Question 1

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

Accepted Answer

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

Question 2

You are considering a project with an initial cost of $4,600.What is the payback period for this project if the cash inflows are $450,$970,$2,800,and $500 a year for Years 1 to 4,respectively?

Accepted Answer

A) 1.03 years 
B) 2.36 years 
C) 2.89 years 
D) 3.76 years 
E) 3.81 years 
A) 1.03 years 
B) 2.36 years 
C) 2.89 years 
D) 3.76 years 
E) 3.81 years

Question 3

Baxter's Market is considering opening a new location with an initial cost of $428,700.This location is expected to generate cash flows of $132,400,$161,500,$187,800,and $201,000 in Years 1 to 4.What is the payback period?

Accepted Answer

A) 1.86 years 
B) 2.72 years 
C) 1.31 years 
D) 2.54 years 
E) 2.31 years 
A) 1.86 years 
B) 2.72 years 
C) 1.31 years 
D) 2.54 years 
E) 2.31 years

Question 4

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

Accepted Answer

A) profitable rate of return. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) risk-free rate. 
A) profitable rate of return. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) risk-free rate.

Question 5

Projects A and B are mutually exclusive,have positive net present values and required discounted payback periods that exceed the projected discounted payback periods.Which project(s),if either,should the firm accept?

Accepted Answer

A) Both A and B 
B) Neither A nor B 
C) A,but not B 
D) B,but not A 
E) Either A or B but not both A and B 
A) Both A and B 
B) Neither A nor B 
C) A,but not B 
D) B,but not A 
E) Either A or B but not both A and B

Question 6

A project produces annual net income of $9,500,$12,500,and $15,500 over its 3-year life.The initial cost of the project is $210,000.This cost is depreciated straightline to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 12.25 percent?

Accepted Answer

A) 14.80% 
B) 14.32% 
C) 23.49% 
D) 11.90% 
E) 17.62% 
A) 14.80% 
B) 14.32% 
C) 23.49% 
D) 11.90% 
E) 17.62%

Question 7

Nadine always makes the final accept/reject decision for proposed projects for ARK International.Her final decision is always based on NPV.Why then does she insist that any proposed project that comes to her desk include an analysis of the project's NPV,IRR,PI,payback,and discounted payback?

Accepted Answer

Student answers will vary but here's one

Question 8

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

Accepted Answer

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

Question 9

A project has a net present value of $1,200 and a project life of four years.Which one of these statements must be true?

Accepted Answer

A) The project's IRR is less than the required rate of return. 
B) The project is expected to return $1,200 in Time 0 dollars over and above the discount rate. 
C) The project would also have a positive net present value if Year 4 was omitted. 
D) The project's cash inflows exceed its outflows by $1,200 over the four years. 
E) The project is expected to return $1,200 in Year 4 dollars over and above the initial investment. 
A) The project's IRR is less than the required rate of return. 
B) The project is expected to return $1,200 in Time 0 dollars over and above the discount rate. 
C) The project would also have a positive net present value if Year 4 was omitted. 
D) The project's cash inflows exceed its outflows by $1,200 over the four years. 
E) The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.

Question 10

The modified internal rate of return is designed primarily to analyze projects that:

Accepted Answer

A) are financing rather than investing projects. 
B) are mutually exclusive. 
C) alternate positive,negative,and positive cash flows. 
D) have significantly different sizes. 
E) have lives in excess of five years. 
A) are financing rather than investing projects. 
B) are mutually exclusive. 
C) alternate positive,negative,and positive cash flows. 
D) have significantly different sizes. 
E) have lives in excess of five years.

Question 11

A project has an initial cash inflow of $95,500 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 9 percent.Should this project be accepted or rejected based on IRR? Why?

Accepted Answer

A) Accepted: because the IRR of 6.98 percent is less than the discount rate 
B) Accepted: because the IRR of 8.21 percent is less than the discount rate 
C) Accepted: because the IRR of 8.78 percent is less than the discount rate 
D) Rejected: because the IRR of 8.21 percent is less than the discount rate 
E) Rejected: because the IRR of 6.98 percent is less than the discount rate 
A) Accepted: because the IRR of 6.98 percent is less than the discount rate 
B) Accepted: because the IRR of 8.21 percent is less than the discount rate 
C) Accepted: because the IRR of 8.78 percent is less than the discount rate 
D) Rejected: because the IRR of 8.21 percent is less than the discount rate 
E) Rejected: because the IRR of 6.98 percent is less than the discount rate

Question 12

What are the limitations of the IRR rule? Given these limitations,why is IRR so commonly used?

