Question 1

If a project with conventional cash flows has a profitability index of 1.0,the project will:

Accepted Answer

A) never pay back. 
B) have a negative net present value. 
C) have a negative internal rate of return. 
D) produce more cash inflows than outflows in today's dollars. 
E) have an internal rate of return that equals the required return. 
A) never pay back. 
B) have a negative net present value. 
C) have a negative internal rate of return. 
D) produce more cash inflows than outflows in today's dollars. 
E) have an internal rate of return that equals the required return.

Question 2

The Tool Box needs to purchase a new machine costing $1.46 million.Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years.If management requires a minimum 12 percent rate of return,should the firm purchase this particular machine based on its IRR? Why or why not?

Accepted Answer

A) Yes, because the IRR is 10.75 percent 
B) Yes, because the IRR is 12.74 percent 
C) No, because the IRR is 10.75 percent 
D) No, because the IRR is 12.74 percent 
E) The answer cannot be determined as there are multiple IRRs 
A) Yes, because the IRR is 10.75 percent 
B) Yes, because the IRR is 12.74 percent 
C) No, because the IRR is 10.75 percent 
D) No, because the IRR is 12.74 percent 
E) The answer cannot be determined as there are multiple IRRs

Question 3

You are considering the following two mutually exclusive projects.The required return on each project is 12 percent.Which project should you accept and what is the best reason for that decision? $\begin{array}{|r|r|r|}
\hline \text { Year } &{\text { Cash }} & {\text { Cash Flow }} \
 & {\text { Flow(A) }} & {\text { (B) }} \
\hline 0&-\$32,000&-\$26,000\
\hline 1 & 11,500,000 & -\$ 26,000 \
\hline 2 & 15,900 & 5,500 \
\hline 3 & 13,200 & 24,900 \
\hline
\end{array}$

Accepted Answer

A) Project A, because it pays back faster 
B) Project A, because it has the higher internal rate of return 
C) Project B, because it has the higher internal rate of return 
D) Project A, because it has the higher net present value 
E) Project B, because it has the higher net present value 
A) Project A, because it pays back faster 
B) Project A, because it has the higher internal rate of return 
C) Project B, because it has the higher internal rate of return 
D) Project A, because it has the higher net present value 
E) Project B, because it has the higher net present value

Question 4

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Accepted Answer

A) produce a positive annual cash flow. 
B) produce a positive cash flow from assets. 
C) offset its fixed expenses. 
D) offset its total expenses. 
E) recoup its initial cost. 
A) produce a positive annual cash flow. 
B) produce a positive cash flow from assets. 
C) offset its fixed expenses. 
D) offset its total expenses. 
E) recoup its initial cost.

Question 5

A project has the following cash flows.What is the internal rate of return? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 68,700 \
\hline 1 & 19,600 \
\hline 2 & 22,300 \
\hline 3 & 27,500 \
\hline 4 & 15,300 \
\hline
\end{array}$$

Accepted Answer

A) 9.08 percent 
B) 9.16 percent 
C) 9.58 percent 
D) 9.23 percent 
E) 9.19 percent 
A) 9.08 percent 
B) 9.16 percent 
C) 9.58 percent 
D) 9.23 percent 
E) 9.19 percent

Question 6

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? $$\begin{array} { | c | r | r | } 
\hline \underline { \text { Year } } & \underline { \text { Project A } } & \text { Project B } \
\hline 0 & - \$ 24,000 & - \$ 21,000 \
\hline 1 & 9,500 & 6,500 \
\hline 2 & 16,200 & 9,800 \
\hline 3 & 8,700 & 15,200 \
\hline
\end{array}$$

Accepted Answer

A) Project A; because it pays back faster 
B) Project A; because it has the higher profitability index 
C) Project B; because it has the higher profitability index 
D) Project B; because it has the higher net present value 
E) Project A; because it has the higher net present value 
A) Project A; because it pays back faster 
B) Project A; because it has the higher profitability index 
C) Project B; because it has the higher profitability index 
D) Project B; because it has the higher net present value 
E) Project A; because it has the higher net present value

Question 7

You're trying to determine whether or not to expand your business by building a new manufacturing plant.The plant has an installation cost of $29 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $1,848,000,$2,080,000,and $2,720,000 over these three years,what is the project's average accounting return (AAR)?

Accepted Answer

A) 14.69 percent 
B) 14.14 percent 
C) 15.03 percent 
D) 15.28 percent 
E) 14.21 percent 
A) 14.69 percent 
B) 14.14 percent 
C) 15.03 percent 
D) 15.28 percent 
E) 14.21 percent

Question 8

Which one of the following statements is correct? Assume cash flows are conventional.

Accepted Answer

A) If the IRR exceeds the required return, the profitability index will be less than 1.0. 
B) The profitability index will be greater than 1.0 when the net present value is negative. 
C) When the internal rate of return is greater than the required return, the net present value is positive. 
D) Projects with conventional cash flows have multiple internal rates of return. 
E) If two projects are mutually exclusive, you should select the project with the shortest payback period. 
A) If the IRR exceeds the required return, the profitability index will be less than 1.0. 
B) The profitability index will be greater than 1.0 when the net present value is negative. 
C) When the internal rate of return is greater than the required return, the net present value is positive. 
D) Projects with conventional cash flows have multiple internal rates of return. 
E) If two projects are mutually exclusive, you should select the project with the shortest payback period.

Question 9

Which one of the following statements is correct?

Accepted Answer

A) The net present value is a measure of profits expressed in today's dollars. 
B) The net present value is positive when the required return exceeds the internal rate of return. 
C) If the initial cost of a project is increased, the net present value of that project will also increase. 
D) If the internal rate of return equals the required return, the net present value will equal zero. 
E) Net present value is equal to an investment's cash inflows discounted to today's dollars. 
A) The net present value is a measure of profits expressed in today's dollars. 
B) The net present value is positive when the required return exceeds the internal rate of return. 
C) If the initial cost of a project is increased, the net present value of that project will also increase. 
D) If the internal rate of return equals the required return, the net present value will equal zero. 
E) Net present value is equal to an investment's cash inflows discounted to today's dollars.

Question 10

Consider the following two mutually exclusive projects: $$\begin{array} { | r | r | r | } 
\hline \underline { \text { Year } } & \underline { \text { Cash Flow } } & \underline { \text { Cash } } \
& \underline { ( A ) } & \underline { \text { Flow } ( B ) } \
\hline0 &-\$54,000&-\$23,000\
\hline 1 & 12,700 & 11,600 \
\hline 2 & 23,200 & 11,200 \
\hline 3 & 27,600 & 12,500 \
\hline 4 & 46,500 & 6,000 \
\hline
\end{array}$$ Whichever project you choose,if any,you require a rate of return of 14 percent on your investment.If you apply the payback criterion,you will choose Project ______; if you apply the NPV criterion,you will choose Project ______; if you apply the IRR criterion,you will choose Project _____; if you choose the profitability index criterion,you will choose Project ___.Based on your first four answers,which project will you finally choose?

Accepted Answer

A) A; B; A; A; B 
B) A; A; B; B; A 
C) A; A; B; B; B 
D) B; A; B; A; A 
E) B; A; B; B; A 
A) A; B; A; A; B 
B) A; A; B; B; A 
C) A; A; B; B; B 
D) B; A; B; A; A 
E) B; A; B; B; A

Question 11

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?

Accepted Answer

A) Mutually exclusive 
B) Conventional 
C) Multiple choice 
D) Dual return 
E) Crosswise 
A) Mutually exclusive 
B) Conventional 
C) Multiple choice 
D) Dual return 
E) Crosswise

Question 12

In which one of the following situations would the payback method be the preferred method of analysis?

Accepted Answer

A) A long-term capital-intensive project 
B) Two mutually exclusive projects 
C) A proposed expansion of a firm's current operations 
D) Different-sized projects 
E) Investment funds available only for a limited period of time 
A) A long-term capital-intensive project 
B) Two mutually exclusive projects 
C) A proposed expansion of a firm's current operations 
D) Different-sized projects 
E) Investment funds available only for a limited period of time

Question 13

Molly is considering a project with cash inflows of $811,$924,$638,and $510 over the next four years,respectively.The relevant.discount rate is 11.2 percent.What is the net present value of this project if it the start-up cost is $2,700?

Accepted Answer

A) -$425.91 
B) -$131.83 
C) -$383.01 
D) $10.45 
E) $229.50 
A) -$425.91 
B) -$131.83 
C) -$383.01 
D) $10.45 
E) $229.50

Question 14

The average accounting return:

Accepted Answer

A) measures profitability rather than cash flow. 
B) discounts all values to today's dollars. 
C) is expressed as a percentage of an investment's current market value. 
D) will equal the required return when the net present value equals zero. 
E) is used more often by CFOs than the internal rate of return. 
A) measures profitability rather than cash flow. 
B) discounts all values to today's dollars. 
C) is expressed as a percentage of an investment's current market value. 
D) will equal the required return when the net present value equals zero. 
E) is used more often by CFOs than the internal rate of return.

Question 15

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? $$\begin{array} { | r | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 11,520 \
\hline 1 & 81 \
\hline 2 & 650 \
\hline 3 & 880 \
\hline 4 & 2,300 \
\hline 5 & 15,800 \
\hline
\end{array}$$

Accepted Answer

A) $2,861.62 
B) $2,311.92 
C) $2,900.15 
D) $3,248.87 
E) $3,545.60 
A) $2,861.62 
B) $2,311.92 
C) $2,900.15 
D) $3,248.87 
E) $3,545.60

Question 16

You are considering an equipment purchase costing $167,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & 15,600 \
\hline 2 & 14,200 \
\hline 3 & 13,500 \
\hline
\end{array}$$

Accepted Answer

A) 18.29 percent 
B) 18.38 percent 
C) 15.67 percent 
D) 17.29 percent 
E) 16.67 percent 
A) 18.29 percent 
B) 18.38 percent 
C) 15.67 percent 
D) 17.29 percent 
E) 16.67 percent

Question 17

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in.Year 4.What is the internal rate of return if the initial cost of the project is $219,000?

Accepted Answer

A) 9.43 percent 
B) 8.29 percent 
C) 7.81 percent 
D) 8.42 percent 
E) 7.55 percent 
A) 9.43 percent 
B) 8.29 percent 
C) 7.81 percent 
D) 8.42 percent 
E) 7.55 percent

Question 18

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 21,400 \
\hline 1 & 11,600 \
\hline 2 & 13,500 \
\hline 3 & 12,200 \
\hline
\end{array}$$

Accepted Answer

A) $0; -$665.07 
B) $0; $6,916.59 
C) $0; $7,208.19 
D) $15,900; $7,208.19 
E) $15,900; $6,916.59 
A) $0; -$665.07 
B) $0; $6,916.59 
C) $0; $7,208.19 
D) $15,900; $7,208.19 
E) $15,900; $6,916.59

Question 19

Auto Detailers is buying some new equipment at a cost of $188,900.This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life.The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years.What is the average accounting rate of return?

Accepted Answer

A) 15.48 percent 
B) 17.76 percent 
C) 18.09 percent 
D) 22.68 percent 
E) 18.53 percent 
A) 15.48 percent 
B) 17.76 percent 
C) 18.09 percent 
D) 22.68 percent 
E) 18.53 percent

Question 20

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

Accepted Answer

A) duplication. 
B) the net present value profile. 
C) multiple rates of return. 
D) the AAR problem. 
E) the dual dilemma. 
A) duplication. 
B) the net present value profile. 
C) multiple rates of return. 
D) the AAR problem. 
E) the dual dilemma.

If a project with conventional cash flows has a profitability index of 1.0,the project will:

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A project has the following cash flows.What is the internal rate of return? Year Cash Flow 0 -\ 68,700 1 19,600 2 22,300 3 27,500 4 15,300

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? Project B 0 -\ 24,000 -\ 21,000 1 9,500 6,500 2 16,200 9,800 3 8,700 15,200

Which one of the following statements is correct? Assume cash flows are conventional.

Which one of the following statements is correct?

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?

In which one of the following situations would the payback method be the preferred method of analysis?

Molly is considering a project with cash inflows of $811,$924,$638,and $510 over the next four years,respectively.The relevant.discount rate is 11.2 percent.What is the net present value of this project if it the start-up cost is $2,700?

The average accounting return:

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? Year Cash Flow 0 -\ 11,520 1 81 2 650 3 880 4 2,300 5 15,800

You are considering an equipment purchase costing $167,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? Year Net Income 1 15,600 2 14,200 3 13,500

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in.Year 4.What is the internal rate of return if the initial cost of the project is $219,000?

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? Year Cash Flow 0 -\ 21,400 1 11,600 2 13,500 3 12,200

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

Introduction to Financial Management

Financial Statements,Taxes,and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 8: Net Present Value and Other Investment Criteria

If a project with conventional cash flows has a profitability index of 1.0,the project will:

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A project has the following cash flows.What is the internal rate of return? Year Cash Flow 0 -\ 68,700 1 19,600 2 22,300 3 27,500 4 15,300

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? Project B 0 -\ 24,000 -\ 21,000 1 9,500 6,500 2 16,200 9,800 3 8,700 15,200

Which one of the following statements is correct? Assume cash flows are conventional.

Which one of the following statements is correct?

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?

In which one of the following situations would the payback method be the preferred method of analysis?

Molly is considering a project with cash inflows of $811,$924,$638,and $510 over the next four years,respectively.The relevant.discount rate is 11.2 percent.What is the net present value of this project if it the start-up cost is $2,700?

The average accounting return:

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? Year Cash Flow 0 -\ 11,520 1 81 2 650 3 880 4 2,300 5 15,800

You are considering an equipment purchase costing $167,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? Year Net Income 1 15,600 2 14,200 3 13,500

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in.Year 4.What is the internal rate of return if the initial cost of the project is $219,000?

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? Year Cash Flow 0 -\ 21,400 1 11,600 2 13,500 3 12,200

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

Introduction to Financial Management

Financial Statements,Taxes,and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters