Question 1

Which one of the following statements is true?

Accepted Answer

A) You must know the discount rate to compute the NPV but not the IRR. 
B) You must have a discount rate to compute,NPV,IRR,PI,and discounted payback. 
C) Payback uses the same discount rate as that applied in the NPV calculation. 
D) Financing projects can only ever have one IRR. 
E) Financing projects are acceptable if the NPV is negative. 
A) You must know the discount rate to compute the NPV but not the IRR. 
B) You must have a discount rate to compute,NPV,IRR,PI,and discounted payback. 
C) Payback uses the same discount rate as that applied in the NPV calculation. 
D) Financing projects can only ever have one IRR. 
E) Financing projects are acceptable if the NPV is negative.

Question 2

An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years.At what discount rate will the project's IRR equal its discount rate?

Accepted Answer

A) 15.24 percent 
B) 27.22 percent 
C) 0 percent 
D) 16.67 percent 
E) 21.08 percent 
A) 15.24 percent 
B) 27.22 percent 
C) 0 percent 
D) 16.67 percent 
E) 21.08 percent

Question 3

You are considering two independent projects with the same discount rate of 11 percent.Project A costs $284,700 and has cash flows of $75,900,$106,400,and $159,800 for Years 1 to 3,respectively.Project B costs $115,000,and has a cash flow of $50,000 a year for Years 1 to 3.You have sufficient funds to finance any decision you make.Which project or projects,if either,should you accept and why?

Accepted Answer

A) Project A; because it is the larger-sized project with a positive IRR 
B) Project A; because it has the larger NPV 
C) Neither project; because their NPVs are less than their initial costs 
D) Project B; because its IRR exceeds the discount rate 
E) Both projects; because their NPVs are both positive 
A) Project A; because it is the larger-sized project with a positive IRR 
B) Project A; because it has the larger NPV 
C) Neither project; because their NPVs are less than their initial costs 
D) Project B; because its IRR exceeds the discount rate 
E) Both projects; because their NPVs are both positive

Question 4

The net present value method of capital budgeting analysis does all of the following except:

Accepted Answer

A) incorporate risk into the analysis. 
B) consider all relevant cash flow information. 
C) discount all future cash flows to their current value. 
D) consider the initial cost of the project. 
E) provide a specific anticipated rate of return. 
A) incorporate risk into the analysis. 
B) consider all relevant cash flow information. 
C) discount all future cash flows to their current value. 
D) consider the initial cost of the project. 
E) provide a specific anticipated rate of return.

Question 5

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why IRR has some limitations NPV does not.

Accepted Answer

At some rate,R,NPV = $0; by definition,w

Question 6

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

Accepted Answer

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

Question 7

The internal rate of return for an investment project is best defined as the:

Accepted Answer

A) discount rate that causes the net present value to equal zero. 
B) difference between the market rate of interest and the discount rate. 
C) market rate of interest less the risk-free rate. 
D) minimum project acceptance rate set by management. 
E) maximum rate that can be earned for a project to be accepted. 
A) discount rate that causes the net present value to equal zero. 
B) difference between the market rate of interest and the discount rate. 
C) market rate of interest less the risk-free rate. 
D) minimum project acceptance rate set by management. 
E) maximum rate that can be earned for a project to be accepted.

Question 8

An investment is acceptable if the payback period:

Accepted Answer

A) is less than some pre-specified period of time. 
B) exceeds the life of the investment. 
C) is negative. 
D) is equal to or greater than some pre-specified period of time. 
E) is equal to,and only if it is equal to,the investment's life. 
A) is less than some pre-specified period of time. 
B) exceeds the life of the investment. 
C) is negative. 
D) is equal to or greater than some pre-specified period of time. 
E) is equal to,and only if it is equal to,the investment's life.

Question 9

A proposed new venture will cost $175,000 and should produce annual cash flows of $48,500,$85,000,$40,000,and $40,000 for Years 1 to 4,respectively.The required payback period is 3 years and the discounted payback period is 3.5 years.The required rate of return is 9 percent.Which methods indicate project acceptance and which indicate project rejection?

Accepted Answer

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

Question 10

Jack is considering adding toys to his general store.He estimates the cost of toy inventory will be $4,200.The remodeling and shelving costs are estimated at $1,500.Toy sales are expected to produce net annual cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively.Should Jack add toys to his merchandise if he requires a three-year payback period? Why or why not?

Accepted Answer

A) Yes; because the payback period is 2.94 years 
B) Yes; because the payback period is 2.02 years 
C) Yes; because the payback period is 3.80 years 
D) No; because the payback period is 2.02 years 
E) No; because the payback period is 3.80 years 
A) Yes; because the payback period is 2.94 years 
B) Yes; because the payback period is 2.02 years 
C) Yes; because the payback period is 3.80 years 
D) No; because the payback period is 2.02 years 
E) No; because the payback period is 3.80 years

Question 11

When a firm commences a positive net present value project,you know:

Accepted Answer

A) the project will pay back within the required payback period. 
B) the present value of the expected cash flows is equal to the project's cost. 
C) the inherent risks within the project have been ignored. 
D) that all the projected cash flows will occur as expected. 
E) the stockholders' value in the firm is expected to increase. 
A) the project will pay back within the required payback period. 
B) the present value of the expected cash flows is equal to the project's cost. 
C) the inherent risks within the project have been ignored. 
D) that all the projected cash flows will occur as expected. 
E) the stockholders' value in the firm is expected to increase.

Question 12

The profitability index:

Accepted Answer

A) rule often results in decisions that conflict with the decisions based on the net present value rule. 
B) is useful as a decision tool when investment funds are limited and all available funds are allocated. 
C) method is most commonly used when deciding between mutually exclusive projects of varying size. 
D) rule states that the project with the lower index value should be accepted. 
E) produces results which typically are difficult to comprehend. 
A) rule often results in decisions that conflict with the decisions based on the net present value rule. 
B) is useful as a decision tool when investment funds are limited and all available funds are allocated. 
C) method is most commonly used when deciding between mutually exclusive projects of varying size. 
D) rule states that the project with the lower index value should be accepted. 
E) produces results which typically are difficult to comprehend.

Question 13

A project has an initial cost of $2,250.The cash inflows are $0,$500,$900,and $700 for Years 1 to 4,respectively.What is the payback period?

Accepted Answer

A) 2.97 years 
B) 2.84 years 
C) 3.98 years 
D) 3.92 years 
E) Never 
A) 2.97 years 
B) 2.84 years 
C) 3.98 years 
D) 3.92 years 
E) Never

Question 14

Graham and Harvey (2001)found that ________ were the two most popular capital budgeting methods.

Accepted Answer

A) IRR and payback 
B) IRR and NPV 
C) NPV and PI 
D) IRR and modified IRR 
E) discounted payback and NPV 
A) IRR and payback 
B) IRR and NPV 
C) NPV and PI 
D) IRR and modified IRR 
E) discounted payback and NPV

Question 15

Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800,$16,400,and $21,700 for Years 1 to 3,respectively.Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not?

Accepted Answer

A) Yes; because the IRR exceeds the required return by .34 percent 
B) Yes; because the IRR is less than the required return by .28 percent 
C) Yes; because the IRR exceeds the required return by .28 percent 
D) No; because the IRR exceeds the required return by .34 percent 
E) No; because the IRR is only 9.69 percent 
A) Yes; because the IRR exceeds the required return by .34 percent 
B) Yes; because the IRR is less than the required return by .28 percent 
C) Yes; because the IRR exceeds the required return by .28 percent 
D) No; because the IRR exceeds the required return by .34 percent 
E) No; because the IRR is only 9.69 percent

Question 16

The discounted payback method:

Accepted Answer

A) considers the time value of money. 
B) discounts the cutoff point. 
C) discounts the initial cost. 
D) is preferred to the NPV method. 
E) ignores project risks. 
A) considers the time value of money. 
B) discounts the cutoff point. 
C) discounts the initial cost. 
D) is preferred to the NPV method. 
E) ignores project risks.

Question 17

An investment costing $25 returns $27.50 at the end of one year with no risk.Given this,you know that the NPV:

Accepted Answer

A) is zero at any given discount rate. 
B) is negative if the required return is less than 10 percent. 
C) equals 1.0 if the required return is 10 percent. 
D) is zero if the required rate of return is 10 percent. 
E) must be positive at any given discount rate. 
A) is zero at any given discount rate. 
B) is negative if the required return is less than 10 percent. 
C) equals 1.0 if the required return is 10 percent. 
D) is zero if the required rate of return is 10 percent. 
E) must be positive at any given discount rate.

Question 18

The difference between the present value of an investment's future cash flows and its initial cost is the:

Accepted Answer

A) net present value. 
B) internal rate of return. 
C) payback period. 
D) profitability index. 
E) discounted payback period. 
A) net present value. 
B) internal rate of return. 
C) payback period. 
D) profitability index. 
E) discounted payback period.

Question 19

The payback method:

Accepted Answer

A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B) determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the market rate of interest. 
E) is irrelevant to the accept/reject decision. 
A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B) determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the market rate of interest. 
E) is irrelevant to the accept/reject decision.

Question 20

A project has an initial cost of $10,600 and produces cash inflows of $3,700,$4,900,and $2,500 for Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 7.5 percent?

Accepted Answer

A) 2.65 years 
B) 2.78 years 
C) 2.94 years 
D) 2.88 years 
E) Never 
A) 2.65 years 
B) 2.78 years 
C) 2.94 years 
D) 2.88 years 
E) Never

Exam 5: Net Present Value and Other Investment Rules

Which one of the following statements is true?

An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years.At what discount rate will the project's IRR equal its discount rate?

The net present value method of capital budgeting analysis does all of the following except:

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why IRR has some limitations NPV does not.

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

The internal rate of return for an investment project is best defined as the:

An investment is acceptable if the payback period:

When a firm commences a positive net present value project,you know:

The profitability index:

A project has an initial cost of $2,250.The cash inflows are $0,$500,$900,and $700 for Years 1 to 4,respectively.What is the payback period?

Graham and Harvey (2001)found that ________ were the two most popular capital budgeting methods.

Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800,$16,400,and $21,700 for Years 1 to 3,respectively.Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not?

The discounted payback method:

An investment costing $25 returns $27.50 at the end of one year with no risk.Given this,you know that the NPV:

The difference between the present value of an investment's future cash flows and its initial cost is the:

The payback method:

A project has an initial cost of $10,600 and produces cash inflows of $3,700,$4,900,and $2,500 for Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 7.5 percent?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

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