Question 1

A project will have more than one IRR if:

Accepted Answer

A) the IRR is positive. 
B) the IRR is negative. 
C) the NPV is zero. 
D) the cash flow pattern exhibits more than one sign change. 
E) the cash flow pattern exhibits exactly one sign change. 
A) the IRR is positive. 
B) the IRR is negative. 
C) the NPV is zero. 
D) the cash flow pattern exhibits more than one sign change. 
E) the cash flow pattern exhibits exactly one sign change.

Question 2

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Accepted Answer

A) .86 years. 
B) 1.46 years. 
C) 1.86 years. 
D) 2.46 years. 
E) 2.86 years. 
A) .86 years. 
B) 1.46 years. 
C) 1.86 years. 
D) 2.46 years. 
E) 2.86 years.

Question 3

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Accepted Answer

A) the discount rate and scale problems. 
B) timing and scale problems. 
C) the discount rate and timing problems. 
D) scale and reversing flow problems. 
E) timing and reversing flow problems. 
A) the discount rate and scale problems. 
B) timing and scale problems. 
C) the discount rate and timing problems. 
D) scale and reversing flow problems. 
E) timing and reversing flow problems.

Question 4

What is the internal rate of return on an investment with the following cash flows?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 123,400 \
\hline 1 & £ 36,200 \
\hline 2 & £ 54,800 \
\hline 3 & £ 48,100 \
\hline
\end{array}$

Accepted Answer

A) 5.93% 
B) 5.96% 
C) 6.04% 
D) 6.09% 
E) 6.13% 
A) 5.93% 
B) 5.96% 
C) 6.04% 
D) 6.09% 
E) 6.13%

Question 5

If you want to review a project from a benefit-cost perspective,you should use the _______ method of analysis.

Accepted Answer

A) net present value 
B) payback 
C) internal rate of return 
D) average accounting return 
E) profitability index 
A) net present value 
B) payback 
C) internal rate of return 
D) average accounting return 
E) profitability index

Question 6

A project produces annual net income of £9,500,£12,500,and £15,500 over the three years of its life,respectively.The initial cost of the project is £260,400.This cost is depreciated straight-line to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 7%?

Accepted Answer

A) 4.80% 
B) 7.32% 
C) 8.97% 
D) 9.60% 
E) 10.27% 
A) 4.80% 
B) 7.32% 
C) 8.97% 
D) 9.60% 
E) 10.27%

Question 7

Consider an investment with an initial cost of £20,000 and is expected to last for 5 years.The expected cash flow in years 1 and 2 are £5,000,in years 3 and 4 are £5,500 and in year 5 is £1,000.The total cash inflow is expected to be £22,000 or an average of £4,400 per year.Compute the payback period in years.

Accepted Answer

A) 3.18 years. 
B) 3.82 years. 
C) 4.00 years. 
D) 4.55 years. 
E) None of the above. 
A) 3.18 years. 
B) 3.82 years. 
C) 4.00 years. 
D) 4.55 years. 
E) None of the above.

Question 8

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

Accepted Answer

A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative. 
A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative.

Question 9

A situation in which accepting one investment prevents the acceptance of another investment is called the:

Accepted Answer

A) net present value profile. 
B) operational ambiguity decision. 
C) mutually exclusive investment decision. 
D) issues of scale problem. 
E) multiple choices of operations decision. 
A) net present value profile. 
B) operational ambiguity decision. 
C) mutually exclusive investment decision. 
D) issues of scale problem. 
E) multiple choices of operations decision.

Question 10

The discounted payback period of a project will decrease whenever the:

Accepted Answer

A) discount rate applied to the project is increased. 
B) initial cash outlay of the project is increased. 
C) time period of the project is increased. 
D) amount of each project cash inflow is increased. 
E) costs of the fixed assets utilized in the project increase. 
A) discount rate applied to the project is increased. 
B) initial cash outlay of the project is increased. 
C) time period of the project is increased. 
D) amount of each project cash inflow is increased. 
E) costs of the fixed assets utilized in the project increase.

Question 11

When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:

Accepted Answer

A) independent. 
B) marginally profitable. 
C) mutually exclusive. 
D) acceptable. 
E) internally profitable. 
A) independent. 
B) marginally profitable. 
C) mutually exclusive. 
D) acceptable. 
E) internally profitable.

Question 12

Analysis using the profitability index:

Accepted Answer

A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital rationing. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply. 
A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital rationing. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply.

Question 13

Which of the following statement is true?

Accepted Answer

A) One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B) One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C) Payback accounts for time value of money. 
D) There will always be one IRR regardless of cash flows. 
E) Average accounting return is the ratio of total assets to total net income. 
A) One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B) One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C) Payback accounts for time value of money. 
D) There will always be one IRR regardless of cash flows. 
E) Average accounting return is the ratio of total assets to total net income.

Question 14

An investment is acceptable if its IRR:

Accepted Answer

A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%. 
A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%.

Question 15

Given the goals of firm value and shareholder wealth maximization,we have stressed the importance of net present value (NPV).And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

Accepted Answer

This is an open-ended question which all

Question 16

You are analyzing a project and have prepared the following data: $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}$$ Required payback period: 2.5 years
Required AAR: 7.25%
Required return: 8.50%
Based on the net present value of _____for this project,you should _____ the project.

Accepted Answer

A) -£2,021.28; reject 
B) -£406.19; reject 
C) £7,978.72; accept 
D) £9,836.74; accept 
E) £12,684.23; accept 
A) -£2,021.28; reject 
B) -£406.19; reject 
C) £7,978.72; accept 
D) £9,836.74; accept 
E) £12,684.23; accept

Question 17

The average accounting return is determined by:

Accepted Answer

A) dividing the yearly cash flows by the investment. 
B) dividing the average cash flows by the investment. 
C) dividing the average net income by the average investment. 
D) dividing the average net income by the initial investment. 
E) dividing the net income by the cash flow. 
A) dividing the yearly cash flows by the investment. 
B) dividing the average cash flows by the investment. 
C) dividing the average net income by the average investment. 
D) dividing the average net income by the initial investment. 
E) dividing the net income by the cash flow.

Question 18

You are analyzing a project and have prepared the following data: $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}$$ Required payback period: 2.5 years
Required AAR: 7.25%
Required return: 8.50%
Based on the profitability index of _____ for this project,you should _____ the project.

Accepted Answer

A) .97; accept 
B) 1.05; accept 
C) 1.18; accept 
D) .97; reject 
E) 1.05; reject 
A) .97; accept 
B) 1.05; accept 
C) 1.18; accept 
D) .97; reject 
E) 1.05; reject

Question 19

The discounted payback rule states that you should accept projects:

Accepted Answer

A) which have a discounted payback period that is greater than some pre-specified period of time. 
B) if the discounted payback is positive and rejected if it is negative. 
C) only if the discounted payback period equals some pre-specified period of time. 
D) if the discounted payback period is less than some pre-specified period of time. 
E) only if the discounted payback period is equal to zero. 
A) which have a discounted payback period that is greater than some pre-specified period of time. 
B) if the discounted payback is positive and rejected if it is negative. 
C) only if the discounted payback period equals some pre-specified period of time. 
D) if the discounted payback period is less than some pre-specified period of time. 
E) only if the discounted payback period is equal to zero.

Question 20

The internal rate of return is:

Accepted Answer

A) more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) difficult to compute without the use of either a financial calculator or a computer. 
D) dependent upon the interest rates offered in the marketplace. 
E) a better methodology than net present value when dealing with unconventional cash flows. 
A) more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) difficult to compute without the use of either a financial calculator or a computer. 
D) dependent upon the interest rates offered in the marketplace. 
E) a better methodology than net present value when dealing with unconventional cash flows.

Exam 6: Net Present Value and Other Investment Rules

A project will have more than one IRR if:

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

What is the internal rate of return on an investment with the following cash flows? Year Cash Flow 0 -£123,400 1 £36,200 2 £54,800 3 £48,100

If you want to review a project from a benefit-cost perspective,you should use the _______ method of analysis.

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

A situation in which accepting one investment prevents the acceptance of another investment is called the:

The discounted payback period of a project will decrease whenever the:

When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:

Analysis using the profitability index:

Which of the following statement is true?

An investment is acceptable if its IRR:

The average accounting return is determined by:

The discounted payback rule states that you should accept projects:

The internal rate of return is:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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