Question 1

Proposed projects should be accepted when those projects:

Accepted Answer

A) create value for the owners of the firm. 
B) have a positive rate of return. 
C) return the initial cash outlay within the life of the project. 
D) have required cash inflows that exceed the actual cash inflows. 
E) have an initial cost that exceeds the present value of the future cash flows. 
A) create value for the owners of the firm. 
B) have a positive rate of return. 
C) return the initial cash outlay within the life of the project. 
D) have required cash inflows that exceed the actual cash inflows. 
E) have an initial cost that exceeds the present value of the future cash flows.

Question 2

The discounted payback rule may cause:

Accepted Answer

A) projects with discounted payback periods in excess of the project's life to be accepted. 
B) the most liquid projects to be rejected in favor of less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) some projects with negative net present values to be accepted. 
E) some positive net present value projects to be rejected. 
A) projects with discounted payback periods in excess of the project's life to be accepted. 
B) the most liquid projects to be rejected in favor of less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) some projects with negative net present values to be accepted. 
E) some positive net present value projects to be rejected.

Question 3

You are considering an investment project with an internal rate of return of 8.7 percent,a net present value of $393,and a payback period of 2.44 years.Which one of the following is correct given this information?

Accepted Answer

A) The discount rate used in computing the net present value was less than 8.7 percent. 
B) The discounted payback period will be less than 2.44 years. 
C) The discount rate used to compute the net present value is equal to the internal rate of return. 
D) The required payback period must be greater than 2.44 years. 
E) This project should be rejected based on the net present value. 
A) The discount rate used in computing the net present value was less than 8.7 percent. 
B) The discounted payback period will be less than 2.44 years. 
C) The discount rate used to compute the net present value is equal to the internal rate of return. 
D) The required payback period must be greater than 2.44 years. 
E) This project should be rejected based on the net present value.

Question 4

Which method(s)of project analysis is(are)best suited for use by a department manager who has no knowledge of time value of money but can estimate the cash flows of small projects with short lives fairly accurately?

Accepted Answer

A) Payback 
B) Discounted payback 
C) Profitability index 
D) Net present value 
E) Either payback or profitability index 
A) Payback 
B) Discounted payback 
C) Profitability index 
D) Net present value 
E) Either payback or profitability index

Question 5

Leslie is charged with determining which small projects should be funded.Along with this assignment,she has been granted the use of $15,000 for a maximum of two years on a discounted basis.She is considering three projects.Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3.Project B costs $8,000 and has cash flows of $3,000,$4,000,and $3,000 for Years 1 to 3,respectively.Project C costs $2,000 and has a cash inflow of $2,500 in Year 2.What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent? Explain why.

Accepted Answer

A) Accept either Projects A and C or Projects B and C,but not all three as there is insufficient financing 
B) Accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years 
C) Accept Projects A and C and reject Project B as they have the shortest discounted payback periods that fit within the $15,000 allocation 
D) Accept Projects A and C and reject Project B as A and B payback within two years 
E) Accept Projects B and C and reject Project A as this combination uses the most initial capital 
A) Accept either Projects A and C or Projects B and C,but not all three as there is insufficient financing 
B) Accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years 
C) Accept Projects A and C and reject Project B as they have the shortest discounted payback periods that fit within the $15,000 allocation 
D) Accept Projects A and C and reject Project B as A and B payback within two years 
E) Accept Projects B and C and reject Project A as this combination uses the most initial capital

Question 6

Project A is opening a bakery at 10 Center Street.Project B is opening a specialty coffee shop at the same address.Both projects have unconventional cash flows,that is,both projects have positive and negative cash flows that occur following the initial investment.When trying to decide which project to accept,given sufficient funding to accept either project,you should rely most heavily on the ________ method of analysis.

Accepted Answer

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

Question 7

Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500,$15,600,and $22,700 for Years 1 to 3,respectively.Based on the profitability index rule,should the project be accepted if the discount rate is 9.5 percent? Why or why not?

Accepted Answer

A) Yes; because the PI is 1.03 
B) Yes; because the PI is .95 
C) Yes; because the PI is negative 
D) No; because the PI is 1.03 
E) No; because the PI is .95 
A) Yes; because the PI is 1.03 
B) Yes; because the PI is .95 
C) Yes; because the PI is negative 
D) No; because the PI is 1.03 
E) No; because the PI is .95

Question 8

Project A costs $84,500 and has cash flows of $32,300,$36,400,and $30,000 for Years 1 to 3,respectively.Project B has an initial cost of $79,000 and has cash flows of $30,000,$36,000,and $29,000 for Years 1 to 3,respectively.What is the incremental IRR of these two mutually exclusive projects?

Accepted Answer

A) 18.11 percent 
B) −13.01 percent 
C) 14.91 percent 
D) 16.75 percent 
E) −20.37 percent 
A) 18.11 percent 
B) −13.01 percent 
C) 14.91 percent 
D) 16.75 percent 
E) −20.37 percent

Question 9

A project has an initial cost of $26,000,a discount rate of 11.7 percent,a life of 5 years,and an NPV of $11,216.Given this,you know that the project is expected to earn a return:

Accepted Answer

A) equal to 11.7 percent of $26,000 plus an additional $11,216. 
B) of $11,216 in total. 
C) equal to 11.7 percent of $37,216 (= $26,000 + 11,216). 
D) of 11.7 percent of $11,216. 
E) of $26,000 minus $11,216. 
A) equal to 11.7 percent of $26,000 plus an additional $11,216. 
B) of $11,216 in total. 
C) equal to 11.7 percent of $37,216 (= $26,000 + 11,216). 
D) of 11.7 percent of $11,216. 
E) of $26,000 minus $11,216.

Question 10

An investment with an initial cost of $4,000 produces cash flows of $3,400,−$500,$2,800,−$100,and $6,000 for Years 1 to 5,respectively.How many IRRs does this project have?

Accepted Answer

A) 4 
B) 3 
C) 5 
D) 6 
E) 2 
A) 4 
B) 3 
C) 5 
D) 6 
E) 2

Question 11

How should a profitability index of zero be interpreted?

Accepted Answer

A) The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). 
B) The project has an internal rate of return equal to the discount rate. 
C) The project produces a net income of zero for every year of its life. 
D) The project's cash flows subsequent to the initial cash flow have a present value of zero. 
E) The project also has a net present value of zero. 
A) The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). 
B) The project has an internal rate of return equal to the discount rate. 
C) The project produces a net income of zero for every year of its life. 
D) The project's cash flows subsequent to the initial cash flow have a present value of zero. 
E) The project also has a net present value of zero.

Question 12

Using the internal rate of return method,a conventional investment project should be accepted if the internal rate of return is:

Accepted Answer

A) equal to,and only if it is equal to,the discount rate. 
B) equal to or greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) positive. 
A) equal to,and only if it is equal to,the discount rate. 
B) equal to or greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) positive.

Question 13

The internal rate of return tends to be:

Accepted Answer

A) easier for managers to comprehend than the net present value. 
B) extremely accurate even when cash flow estimates are faulty. 
C) ignored by most financial managers. 
D) used primarily to differentiate between mutually exclusive projects. 
E) utilized in project analysis only when multiple net present values apply. 
A) easier for managers to comprehend than the net present value. 
B) extremely accurate even when cash flow estimates are faulty. 
C) ignored by most financial managers. 
D) used primarily to differentiate between mutually exclusive projects. 
E) utilized in project analysis only when multiple net present values apply.

Question 14

You are considering two independent projects that have differing requirements.Project A has a required return of 12 percent compared to Project B's required return of 13.5 percent.Project A costs $75,000 and has cash flows of $21,000,$49,000,and $12,000 for Years 1 to 3,respectively.Project B has an initial cost of $70,000 and cash flows of $15,000,$18,000,and $41,000 for Years 1 to 3,respectively.Based on the NPV,you should:

Accepted Answer

A) accept both Project A and Project B. 
B) accept Project A and reject Project B. 
C) accept Project B and reject Project A. 
D) reject both Project A and Project B. 
E) accept whichever one you want but not both. 
A) accept both Project A and Project B. 
B) accept Project A and reject Project B. 
C) accept Project B and reject Project A. 
D) reject both Project A and Project B. 
E) accept whichever one you want but not both.

Question 15

Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2,$36,000 in Year 3,and −$5,000 in Year 4.She requires a rate of return of 8 percent and has a required discounted payback period of three years.Should this project be accepted? Why?

Accepted Answer

A) Yes; The project pays back on a discounted basis within the assigned time period and also produces a positive NPV. 
B) Yes; The discounted payback requirement is met and other methods of analysis are less desirable. 
C) No; Although the project earns more than 8 percent,there is no situation where the project can pay back on a discounted basis within three years. 
D) No; The discounted payback period is too short. 
E) No; The NPV indicates rejection as does DPB when all cash flows are considered. 
A) Yes; The project pays back on a discounted basis within the assigned time period and also produces a positive NPV. 
B) Yes; The discounted payback requirement is met and other methods of analysis are less desirable. 
C) No; Although the project earns more than 8 percent,there is no situation where the project can pay back on a discounted basis within three years. 
D) No; The discounted payback period is too short. 
E) No; The NPV indicates rejection as does DPB when all cash flows are considered.

Question 16

An investment project has an initial cost of $382 and cash flows $105,$130,$150,and $150 for Years 1 to 4,respectively.The cost of capital is 9 percent.What is the discounted payback period?

Accepted Answer

A) 2.76 years 
B) 3.57 years 
C) 3.42 years 
D) 3.68 years 
E) 2.92 years 
A) 2.76 years 
B) 3.57 years 
C) 3.42 years 
D) 3.68 years 
E) 2.92 years

Question 17

Blue Bird Café is considering a project with an initial cost of $46,800,and cash flows of $8,500,$25,000,$19,000,and −$4,500 for Years 1 to 4,respectively.How many internal rates of return do you expect this project to have?

Accepted Answer

A) 0 
B) 1 
C) 4 
D) 3 
E) 2 
A) 0 
B) 1 
C) 4 
D) 3 
E) 2

Question 18

The internal rate of return for a project will increase if:

Accepted Answer

A) the initial cost of the project can be reduced. 
B) the total amount of the cash inflows is reduced. 
C) each cash inflow is moved such that it occurs one year later than originally projected. 
D) the required rate of return is reduced. 
E) the discount rate is increased. 
A) the initial cost of the project can be reduced. 
B) the total amount of the cash inflows is reduced. 
C) each cash inflow is moved such that it occurs one year later than originally projected. 
D) the required rate of return is reduced. 
E) the discount rate is increased.

Question 19

If a project has a net present value equal to zero,then:

Accepted Answer

A) the initial cost of the project exceeds the present value of the project's subsequent cash flows. 
B) the internal rate of return exceeds the discount rate. 
C) the project produces cash inflows that exceed the minimum required inflows. 
D) any delay in receiving the projected cash inflows will cause the project's NPV to be negative. 
E) the discount rate exceeds the internal rate of return. 
A) the initial cost of the project exceeds the present value of the project's subsequent cash flows. 
B) the internal rate of return exceeds the discount rate. 
C) the project produces cash inflows that exceed the minimum required inflows. 
D) any delay in receiving the projected cash inflows will cause the project's NPV to be negative. 
E) the discount rate exceeds the internal rate of return.

Question 20

A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years.After the three years,the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300.What is the net present value of this project if the required rate of return is 11.3 percent?

Accepted Answer

A) $2,474.76 
B) $2,903.19 
C) $935.56 
D) $3,011.40 
E) $1,980.02 
A) $2,474.76 
B) $2,903.19 
C) $935.56 
D) $3,011.40 
E) $1,980.02

Exam 5: Net Present Value and Other Investment Rules

Proposed projects should be accepted when those projects:

The discounted payback rule may cause:

You are considering an investment project with an internal rate of return of 8.7 percent,a net present value of $393,and a payback period of 2.44 years.Which one of the following is correct given this information?

Which method(s)of project analysis is(are)best suited for use by a department manager who has no knowledge of time value of money but can estimate the cash flows of small projects with short lives fairly accurately?

Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500,$15,600,and $22,700 for Years 1 to 3,respectively.Based on the profitability index rule,should the project be accepted if the discount rate is 9.5 percent? Why or why not?

Project A costs $84,500 and has cash flows of $32,300,$36,400,and $30,000 for Years 1 to 3,respectively.Project B has an initial cost of $79,000 and has cash flows of $30,000,$36,000,and $29,000 for Years 1 to 3,respectively.What is the incremental IRR of these two mutually exclusive projects?

A project has an initial cost of $26,000,a discount rate of 11.7 percent,a life of 5 years,and an NPV of $11,216.Given this,you know that the project is expected to earn a return:

An investment with an initial cost of $4,000 produces cash flows of $3,400,−$500,$2,800,−$100,and $6,000 for Years 1 to 5,respectively.How many IRRs does this project have?

How should a profitability index of zero be interpreted?

Using the internal rate of return method,a conventional investment project should be accepted if the internal rate of return is:

The internal rate of return tends to be:

Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2,$36,000 in Year 3,and −$5,000 in Year 4.She requires a rate of return of 8 percent and has a required discounted payback period of three years.Should this project be accepted? Why?

An investment project has an initial cost of $382 and cash flows $105,$130,$150,and $150 for Years 1 to 4,respectively.The cost of capital is 9 percent.What is the discounted payback period?

Blue Bird Café is considering a project with an initial cost of $46,800,and cash flows of $8,500,$25,000,$19,000,and −$4,500 for Years 1 to 4,respectively.How many internal rates of return do you expect this project to have?

The internal rate of return for a project will increase if:

If a project has a net present value equal to zero,then:

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

Filters