Question 1

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 the 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 the statements are correct.

Question 2

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 NPV decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  NPV = $1,766.55; accept the project 
B)  NPV = −$892.19; reject the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = −$3,577.90; reject the project 
A)  NPV = $1,766.55; accept the project 
B)  NPV = −$892.19; reject the project 
C)  NPV = $1,288.94; accept the project 
D)  NPV = −$3,577.90; reject the project

Question 3

Compute the IRR 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, accept 
B)  10 percent, reject 
C)  13.26 percent, accept 
D)  13.26 percent, reject 
A)  10 percent, accept 
B)  10 percent, reject 
C)  13.26 percent, accept 
D)  13.26 percent, reject

Question 4

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Accepted Answer

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

Question 5

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 MIRR decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  MIRR = 13.59 percent; accept the project 
B)  MIRR = 7.96 percent; reject the project 
C)  MIRR = 7.19 percent; reject the project 
D)  MIRR = 12.58 percent; accept the project 
A)  MIRR = 13.59 percent; accept the project 
B)  MIRR = 7.96 percent; reject the project 
C)  MIRR = 7.19 percent; reject the project 
D)  MIRR = 12.58 percent; accept the project

Question 6

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent. Project Y

Accepted Answer

A)  −$19,594.29 
B)  $7.788.34 
C)  $9.367.11 
D)  $107,788.34 
A)  −$19,594.29 
B)  $7.788.34 
C)  $9.367.11 
D)  $107,788.34

Question 7

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:

Accepted Answer

A)  time or resource constraints. 
B)  a labor union. 
C)  the election of a new board of directors. 
D)  a major investment. 
A)  time or resource constraints. 
B)  a labor union. 
C)  the election of a new board of directors. 
D)  a major investment.

Question 8

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 three and a half years,respectively.Use the payback decision to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  Payback = 4.90 years; reject 
B)  Payback = 4.40 years; reject 
C)  Payback = 5.80 years; reject 
D)  Payback > 6.00 years; reject 
A)  Payback = 4.90 years; reject 
B)  Payback = 4.40 years; reject 
C)  Payback = 5.80 years; reject 
D)  Payback > 6.00 years; reject

Question 9

Suppose you have a project whose discounted payback is equal to its termination date.What can you say for sure about its PI?

Accepted Answer

A)  The discounted payback will be greater than zero. 
B)  It will have a PI and NPV of zero. 
C)  The NPV and IRR will yield the same decision. 
D)  The IRR will just equal the cost of capital. 
A)  The discounted payback will be greater than zero. 
B)  It will have a PI and NPV of zero. 
C)  The NPV and IRR will yield the same decision. 
D)  The IRR will just equal the cost of capital.

Question 10

A company is considering two mutually exclusive projects,A and B.Project A requires an initial investment of $100,followed by cash flows of $95,$20,and $5.Project B requires an initial investment of $100,followed by cash flows of $0,$20,and $130.What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

Accepted Answer

A)  15.24 percent 
B)  15.96 percent 
C)  16.17 percent 
D)  15.42 percent 
A)  15.24 percent 
B)  15.96 percent 
C)  16.17 percent 
D)  15.42 percent

Question 11

Rate-based statistics represent summary cash flows,and these summaries tend to lose which two important details?

Accepted Answer

A)  The investment size and cash inflows that occur after the rather arbitrary testing period 
B)  The investment size and the cash inflows that occur before the testing period 
C)  The investment size and the cash outflows that occur before the testing period 
D)  The investment size and the cash inflows that occur during the testing period 
A)  The investment size and cash inflows that occur after the rather arbitrary testing period 
B)  The investment size and the cash inflows that occur before the testing period 
C)  The investment size and the cash outflows that occur before the testing period 
D)  The investment size and the cash inflows that occur during the testing period

Question 12

A project's IRR is the interest rate that:

Accepted Answer

A)  causes the project's NPV to equal zero. 
B)  is used to discount cash flows when computing the project's NPV. 
C)  is used to determine which one of two mutually exclusive projects should be accepted. 
D)  is used to compute the project's discounted payback period. 
A)  causes the project's NPV to equal zero. 
B)  is used to discount cash flows when computing the project's NPV. 
C)  is used to determine which one of two mutually exclusive projects should be accepted. 
D)  is used to compute the project's discounted payback period.

Question 13

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 14

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 8 percent,and the maximum allowable payback and discounted payback statistic for the projects are two 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 15

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 IRR 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 16

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7.The initial investment is $750.What is the payback for this investment?

Accepted Answer

A)  4.88 years 
B)  4.48 years 
C)  5.88 years 
D)  5.48 years 
A)  4.88 years 
B)  4.48 years 
C)  5.88 years 
D)  5.48 years

Question 17

The net present value decision technique uses a statistic denominated in:

Accepted Answer

A)  years. 
B)  currency. 
C)  a percentage. 
D)  time lines. 
A)  years. 
B)  currency. 
C)  a percentage. 
D)  time lines.

Question 18

A company is considering two mutually exclusive projects,A and B.Project A requires an initial investment of $200,followed by cash flows of $185,$40,and $15.Project B requires an initial investment of $200,followed by cash flows of $0,$50,and $230.What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

Accepted Answer

A)  15.45 percent 
B)  15.12 percent 
C)  13.57 percent 
D)  12.71 percent 
A)  15.45 percent 
B)  15.12 percent 
C)  13.57 percent 
D)  12.71 percent

Question 19

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 12 percent,and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years,respectively.   Use the payback decision rule to evaluate this project; should it be accepted or rejected?

Accepted Answer

A)  0.23 years, accept 
B)  1.77 years, accept 
C)  2 years, accept 
D)  4.33 years, reject 
A)  0.23 years, accept 
B)  1.77 years, accept 
C)  2 years, accept 
D)  4.33 years, reject

Question 20

A disadvantage of the payback statistic is that:

Accepted Answer

A)  it does not reflect the time value of money. 
B)  it does not give an indication of the project's riskiness. 
C)  it does not consider cash flows beyond the payback period. 
D)  All of the options are disadvantages of payback. 
A)  it does not reflect the time value of money. 
B)  it does not give an indication of the project's riskiness. 
C)  it does not consider cash flows beyond the payback period. 
D)  All of the options are disadvantages of payback.

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

Compute the IRR 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.

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent. Project Y

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:

Suppose you have a project whose discounted payback is equal to its termination date.What can you say for sure about its PI?

Rate-based statistics represent summary cash flows,and these summaries tend to lose which two important details?

A project's IRR is the interest rate that:

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7.The initial investment is $750.What is the payback for this investment?

The net present value decision technique uses a statistic denominated in:

A disadvantage of the payback statistic is that:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Filters

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

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

Compute the IRR 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.

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent. Project Y

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing:

Suppose you have a project whose discounted payback is equal to its termination date.What can you say for sure about its PI?

Rate-based statistics represent summary cash flows,and these summaries tend to lose which two important details?

A project's IRR is the interest rate that:

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7.The initial investment is $750.What is the payback for this investment?

The net present value decision technique uses a statistic denominated in:

A disadvantage of the payback statistic is that:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Filters