Question 1

The discounted payback period of a project will decrease whenever the:

Accepted Answer

A) discount rate applied to the project is increased. 
B) initial cash outlay of the project is increased. 
C) time period of the project is increased. 
D) amount of each project cash inflow is increased. 
E) costs of the fixed assets utilized in the project increase. 
A) discount rate applied to the project is increased. 
B) initial cash outlay of the project is increased. 
C) time period of the project is increased. 
D) amount of each project cash inflow is increased. 
E) costs of the fixed assets utilized in the project increase.

Question 2

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 analysts. 
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 analysts. 
D) used primarily to differentiate between mutually exclusive projects. 
E) utilized in project analysis only when multiple net present values apply.

Question 3

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 4

All else constant, the net present value of a typical investment project increases when:

Accepted Answer

A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project. 
A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project.

Question 5

Given the goal of maximization of firm value and shareholder wealth, we have stressed the importance of net present value (NPV).And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

Accepted Answer

This is an open-ended question which all

Question 6

If a project is assigned a required rate of return equal to zero, then:

Accepted Answer

A) the timing of the project's cash flows has no bearing on the value of the project. 
B) the project will always be accepted. 
C) the project will always be rejected. 
D) whether the project is accepted or rejected will depend on the timing of the cash flows. 
E) the project can never add value for the shareholders. 
A) the timing of the project's cash flows has no bearing on the value of the project. 
B) the project will always be accepted. 
C) the project will always be rejected. 
D) whether the project is accepted or rejected will depend on the timing of the cash flows. 
E) the project can never add value for the shareholders.

Question 7

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

Accepted Answer

A) how the incremental IRR varies with changes in the discount rate. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the payback period and the initial cash outflow of a project are related. 
E) how the profitability index and the net present value are related. 
A) how the incremental IRR varies with changes in the discount rate. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the payback period and the initial cash outflow of a project are related. 
E) how the profitability index and the net present value are related.

Question 8

The problem of multiple IRRs can occur when:

Accepted Answer

A) there is only one sign change in the cash flows. 
B) the first cash flow is always positive. 
C) the cash flows decline over the life of the project. 
D) there is more than one sign change in the cash flows. 
E) None of the above. 
A) there is only one sign change in the cash flows. 
B) the first cash flow is always positive. 
C) the cash flows decline over the life of the project. 
D) there is more than one sign change in the cash flows. 
E) None of the above.

Question 9

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300.The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year.The interest rate is 12%.Calculate the project's payback.Also, calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

Accepted Answer

Payback - 2.63 years.
IRR = 10

Question 10

Based on the net present value of _____ for this project, you should _____ the project.

Accepted Answer

A) -$2,021.28; reject 
B) -$406.19; reject 
C) $7,978.72; accept 
D) $9,836.74; accept 
E) $12,684.23; accept 
A) -$2,021.28; reject 
B) -$406.19; reject 
C) $7,978.72; accept 
D) $9,836.74; accept 
E) $12,684.23; accept

Question 11

The advantages of the payback method of project analysis include the:
I.application of a discount rate to each separate cash flow.
II.bias towards liquidity.
III.ease of use.
IV.arbitrary cutoff point.

Accepted Answer

A) I and II only 
B) I and III only 
C) II and III only 
D) II and IV only 
E) II, III, and IV only 
A) I and II only 
B) I and III only 
C) II and III only 
D) II and IV only 
E) II, III, and IV only

Question 12

You would like to invest in the following project. $$\begin{array} { c c } 
\underline{\text { Year }} &\underline{ \text { Cash Flow }} \
 0 & - \$ 55,000 \
1 & \$ 30,000 \
2 & \$37,000 \

\end{array}$$ Victoria, your boss, insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria, you should:

Accepted Answer

A) accept the project because it returns almost $1.22 for every $1 invested. 
B) accept the project because it has a positive PI. 
C) accept the project because the NPV is $2,851. 
D) reject the project because the PI is 1.05. 
E) reject the project because the IRR exceeds 10%. 
A) accept the project because it returns almost $1.22 for every $1 invested. 
B) accept the project because it has a positive PI. 
C) accept the project because the NPV is $2,851. 
D) reject the project because the PI is 1.05. 
E) reject the project because the IRR exceeds 10%.

Question 13

An investment is acceptable if its IRR:

Accepted Answer

A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%. 
A) is exactly equal to its net present value (NPV). 
B) is exactly equal to zero. 
C) is less than the required return. 
D) exceeds the required return. 
E) is exactly equal to 100%.

Question 14

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 salvage value of the project is omitted from the analysis. 
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 salvage value of the project is omitted from the analysis.

Question 15

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.

Question 16

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

Accepted Answer

A) greater than one. 
B) greater than the cutoff point. 
C) less than the cutoff point. 
D) positive. 
E) None of the above. 
A) greater than one. 
B) greater than the cutoff point. 
C) less than the cutoff point. 
D) positive. 
E) None of the above.

Question 17

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 18

You are considering two independent projects with the following cash flows.The required return for both projects is 10%.Given this information, which one of the following statements is correct? $\begin{array}{lll}
\underline{\text { Year} } & \underline{\text { Project A }} &\underline{ \text { Project B }} \
 0 & -\$ 950,000 & -\$ 125,000 \
1 & \$ 330,000 & \$ 55,000 \
2 & \$ 400,000 & \$ 50,000 \
3 & \$ 450,000 & \$ 50,000
\end{array}$

Accepted Answer

A) You should accept project B since it has the higher IRR and reject project A because you can not accept both projects. 
B) You should accept project A because it has the lower NPV and reject project B. 
C) You should accept project A because it has the higher NPV and you can not accept both projects. 
D) You should accept project B because it has the higher IRR and reject project A. 
E) You should accept both projects if the funds are available to do so since both NPV's are > 0. 
A) You should accept project B since it has the higher IRR and reject project A because you can not accept both projects. 
B) You should accept project A because it has the lower NPV and reject project B. 
C) You should accept project A because it has the higher NPV and you can not accept both projects. 
D) You should accept project B because it has the higher IRR and reject project A. 
E) You should accept both projects if the funds are available to do so since both NPV's are > 0.

Question 19

In actual practice, managers may use the:
I.IRR because the results are easy to communicate and understand.
II.payback because of its simplicity.
III.net present value because it is considered by many to be the best method of analysis.

Accepted Answer

A) I and II only 
B) II and III only 
C) I and III only 
D) I, II, and III 
E) None of the above 
A) I and II only 
B) II and III only 
C) I and III only 
D) I, II, and III 
E) None of the above

Question 20

A project will produce cash inflows of $1,750 a year for four years.The project initially costs $10,600 to get started.In year five, the project will be closed and as a result should produce a cash inflow of $8,500.What is the net present value of this project if the required rate of return is 13.75%?

Accepted Answer

A) -$5,474.76 
B) -$1,011.40 
C) -$935.56 
D) $1,011.40 
E) $5,474.76 
A) -$5,474.76 
B) -$1,011.40 
C) -$935.56 
D) $1,011.40 
E) $5,474.76

Exam 5: Net Present Value and Other Investment Rules

The discounted payback period of a project will decrease whenever the:

The internal rate of return tends to be:

Payback is frequently used to analyze independent projects because:

All else constant, the net present value of a typical investment project increases when:

If a project is assigned a required rate of return equal to zero, then:

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

The problem of multiple IRRs can occur when:

Based on the net present value of _____ for this project, you should _____ the project.

The advantages of the payback method of project analysis include the: I.application of a discount rate to each separate cash flow. II.bias towards liquidity. III.ease of use. IV.arbitrary cutoff point.

An investment is acceptable if its IRR:

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

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

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

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

You are considering two independent projects with the following cash flows.The required return for both projects is 10%.Given this information, which one of the following statements is correct? 0 -\ 950,000 -\ 125,000 1 \ 330,000 \ 55,000 2 \ 400,000 \ 50,000 3 \ 450,000 \ 50,000

In actual practice, managers may use the: I.IRR because the results are easy to communicate and understand. II.payback because of its simplicity. III.net present value because it is considered by many to be the best method of analysis.

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

Based on the net present value of _ for this project, you should _ the project.