method. 
B) manager's tastes and preferences. 
C) project's cash flows and opportunity cost of capital. 
D) company's profitability index.

Question 11

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 12

Discuss some of the disadvantages of the payback rule.

Accepted Answer

The disadvantages are that it

Question 13

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 percent 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 14

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

Question 15

Briefly discuss capital rationing.

Accepted Answer

There are two types of capital rationing

Question 16

The following are measures used by firms when making capital budgeting decisions except

Accepted Answer

A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value. 
A) payback period. 
B) internal rate of return. 
C) P/E ratio. 
D) net present value.

Question 17

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

Question 18

The following table gives the available projects (in $millions) for a firm. $\begin{array}{rrrrrrll}
\underline { \mathrm { A }} & \underline { \mathrm { B } } & \underline { \mathrm { C } } & \underline { \mathrm { D } } & \underline { \mathrm { E } } & \underline { \mathrm { F } } & \underline { \mathrm { G } } & \
5.0 & 4.0 & 5.0 & 1.0 & 2.0 & 7.0 & 8.0 & \text { Initial investment } \
1.5 & -0.5 & 1.0 & 0.5 & 0.5 & 1.0 & 1.0 & \mathrm{NPV}
\end{array}$ The firm has only $20 million to invest.What is the maximum NPV that the company can obtain?

Accepted Answer

A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0 
A) 3.5 
B) 4.0 
C) 4.5 
D) 5.0

Question 19

What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?

Accepted Answer

A) .15 
B) .22 
C) .35 
D) .42 
A) .15 
B) .22 
C) .35 
D) .42

Question 20

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

Accepted Answer

A) True 
 B)False

Exam 5: Net Present Value and Other Investment Criteria

Which of the following investment rules has the value additivity property?

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

If the sign of the cash flows for a project changes two times, then the project likely has

The profitability index is the ratio of the

If the NPV of project A is + $120, that of project B is -$40, and that of project C is + $40, what is the NPV of the combined project?

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

Suppose a firm has $100 million in excess cash.It could

The profitability index of a positive NPV project is always positive.

One can use the profitability index most usefully for which situation?

The net present value of a project depends upon the

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

Discuss some of the disadvantages of the payback rule.

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 percent of the cost of the machine, calculate the payback period for the project.

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.

Briefly discuss capital rationing.

The following are measures used by firms when making capital budgeting decisions except

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

The following table gives the available projects (in $millions) for a firm. 5.0 4.0 5.0 1.0 2.0 7.0 8.0 Initial investment 1.5 -0.5 1.0 0.5 0.5 1.0 1.0 The firm has only $20 million to invest.What is the maximum NPV that the company can obtain?

What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?

In the case of a loan project (borrowing), one should accept the project if the IRR is more than the cost of capital.

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters