Question 1

The profitability index is closely related to:

Accepted Answer

A) payback. 
B) discounted payback. 
C) average accounting return. 
D) net present value. 
E) internal rate of return. 
A) payback. 
B) discounted payback. 
C) average accounting return. 
D) net present value. 
E) internal rate of return.

Question 2

The payback period rule:

Accepted Answer

A) discounts cash flows. 
B) ignores initial cost. 
C) always uses all possible cash flows in its calculation. 
D) Both A and C. 
E) None of the above. 
A) discounts cash flows. 
B) ignores initial cost. 
C) always uses all possible cash flows in its calculation. 
D) Both A and C. 
E) None of the above.

Question 3

Which one of the following statements concerning net present value (NPV) is correct?

Accepted Answer

A) An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B) An investment should be accepted only if the NPV is equal to the initial cash flow. 
C) An investment should be accepted if the NPV is positive and rejected if it is negative. 
D) An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E) Any project that has positive cash flows for every time period after the initial investment should be accepted. 
A) An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B) An investment should be accepted only if the NPV is equal to the initial cash flow. 
C) An investment should be accepted if the NPV is positive and rejected if it is negative. 
D) An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. 
E) Any project that has positive cash flows for every time period after the initial investment should be accepted.

Question 4

The payback period rule:

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 so that depreciation is just equal to positive cash flows in the payback year. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the interest rate. 
E) Both A and D. 
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 so that depreciation is just equal to positive cash flows in the payback year. 
C) requires an arbitrary choice of a cutoff point. 
D) varies the cutoff point with the interest rate. 
E) Both A and D.

Question 5

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A) planning to build a warehouse and a retail outlet side by side. 
B) buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C) using an empty warehouse for storage or renting it entirely out to another firm. 
D) using the company sales force to promote sales of both shoes and socks. 
E) buying both inventory and fixed assets using funds from the same bond issue. 
A) planning to build a warehouse and a retail outlet side by side. 
B) buying sufficient equipment to manufacture both desks and chairs simultaneously. 
C) using an empty warehouse for storage or renting it entirely out to another firm. 
D) using the company sales force to promote sales of both shoes and socks. 
E) buying both inventory and fixed assets using funds from the same bond issue.

Question 6

An investment cost $10,000 with expected cash flows of $3,000 for 5 years.The discount rate is 15.2382%.The NPV is ___ and the IRR is ___ for the project.

Accepted Answer

A) $0; 15.2382% 
B) $3.33; 27.2242% 
C) $5,000; 0% 
D) Can not answer without one or the other value as input. 
E) None of the above. 
A) $0; 15.2382% 
B) $3.33; 27.2242% 
C) $5,000; 0% 
D) Can not answer without one or the other value as input. 
E) None of the above.

Question 7

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

Question 8

Which of the following statement is true?

Accepted Answer

A) One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B) One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C) Payback accounts for time value of money. 
D) There will always be one IRR regardless of cash flows. 
E) Return on equity is the ratio of total assets to total net income. 
A) One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. 
B) One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. 
C) Payback accounts for time value of money. 
D) There will always be one IRR regardless of cash flows. 
E) Return on equity is the ratio of total assets to total net income.

Question 9

A project will have more than one IRR if:

Accepted Answer

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

Question 10

Analysis using the profitability index:

Accepted Answer

A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital rationing. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply. 
A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) cannot be used to aid capital rationing. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results which typically are difficult to comprehend or apply.

Question 11

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

Accepted Answer

A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative. 
A) accepted because the internal rate of return is positive. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is negative.

Question 12

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

Question 13

No matter how many forms of investment analysis you do:

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 14

The difference between the present value of an investment and its 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 15

The primary reason that company projects with positive net present values are considered acceptable is that:

Accepted Answer

A) they create value for the owners of the firm. 
B) the project's rate of return exceeds the rate of inflation. 
C) they return the initial cash outlay within three years or less. 
D) the required cash inflows exceed the actual cash inflows. 
E) the investment's cost exceeds the present value of the cash inflows. 
A) they create value for the owners of the firm. 
B) the project's rate of return exceeds the rate of inflation. 
C) they return the initial cash outlay within three years or less. 
D) the required cash inflows exceed the actual cash inflows. 
E) the investment's cost exceeds the present value of the cash inflows.

Question 16

Modified internal rate of return:

Accepted Answer

A) handles the multiple IRR problem by combining cash flows until only one change in sign change remains. 
B) requires the use of a discount rate. 
C) does not require the use of a discount rate. 
D) Both A and B. 
E) Both A and C. 
A) handles the multiple IRR problem by combining cash flows until only one change in sign change remains. 
B) requires the use of a discount rate. 
C) does not require the use of a discount rate. 
D) Both A and B. 
E) Both A and C.

Question 17

You are considering the following two mutually exclusive projects that will not be repeated.The required rate of return is 11.25% for project A and 10.75% for project B.Which project should you accept and why? $\begin{array}{cccl}
\underline{\text { Year } }&\underline{\text { Project A }}& & \underline{\text { Project B }} \
0 &-\$ 48,000 & & -\$ 126,900 \
1 &\$ 18,400 & & \$ 69,700 \
2 &  \$ 31,300 & & \$ 80,900\
3 & \$ 11,700 & & \$ 0\

\end{array}$

Accepted Answer

A) project A; because its NPV is about $335 more than the NPV of project B. 
B) project A; because it has the higher required rate of return. 
C) project B; because it has the largest total cash inflow. 
D) project B; because it returns all its cash flows within two years. 
E) project B; because it is the largest sized project. 
A) project A; because its NPV is about $335 more than the NPV of project B. 
B) project A; because it has the higher required rate of return. 
C) project B; because it has the largest total cash inflow. 
D) project B; because it returns all its cash flows within two years. 
E) project B; because it is the largest sized project.

Question 18

An investment project has the cash flow stream of $-250, $75, $125, $100, and $50.The cost of capital is 12%.What is the discounted payback period?

Accepted Answer

A) 3.15 years 
B) 3.38 years 
C) 3.45 years 
D) 3.60 years 
E) 4.05 years 
A) 3.15 years 
B) 3.38 years 
C) 3.45 years 
D) 3.60 years 
E) 4.05 years

Question 19

What is the internal rate of return on an investment with the following cash flows? $$\begin{array} { c c } 
\underline{\text { Year }}  & \underline{\text { Cash Flow }}  \
0 & - \$ 123,400 \
1&\$ 36,200 \
2 & \$ 54,800 \
3 & \$ 48,100
\end{array}$$

Accepted Answer

A) 5.93% 
B) 5.96% 
C) 6.04% 
D) 6.09% 
E) 6.13% 
A) 5.93% 
B) 5.96% 
C) 6.04% 
D) 6.09% 
E) 6.13%

Question 20

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Accepted Answer

A) net present value. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) profile period. 
A) net present value. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) profile period.

Exam 5: Net Present Value and Other Investment Rules

The profitability index is closely related to:

The payback period rule:

Which one of the following statements concerning net present value (NPV) is correct?

The payback period rule:

Which one of the following is the best example of two mutually exclusive projects?

An investment cost $10,000 with expected cash flows of $3,000 for 5 years.The discount rate is 15.2382%.The NPV is ___ and the IRR is ___ for the project.

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

Which of the following statement is true?

A project will have more than one IRR if:

Analysis using the profitability index:

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

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

No matter how many forms of investment analysis you do:

The difference between the present value of an investment and its cost is the:

The primary reason that company projects with positive net present values are considered acceptable is that:

Modified internal rate of return:

You are considering the following two mutually exclusive projects that will not be repeated.The required rate of return is 11.25% for project A and 10.75% for project B.Which project should you accept and why? 0 -\ 48,000 -\ 126,900 1 \ 18,400 \ 69,700 2 \ 31,300 \ 80,900 3 \ 11,700 \ 0

An investment project has the cash flow stream of $-250, $75, $125, $100, and $50.The cost of capital is 12%.What is the discounted payback period?

What is the internal rate of return on an investment with the following cash flows? 0 -\ 123,400 1 \ 36,200 2 \ 54,800 3 \ 48,100

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

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

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

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 and Acquisitions

Financial Distress

International Corporate Finance

Filters

An investment cost $10,000 with expected cash flows of $3,000 for 5 years.The discount rate is 15.2382%.The NPV is _ and the IRR is _ for the project.