Question 1

The benchmark for the profitability index (PI)is the:

Accepted Answer

A) cost of capital. 
B) managers' maximum number of years. 
C) zero or anything larger than zero. 
D) zero or anything less than zero. 
A) cost of capital. 
B) managers' maximum number of years. 
C) zero or anything larger than zero. 
D) zero or anything less than zero.

Question 2

Which of the following statements is correct regarding the NPV profile?

Accepted Answer

A) The IRR appears as the intersection of the NPV profile with the x-axis. 
B) The IRR appears at the crossover point or where the two profiles intersect. 
C) NPV profiles for independent projects with normal cash flows will intersect. 
D) All of these statements are correct. 
A) The IRR appears as the intersection of the NPV profile with the x-axis. 
B) The IRR appears at the crossover point or where the two profiles intersect. 
C) NPV profiles for independent projects with normal cash flows will intersect. 
D) All of these statements are correct.

Question 3

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 10 percent,and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years,respectively.Use the PI decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) PI = 6.94 percent; reject the project 
B) PI = -7.52 percent; reject the project 
C) PI = -4.21 percent; reject the project 
D) PI = 5.33 percent; accept the project 
A) PI = 6.94 percent; reject the project 
B) PI = -7.52 percent; reject the project 
C) PI = -4.21 percent; reject the project 
D) PI = 5.33 percent; accept the project

Question 4

Which of the following tools is suitable for choosing between mutually exclusive projects?

Accepted Answer

A) NPV 
B) IRR 
C) MIRR 
D) None are suitable 
A) NPV 
B) IRR 
C) MIRR 
D) None are suitable

Question 5

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year.

Accepted Answer

A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept 
A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept

Question 6

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 8 percent,and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years,respectively.
Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) 1.23 years, accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject 
A) 1.23 years, accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject

Question 7

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Accepted Answer

A) Expected cash flows 
B) Time line cash flows 
C) Non-normal cash flows 
D) Normal cash flows 
A) Expected cash flows 
B) Time line cash flows 
C) Non-normal cash flows 
D) Normal cash flows

Question 8

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

Accepted Answer

A) 2.49 years, accept 
B) 2.98 years, accept 
C) 3.49 years, reject 
D) 4.98 years, reject 
A) 2.49 years, accept 
B) 2.98 years, accept 
C) 3.49 years, reject 
D) 4.98 years, reject

Question 9

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

Accepted Answer

A) The project has only one negative cash flow. 
B) The project's MIRR is less than 15 percent but greater than 10 percent. 
C) The project's discounted payback is less than the project's payback. 
D) The project's NPV > 0. 
A) The project has only one negative cash flow. 
B) The project's MIRR is less than 15 percent but greater than 10 percent. 
C) The project's discounted payback is less than the project's payback. 
D) The project's NPV > 0.

Question 10

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Accepted Answer

A) PI. 
B) IRR. 
C) NPV. 
D) MIRR. 
A) PI. 
B) IRR. 
C) NPV. 
D) MIRR.

Question 11

Suppose your firm is considering two mutually exclusive,required projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 10 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years,respectively.
Use the discounted payback decision rule to evaluate these projects; which one(s)should be accepted or rejected?

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 12

Suppose your firm is considering two independent projects with the cash flows shown as follows.The required rate of return on projects of both of their risk class is 12 percent,and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years,respectively.
Use the NPV decision rule to evaluate these projects; which one(s)should be accepted or rejected?

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 13

For a project with normal cash flows,what would you expect the relationship to be between the MIRR and the IRR?

Accepted Answer

Since the reinvestment rate of

Question 14

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years.What is the IRR of this financial asset?

Accepted Answer

A) 8.64 percent 
B) 9.02 percent 
C) 10.51 percent 
D) 11.29 percent 
A) 8.64 percent 
B) 9.02 percent 
C) 10.51 percent 
D) 11.29 percent

Question 15

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 10 percent,and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years,respectively.Use the IRR decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) IRR = 16.92 percent; accept the project 
B) IRR = 7.123 percent; reject the project 
C) IRR = 8.81 percent; reject the project 
D) IRR = 10.59 percent; accept the project 
A) IRR = 16.92 percent; accept the project 
B) IRR = 7.123 percent; reject the project 
C) IRR = 8.81 percent; reject the project 
D) IRR = 10.59 percent; accept the project

Question 16

Suppose your firm is considering investing in a project with the cash flows shown as follows,that the required rate of return on projects of this risk class is 8 percent,and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years,respectively.Use the PI decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A) PI = 6.94 percent; reject the project 
B) PI = 7.52 percent; reject the project 
C) PI = 23.61 percent; accept the project 
D) PI = 35.33 percent; accept the project 
A) PI = 6.94 percent; reject the project 
B) PI = 7.52 percent; reject the project 
C) PI = 23.61 percent; accept the project 
D) PI = 35.33 percent; accept the project

Question 17

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Accepted Answer

A) Discounted payback 
B) Net present value 
C) Internal rate of return 
D) Profitability index 
A) Discounted payback 
B) Net present value 
C) Internal rate of return 
D) Profitability index

Question 18

Explain the Rule of Signs as it pertains to IRR.

Accepted Answer

If management insists on using IRR for n

Question 19

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Accepted Answer

A) 10 percent, reject 
B) 14.22 percent, accept 
C) 13.26 percent, accept 
D) 18.96 percent, accept 
A) 10 percent, reject 
B) 14.22 percent, accept 
C) 13.26 percent, accept 
D) 18.96 percent, accept

Question 20

Projects A and B are mutually exclusive.Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years.Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000.The cost of capital is 12%.Which project would you accept and why?

Accepted Answer

A) Project B because it has the higher NPV. 
B) Project B because it has the higher IRR. 
C) Project A because it has the higher NPV. 
D) Project A because it has the higher IRR. 
A) Project B because it has the higher NPV. 
B) Project B because it has the higher IRR. 
C) Project A because it has the higher NPV. 
D) Project A because it has the higher IRR.

The benchmark for the profitability index (PI)is the:

Which of the following statements is correct regarding the NPV profile?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year.

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

For a project with normal cash flows,what would you expect the relationship to be between the MIRR and the IRR?

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years.What is the IRR of this financial asset?

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Explain the Rule of Signs as it pertains to IRR.

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Projects A and B are mutually exclusive.Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years.Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000.The cost of capital is 12%.Which project would you accept and why?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

The benchmark for the profitability index (PI)is the:

Which of the following statements is correct regarding the NPV profile?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year.

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

A project has normal cash flows.Its IRR is 15 percent and its cost of capital is 10 percent.Which of the following statements is incorrect?

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

For a project with normal cash flows,what would you expect the relationship to be between the MIRR and the IRR?

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years.What is the IRR of this financial asset?

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Explain the Rule of Signs as it pertains to IRR.

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Projects A and B are mutually exclusive.Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years.Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000.The cost of capital is 12%.Which project would you accept and why?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters