Question 1

The benefit-cost ratio is equal to the profitability index plus one.

Accepted Answer

A) True 
 B)False

Question 2

The profitability index is always less than 1.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

Accepted Answer

A) Payback period, discounted payback period, and net present value (NPV) only 
B) Discounted payback period, net present value (NPV),and internal rate of return only 
C) Net present value (NPV) and internal rate of return only 
D) Payback period, discounted payback period, net present value (NPV), and internal rate of return 
A) Payback period, discounted payback period, and net present value (NPV) only 
B) Discounted payback period, net present value (NPV),and internal rate of return only 
C) Net present value (NPV) and internal rate of return only 
D) Payback period, discounted payback period, net present value (NPV), and internal rate of return

Question 4

A project's "book value" represents, essentially, the market valuation of the project.

Accepted Answer

A) True 
 B)False

Question 5

The following table gives the available projects (in $millions) for a firm. $\begin{array} { r r r r r r r l } 
\underline { \mathrm { A } } & \underline { \mathrm { B } } & \underline { \mathrm { C } } & \underline { \mathrm { D } } & \underline { \mathrm { E } } & \underline { \mathrm { F } } & \underline { \mathrm { G } } & \
90 & 20 & 60 & 50 & 150 & 40 & 20 & \text { Initial investment } \
140 & 70 & 65 & - 10 & 30 & 32 & 10 & \mathrm { NPV }
\end{array}$
 If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

Accepted Answer

A) 200 
B) 283 
C) 307 
D) 347 
A) 200 
B) 283 
C) 307 
D) 347

Question 6

Briefly explain the term hard rationing.

Accepted Answer

A firm faces hard rationing when it cann

Question 7

Accounting earnings from a firm's income statement, prepared according to generally accepted accounting principles (GAAP), are typically the best data source for calculating a project's NPV.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following investment rules may not use all possible cash flows in its calculations?

Accepted Answer

A) NPV 
B) Payback period 
C) IRR 
D) Profitability index 
A) NPV 
B) Payback period 
C) IRR 
D) Profitability index

Question 9

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

The main advantage of the payback rule is that it

Accepted Answer

A) adjusts for uncertainty of early cash flows. 
B) is simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project. 
A) adjusts for uncertainty of early cash flows. 
B) is simple to use. 
C) does not discount cash flows. 
D) better accounts for salvage costs at the end of a project.

Question 11

Dry-Sand Company is considering investing in a new project.The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years.However, at the end of the fourth year, the project will generate -$500,000 of after-tax cash flow due to dismantling costs.Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is 15 percent.

Accepted Answer

A) 8.1 percent 
B) 12.6 percent 
C) 28.2 percent 
D) 20.4 percent 
A) 8.1 percent 
B) 12.6 percent 
C) 28.2 percent 
D) 20.4 percent

Question 12

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

Accepted Answer

A) True 
 B)False

Question 13

If the cash flows for project A are C0 = -1,000; C1 = +600; C2 = +400; and C3 = +1,500, calculate the payback period.

Accepted Answer

A) One year 
B) Two years 
C) Three years 
D) Cannot be determined 
A) One year 
B) Two years 
C) Three years 
D) Cannot be determined

Question 14

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately

Accepted Answer

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

Exam 5: Net Present Value and Other Investment Criteria

The benefit-cost ratio is equal to the profitability index plus one.

The profitability index is always less than 1.

Which of the following methods of evaluating capital investment projects incorporates the time value of money concept?

A project's "book value" represents, essentially, the market valuation of the project.

The following table gives the available projects (in $millions) for a firm. 90 20 60 50 150 40 20 Initial investment 140 70 65 -10 30 32 10 If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

Briefly explain the term hard rationing.

Accounting earnings from a firm's income statement, prepared according to generally accepted accounting principles (GAAP), are typically the best data source for calculating a project's NPV.

Which of the following investment rules may not use all possible cash flows in its calculations?

The IRR rule states that firms should accept any project offering an internal rate of return in excess of the cost of capital.

The main advantage of the payback rule is that it

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero.

If the cash flows for project A are C0 = -1,000; C1 = +600; C2 = +400; and C3 = +1,500, calculate the payback period.

The survey of CFOs indicates that the IRR method is used for evaluating investment projects by approximately

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

If the cash flows for project A are C₀ = -1,000; C₁ = +600; C₂ = +400; and C₃ = +1,500, calculate the payback period.