Question 1

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

Accepted Answer

A)  The internal rate of return decision may contradict the net present value decision. 
B)  Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. 
C)  The payback decision rule could override the net present value decision rule should cash availability be limited. 
D)  The profitability index rule cannot be applied in this situation. 
E)  The projects cannot be accepted unless the average accounting return decision ruling is positive. 
A)  The internal rate of return decision may contradict the net present value decision. 
B)  Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. 
C)  The payback decision rule could override the net present value decision rule should cash availability be limited. 
D)  The profitability index rule cannot be applied in this situation. 
E)  The projects cannot be accepted unless the average accounting return decision ruling is positive. C

Question 2

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only.The required return is 8 percent.Rosa has estimated the cash flows for one gown as follows.Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR)?

Accepted Answer

A)  Rosa should sell the gown for $155,000. 
B)  Rose can sell the gown for as little as $153,819 and still earn her required return. 
C)  The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return. 
D)  The IRR decision rule cannot be applied to this project. 
E)  Insufficient information is provided to make a decision based on IRR. 
A)  Rosa should sell the gown for $155,000. 
B)  Rose can sell the gown for as little as $153,819 and still earn her required return. 
C)  The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return. 
D)  The IRR decision rule cannot be applied to this project. 
E)  Insufficient information is provided to make a decision based on IRR. C

Question 3

A project has a net present value of zero.Which one of the following best describes this project?

Accepted Answer

A)  The project has a zero percent rate of return. 
B)  The project requires no initial cash investment. 
C)  The project has no cash flows. 
D)  The summation of all of the project's cash flows is zero. 
E)  The project's cash inflows equal its cash outflows in current dollar terms. 
A)  The project has a zero percent rate of return. 
B)  The project requires no initial cash investment. 
C)  The project has no cash flows. 
D)  The summation of all of the project's cash flows is zero. 
E)  The project's cash inflows equal its cash outflows in current dollar terms. E

Question 4

-Colin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project.

Accepted Answer

A)  6.94 percent 
B)  13.88 percent 
C)  15.66 percent 
D)  27.75 percent 
E)  31.31 percent 
A)  6.94 percent 
B)  13.88 percent 
C)  15.66 percent 
D)  27.75 percent 
E)  31.31 percent

Question 5

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives.  
Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

Accepted Answer

A)  both projects. 
B)  project B because it has the shortest payback period. 
C)  project B and reject project A based on their net present values. 
D)  project A and reject project B based on their average accounting returns. 
E)  neither project. 
A)  both projects. 
B)  project B because it has the shortest payback period. 
C)  project B and reject project A based on their net present values. 
D)  project A and reject project B based on their average accounting returns. 
E)  neither project.

Question 6

The Taxi Co.is evaluating a project with the following cash flows:  
The company uses an 8 percent interest rate on all of its projects.What is the MIRR using the discounted approach?

Accepted Answer

A)  13.25 percent 
B)  14.08 percent 
C)  15.40 percent 
D)  16.13 percent 
E)  19.23 percent 
A)  13.25 percent 
B)  14.08 percent 
C)  15.40 percent 
D)  16.13 percent 
E)  19.23 percent

Question 7

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

Accepted Answer

The NPV rule states that a project shoul

Question 8

Which of the following statements generally apply to the cash flows of a financing type project?
I.nonconventional cash flows
II.cash outflows exceed cash inflows prior to any time value adjustments
III.cash for services rendered is received prior to the cash that is spent providing the services
IV.the total of all cash flows must equal zero on an unadjusted basis

Accepted Answer

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

Question 9

-Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project.Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Accepted Answer

A)  Yes;The MIRR is 6.50 percent. 
B)  No;The MIRR is 8.67 percent. 
C)  Yes;The MIRR is 8.23 percent. 
D)  No;The MIRR is 6.50 percent. 
E)  No;The MIRR is 7.59 percent. 
A)  Yes;The MIRR is 6.50 percent. 
B)  No;The MIRR is 8.67 percent. 
C)  Yes;The MIRR is 8.23 percent. 
D)  No;The MIRR is 6.50 percent. 
E)  No;The MIRR is 7.59 percent.

Question 10

If a project has a net present value equal to zero,then:

Accepted Answer

A)  the total of the cash inflows must equal the initial cost of the project. 
B)  the project earns a return exactly equal to the discount rate. 
C)  a decrease in the project's initial cost will cause the project to have a negative NPV. 
D)  any delay in receiving the projected cash inflows will cause the project to have a positive NPV. 
E)  the project's PI must be also be equal to zero. 
A)  the total of the cash inflows must equal the initial cost of the project. 
B)  the project earns a return exactly equal to the discount rate. 
C)  a decrease in the project's initial cost will cause the project to have a negative NPV. 
D)  any delay in receiving the projected cash inflows will cause the project to have a positive NPV. 
E)  the project's PI must be also be equal to zero.

Question 11

-A project has an initial cost of $18,400 and produces cash inflows of $7,200,$8,900,and $7,500 over three years,respectively.What is the discounted payback period if the required rate of return is 16 percent?

Accepted Answer

A)  2.31 years 
B)  2.45 years 
C)  2.55 years 
D)  2.62 years 
E)  never 
A)  2.31 years 
B)  2.45 years 
C)  2.55 years 
D)  2.62 years 
E)  never

Question 12

Which of the following are advantages of the payback method of project analysis?
I.works well for research and development projects
II.liquidity bias
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 13

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

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 14

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Accepted Answer

A)  conflicts with the results of the net present value decision rule 
B)  assumes the firm has sufficient funds to undertake both projects 
C)  agrees with the decision that would also apply if the projects were mutually exclusive 
D)  bases the accept/reject decision on the same variables as the average accounting return 
E)  fails to provide useful information as the firm must reject at least one of the projects 
A)  conflicts with the results of the net present value decision rule 
B)  assumes the firm has sufficient funds to undertake both projects 
C)  agrees with the decision that would also apply if the projects were mutually exclusive 
D)  bases the accept/reject decision on the same variables as the average accounting return 
E)  fails to provide useful information as the firm must reject at least one of the projects

Question 15

-What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Accepted Answer

A)  -$3,383.25 
B)  -$2,784.62 
C)  -$2,481.53 
D)  $52,311.08 
E)  $66,416.75 
A)  -$3,383.25 
B)  -$2,784.62 
C)  -$2,481.53 
D)  $52,311.08 
E)  $66,416.75

Question 16

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value.  
Should you accept or reject these projects based on the average accounting return?

Accepted Answer

A)  accept Project A and reject Project B 
B)  reject Project A and accept Project B 
C)  accept both Projects A and B 
D)  reject both Projects A and B 
E)  You cannot make this decision based on the information provided. 
A)  accept Project A and reject Project B 
B)  reject Project A and accept Project B 
C)  accept both Projects A and B 
D)  reject both Projects A and B 
E)  You cannot make this decision based on the information provided.

Question 17

Which one of the following statements related to payback and discounted payback is correct?

Accepted Answer

A)  Payback is a better method of analysis than is discounted payback. 
B)  Discounted payback is used more frequently in business than is payback. 
C)  Discounted payback does not require a cutoff point like the payback method does. 
D)  Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. 
E)  Payback is used more frequently even though discounted payback is a better method. 
A)  Payback is a better method of analysis than is discounted payback. 
B)  Discounted payback is used more frequently in business than is payback. 
C)  Discounted payback does not require a cutoff point like the payback method does. 
D)  Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. 
E)  Payback is used more frequently even though discounted payback is a better method.

Question 18

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Accepted Answer

A)  conventional cash flows 
B)  cash flows that extend beyond the acceptable payback period 
C)  a year or more in the middle of a project where the cash flows are equal to zero 
D)  a cash inflow at time zero 
E)  cash inflows which are equal in amount 
A)  conventional cash flows 
B)  cash flows that extend beyond the acceptable payback period 
C)  a year or more in the middle of a project where the cash flows are equal to zero 
D)  a cash inflow at time zero 
E)  cash inflows which are equal in amount

Question 19

Which two methods of project analysis are the most biased towards short-term projects?

Accepted Answer

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

Question 20

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value.  
Should you accept or reject these projects based on net present value analysis?

Accepted Answer

A)  accept Project A and reject Project B 
B)  reject Project A and accept Project B 
C)  accept both Projects A and B 
D)  reject both Projects A and B 
E)  You cannot make this decision based on net present value analysis. 
A)  accept Project A and reject Project B 
B)  reject Project A and accept Project B 
C)  accept both Projects A and B 
D)  reject both Projects A and B 
E)  You cannot make this decision based on net present value analysis.

Exam 9: Net Present Value and Other Investment Criteria

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

A project has a net present value of zero.Which one of the following best describes this project?

-Colin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project.

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

The Taxi Co.is evaluating a project with the following cash flows: The company uses an 8 percent interest rate on all of its projects.What is the MIRR using the discounted approach?

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

If a project has a net present value equal to zero,then:

-A project has an initial cost of $18,400 and produces cash inflows of $7,200,$8,900,and $7,500 over three years,respectively.What is the discounted payback period if the required rate of return is 16 percent?

Which of the following are advantages of the payback method of project analysis? I.works well for research and development projects II.liquidity bias III.ease of use IV.arbitrary cutoff point

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

-What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Which one of the following statements related to payback and discounted payback is correct?

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Which two methods of project analysis are the most biased towards short-term projects?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flowpart Two: Financial Statements and Long-Term Financial Planning

Working With Financial Statements

Long-Term Financial Planning and Growthpart Three: Valuation of Future Cash Flows

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuationpart Four: Capital Budgeting

Making Capital Investment Decisions

Project Analysis and Evaluationpart Five: Risk and Return

Some Lessons From Capital Market History

Return, Risk, and the Security Market Linepart Six: Cost of Capital and Long-Term Financial Policy

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policypart Seven: Short-Term Financial Planning and Management

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Managementpart Eight: Topics in Corporate Finance

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters