Question 1

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

Question 2

A project will have more than one IRR if,and only if,the:

Accepted Answer

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

Question 3

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

Accepted Answer

A) external rate of return. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) equalizer. 
A) external rate of return. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) equalizer.

Question 4

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

Accepted Answer

A) net present value. 
B) discounted net present value. 
C) payback period. 
D) discounted profitability index. 
E) discounted payback period. 
A) net present value. 
B) discounted net present value. 
C) payback period. 
D) discounted profitability index. 
E) discounted payback period.

Question 5

An investment project has an initial cost of $260 and cash flows $75,$105,$100,and $50 for Years 1 to 4,respectively.The cost of capital is 12 percent.What is the discounted payback period?

Accepted Answer

A) 3.76 years 
B) Never 
C) 3.42 years 
D) 3.68 years 
E) 3.92 years 
A) 3.76 years 
B) Never 
C) 3.42 years 
D) 3.68 years 
E) 3.92 years

Question 6

Down Under Stores is considering an investment with an initial cost of $236,000.In Year 4,the project will require an additional investment and finally,the project will be shut down in Year 7.The annual cash flows for Years 1 to 7,respectively,are projected as $64,000,$87,000,$91,000,−$48,000,$122,000,$154,000,and −$30,000.If all negative cash flows are moved to Time 0 using a discount rate of 13 percent,what is the project's modified IRR?

Accepted Answer

A) 15.44 percent 
B) 17.67 percent 
C) 18.54 percent 
D) 14.91 percent 
E) 22.08 percent 
A) 15.44 percent 
B) 17.67 percent 
C) 18.54 percent 
D) 14.91 percent 
E) 22.08 percent

Question 7

Payback is frequently used to analyze independent projects because:

Accepted Answer

A) it considers the time value of money. 
B) all relevant cash flows are included in the analysis. 
C) it is easy and quick to calculate. 
D) it is the most desirable of all the available analytical methods from a financial perspective. 
E) it produces better decisions than those made using either NPV or IRR. 
A) it considers the time value of money. 
B) all relevant cash flows are included in the analysis. 
C) it is easy and quick to calculate. 
D) it is the most desirable of all the available analytical methods from a financial perspective. 
E) it produces better decisions than those made using either NPV or IRR.

Question 8

Why do managers suggest that ignoring all cash flows following the required payback period is not a major flaw of the payback method of capital budgeting analysis?

Accepted Answer

A) Payback is never used in real practice so it makes no difference how academics apply the method in their studies. 
B) All projected cash flows after the required period are highly inaccurate so including them lessens the reliability of the resulting decision. 
C) If the cash flows after the required period are significant,managers will use their discretion to override the payback rule. 
D) All cash flows after the required period are relatively worthless in today's dollars so ignoring them has no consequence. 
E) Any consideration of the cash flows after the required period rarely has any effect on the accept/reject decision. 
A) Payback is never used in real practice so it makes no difference how academics apply the method in their studies. 
B) All projected cash flows after the required period are highly inaccurate so including them lessens the reliability of the resulting decision. 
C) If the cash flows after the required period are significant,managers will use their discretion to override the payback rule. 
D) All cash flows after the required period are relatively worthless in today's dollars so ignoring them has no consequence. 
E) Any consideration of the cash flows after the required period rarely has any effect on the accept/reject decision.

Question 9

A project costing $218,000 has equal annual cash inflows over its 7-year life.If the discounted payback period is seven years and the discount rate is zero percent,what is the amount of the cash flow in each of the seven years?

Accepted Answer

A) $31,142.86 per year for each of the seven years 
B) $0 for Years 1 to 6 and $218,000 in Year 7 
C) Any amount between $0 and $218,000 for any one year,provided the sum of the seven cash flows totals $218,000. 
D) $218,000 for Year 1 and $0 for Years 2 through 7. 
E) $0 for each of the seven years 
A) $31,142.86 per year for each of the seven years 
B) $0 for Years 1 to 6 and $218,000 in Year 7 
C) Any amount between $0 and $218,000 for any one year,provided the sum of the seven cash flows totals $218,000. 
D) $218,000 for Year 1 and $0 for Years 2 through 7. 
E) $0 for each of the seven years

Question 10

No matter how many forms of investment analysis you employ:

Accepted Answer

A) the actual results from a project may vary significantly from the expected results. 
B) the internal rate of return will always produce the most reliable results. 
C) a project will never be accepted unless the payback period is met. 
D) the initial costs will generally vary considerably from the estimated costs. 
E) only the first three years of a project ever affect its final outcome. 
A) the actual results from a project may vary significantly from the expected results. 
B) the internal rate of return will always produce the most reliable results. 
C) a project will never be accepted unless the payback period is met. 
D) the initial costs will generally vary considerably from the estimated costs. 
E) only the first three years of a project ever affect its final outcome.

Question 11

You are considering a project with an initial cost of $4,300.What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year for Years 1 to 4,respectively?

Accepted Answer

A) 2.04 years 
B) 2.36 years 
C) 2.89 years 
D) 3.04 years 
E) 3.36 years 
A) 2.04 years 
B) 2.36 years 
C) 2.89 years 
D) 3.04 years 
E) 3.36 years

Question 12

The payback method:

Accepted Answer

A) is the most frequently used method of capital budgeting analysis. 
B) is a more sophisticated method of analysis than the profitability index. 
C) considers the time value of money. 
D) applies mainly to projects where the actual results will be known relatively soon. 
E) generally results in decisions that conflict with the decision suggested by NPV analysis. 
A) is the most frequently used method of capital budgeting analysis. 
B) is a more sophisticated method of analysis than the profitability index. 
C) considers the time value of money. 
D) applies mainly to projects where the actual results will be known relatively soon. 
E) generally results in decisions that conflict with the decision suggested by NPV analysis.

Question 13

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

Question 14

A mutually exclusive project is a project whose:

Accepted Answer

A) acceptance or rejection has no effect on the acceptance of other projects. 
B) NPV is always negative. 
C) IRR is always negative. 
D) acceptance or rejection affects the acceptance of other projects. 
E) cash flow pattern exhibits more than one sign change. 
A) acceptance or rejection has no effect on the acceptance of other projects. 
B) NPV is always negative. 
C) IRR is always negative. 
D) acceptance or rejection affects the acceptance of other projects. 
E) cash flow pattern exhibits more than one sign change.

Question 15

The modified internal rate of return:

Accepted Answer

A) is used as the discount rate for all NPV calculations. 
B) applies only to profitability calculations. 
C) is used to make accept/reject decisions when no discount rate can be assigned. 
D) is computed by combining cash flows until only one change in sign remains. 
E) assumes all projects are financing projects. 
A) is used as the discount rate for all NPV calculations. 
B) applies only to profitability calculations. 
C) is used to make accept/reject decisions when no discount rate can be assigned. 
D) is computed by combining cash flows until only one change in sign remains. 
E) assumes all projects are financing projects.

Question 16

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created,then the firm is most apt to evaluate a capital project using the ________ method of analysis.

Accepted Answer

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

Question 17

Comparing the NPV profile of an investment project to that of a financing project demonstrates why the:

Accepted Answer

A) incremental IRR is computed differently for financing projects than for investment projects. 
B) IRR decision rule for investment projects is the opposite of the rule for financing projects. 
C) life span of a project affects the decision as to which project to accept. 
D) NPV rule for financing projects is the opposite of the rule for investment projects. 
E) profitability index and the net present value are related. 
A) incremental IRR is computed differently for financing projects than for investment projects. 
B) IRR decision rule for investment projects is the opposite of the rule for financing projects. 
C) life span of a project affects the decision as to which project to accept. 
D) NPV rule for financing projects is the opposite of the rule for investment projects. 
E) profitability index and the net present value are related.

Question 18

All else equal,the payback period for a project will decrease whenever the:

Accepted Answer

A) initial cost increases. 
B) required return for a project increases. 
C) assigned discount rate decreases. 
D) cash inflows are moved earlier in time. 
E) duration of a project is lengthened. 
A) initial cost increases. 
B) required return for a project increases. 
C) assigned discount rate decreases. 
D) cash inflows are moved earlier in time. 
E) duration of a project is lengthened.

Exam 5: Net Present Value and Other Investment Rules

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

A project will have more than one IRR if,and only if,the:

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

An investment project has an initial cost of $260 and cash flows $75,$105,$100,and $50 for Years 1 to 4,respectively.The cost of capital is 12 percent.What is the discounted payback period?

Payback is frequently used to analyze independent projects because:

Why do managers suggest that ignoring all cash flows following the required payback period is not a major flaw of the payback method of capital budgeting analysis?

A project costing $218,000 has equal annual cash inflows over its 7-year life.If the discounted payback period is seven years and the discount rate is zero percent,what is the amount of the cash flow in each of the seven years?

No matter how many forms of investment analysis you employ:

You are considering a project with an initial cost of $4,300.What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year for Years 1 to 4,respectively?

The payback method:

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

A mutually exclusive project is a project whose:

The modified internal rate of return:

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created,then the firm is most apt to evaluate a capital project using the ________ method of analysis.

Comparing the NPV profile of an investment project to that of a financing project demonstrates why the:

All else equal,the payback period for a project will decrease whenever the:

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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