Accepted Answer

The IRR rule cannot be applied in situat

Question 13

Miller's is considering a 2-year expansion project that will require $410,000 up front.The project will produce cash flows of $358,000 and $98,000 for Years 1 and 2,respectively.Based on the profitability index (PI)rule,should the project be accepted if the discount rate is 12 percent? Why or why not?

Accepted Answer

A) Yes;because the PI is 1.03 
B) Yes;because the PI is .97 
C) Yes;because the PI is .94 
D) No;because the PI is 1.03 
E) No;because the PI is .97 
A) Yes;because the PI is 1.03 
B) Yes;because the PI is .97 
C) Yes;because the PI is .94 
D) No;because the PI is 1.03 
E) No;because the PI is .97

Question 14

A project costs $22,900 to initiate.It is expected to provide cash flows of $15,900 in Year 1 and $9,900 in Year 2.In Year 3,it will cost the firm $5,500 to end the project.What is the modified IRR at a discount rate of 14 percent?

Accepted Answer

A) -6.79% 
B) -6.67% 
C) 10.63% 
D) 11.08% 
E) 14.00% 
A) -6.79% 
B) -6.67% 
C) 10.63% 
D) 11.08% 
E) 14.00%

Question 15

What is the key reason why a positive NPV project should be accepted?

Accepted Answer

A) The project is expected to increase shareholder value. 
B) The present value of the expected cash flows equal the project's cost. 
C) The firm will earn a return equal to the NPV value at the end of the project. 
D) The project will have a payback period equal to its life. 
E) The project's PI will be less than 1,which also indicates acceptance. 
A) The project is expected to increase shareholder value. 
B) The present value of the expected cash flows equal the project's cost. 
C) The firm will earn a return equal to the NPV value at the end of the project. 
D) The project will have a payback period equal to its life. 
E) The project's PI will be less than 1,which also indicates acceptance.

Question 16

Which one of the following statements is correct concerning the payback period?

Accepted Answer

A) An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 
B) An investment should be accepted if the payback is positive and rejected if it is negative. 
C) An investment should be rejected if the payback is positive and accepted if it is negative. 
D) An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. 
E) An investment should be accepted any time the payback period is less than the discounted payback period,given a positive discount rate. 
A) An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 
B) An investment should be accepted if the payback is positive and rejected if it is negative. 
C) An investment should be rejected if the payback is positive and accepted if it is negative. 
D) An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. 
E) An investment should be accepted any time the payback period is less than the discounted payback period,given a positive discount rate.

Question 17

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

Accepted Answer

A) The lack of use in the business world 
B) The lack of a clear-cut decision rule 
C) The degree of the calculation difficulty 
D) The degree of estimation involved with the initial cost 
E) The use of net income rather than cash flows 
A) The lack of use in the business world 
B) The lack of a clear-cut decision rule 
C) The degree of the calculation difficulty 
D) The degree of estimation involved with the initial cost 
E) The use of net income rather than cash flows

Question 18

If the net present value of a project is positive (non-zero),then the project's:

Accepted Answer

A) PI will be less than 1. 
B) internal rate of return will exceed its required rate of return. 
C) costs exceed its benefits. 
D) discounted payback period will exceed the life of the project. 
E) payback period must equal the life of the project. 
A) PI will be less than 1. 
B) internal rate of return will exceed its required rate of return. 
C) costs exceed its benefits. 
D) discounted payback period will exceed the life of the project. 
E) payback period must equal the life of the project.

Question 19

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV(II - I), which project(s)should be accepted and why?

Accepted Answer

A) Project II;because the incremental NPV(II - I) is negative 
B) Project I;because both the incremental NPV(II - I) and NPVI are positive 
C) Both Project I and II;because both project NPVs are positive 
D) Project II;because it has the larger NPV 
E) Project I;because the incremental NPV(II - I) is negative and NPVI is positive 
A) Project II;because the incremental NPV(II - I) is negative 
B) Project I;because both the incremental NPV(II - I) and NPVI are positive 
C) Both Project I and II;because both project NPVs are positive 
D) Project II;because it has the larger NPV 
E) Project I;because the incremental NPV(II - I) is negative and NPVI is positive

Question 20

A project has an initial cost of $38,300 and anticipated cash flows of $9,200,$18,700,$14,600 for Years 1 to 3,respectively.What is the profitability index value if the required return is 9.5 percent?

Accepted Answer

A) .86 
B) .92 
C) .99 
D) 1.09 
E) 1.16 
A) .86 
B) .92 
C) .99 
D) 1.09 
E) 1.16

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

You are considering a project with an initial cost of $4,600.What is the payback period for this project if the cash inflows are $450,$970,$2,800,and $500 a year for Years 1 to 4,respectively?

Baxter's Market is considering opening a new location with an initial cost of $428,700.This location is expected to generate cash flows of $132,400,$161,500,$187,800,and $201,000 in Years 1 to 4.What is the payback period?

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

Projects A and B are mutually exclusive,have positive net present values and required discounted payback periods that exceed the projected discounted payback periods.Which project(s),if either,should the firm accept?

Nadine always makes the final accept/reject decision for proposed projects for ARK International.Her final decision is always based on NPV.Why then does she insist that any proposed project that comes to her desk include an analysis of the project's NPV,IRR,PI,payback,and discounted payback?

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

A project has a net present value of $1,200 and a project life of four years.Which one of these statements must be true?

The modified internal rate of return is designed primarily to analyze projects that:

A project has an initial cash inflow of $95,500 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 9 percent.Should this project be accepted or rejected based on IRR? Why?

What are the limitations of the IRR rule? Given these limitations,why is IRR so commonly used?

A project costs $22,900 to initiate.It is expected to provide cash flows of $15,900 in Year 1 and $9,900 in Year 2.In Year 3,it will cost the firm $5,500 to end the project.What is the modified IRR at a discount rate of 14 percent?

What is the key reason why a positive NPV project should be accepted?

Which one of the following statements is correct concerning the payback period?

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

If the net present value of a project is positive (non-zero),then the project's:

A project has an initial cost of $38,300 and anticipated cash flows of $9,200,$18,700,$14,600 for Years 1 to 3,respectively.What is the profitability index value if the required return is 9.5 percent?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

Exam 7: Net Present Value and Other Investment Rules

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

You are considering a project with an initial cost of $4,600.What is the payback period for this project if the cash inflows are $450,$970,$2,800,and $500 a year for Years 1 to 4,respectively?

Baxter's Market is considering opening a new location with an initial cost of $428,700.This location is expected to generate cash flows of $132,400,$161,500,$187,800,and $201,000 in Years 1 to 4.What is the payback period?

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

Projects A and B are mutually exclusive,have positive net present values and required discounted payback periods that exceed the projected discounted payback periods.Which project(s),if either,should the firm accept?

Nadine always makes the final accept/reject decision for proposed projects for ARK International.Her final decision is always based on NPV.Why then does she insist that any proposed project that comes to her desk include an analysis of the project's NPV,IRR,PI,payback,and discounted payback?

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

A project has a net present value of $1,200 and a project life of four years.Which one of these statements must be true?

The modified internal rate of return is designed primarily to analyze projects that:

A project has an initial cash inflow of $95,500 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 9 percent.Should this project be accepted or rejected based on IRR? Why?

What are the limitations of the IRR rule? Given these limitations,why is IRR so commonly used?

A project costs $22,900 to initiate.It is expected to provide cash flows of $15,900 in Year 1 and $9,900 in Year 2.In Year 3,it will cost the firm $5,500 to end the project.What is the modified IRR at a discount rate of 14 percent?

What is the key reason why a positive NPV project should be accepted?

Which one of the following statements is correct concerning the payback period?

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

If the net present value of a project is positive (non-zero),then the project's:

A project has an initial cost of $38,300 and anticipated cash flows of $9,200,$18,700,$14,600 for Years 1 to 3,respectively.What is the profitability index value if the required return is 9.5 percent?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters