Question 1

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 2

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

Accepted Answer

A)  constant dividend growth model 
B)  discounted cash flow valuation 
C)  average accounting return 
D)  expected earnings model 
E)  internal rate of return 
A)  constant dividend growth model 
B)  discounted cash flow valuation 
C)  average accounting return 
D)  expected earnings model 
E)  internal rate of return

Question 3

Which one of the following is an advantage of the average accounting return method of analysis?

Accepted Answer

A)  easy availability of information needed for the computation 
B)  inclusion of time value of money considerations 
C)  the use of a cutoff rate as a benchmark 
D)  the use of pre-tax income in the computation 
E)  use of real,versus nominal,average income 
A)  easy availability of information needed for the computation 
B)  inclusion of time value of money considerations 
C)  the use of a cutoff rate as a benchmark 
D)  the use of pre-tax income in the computation 
E)  use of real,versus nominal,average income

Question 4

Mutually exclusive projects are best defined as competing projects which:

Accepted Answer

A)  would commence on the same day. 
B)  have the same initial start-up costs. 
C)  both require the total use of the same limited resource. 
D)  both have negative cash outflows at time zero. 
E)  have the same life span. 
A)  would commence on the same day. 
B)  have the same initial start-up costs. 
C)  both require the total use of the same limited resource. 
D)  both have negative cash outflows at time zero. 
E)  have the same life span.

Question 5

-Cool Water Drinks is considering a proposed project with the following cash flows.Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Accepted Answer

A)  Yes;The MIRR is 8.81 percent. 
B)  Yes;The MIRR is 9.23 percent. 
C)  No;The MIRR is 8.81 percent. 
D)  No;The MIRR is 9.06 percent. 
E)  No;The MIRR is 9.23 percent. 
A)  Yes;The MIRR is 8.81 percent. 
B)  Yes;The MIRR is 9.23 percent. 
C)  No;The MIRR is 8.81 percent. 
D)  No;The MIRR is 9.06 percent. 
E)  No;The MIRR is 9.23 percent.

Question 6

-The Square Box is considering two projects,both of which have an initial cost of $35,000 and total cash inflows of $50,000.The cash inflows of project A are $5,000,$10,000,$15,000,and $20,000 over the next four years,respectively.The cash inflows for project B are $20,000,$15,000,$10,000,and $5,000 over the next four years,respectively.Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years?

Accepted Answer

A)  Both projects should be accepted. 
B)  Both projects should be rejected. 
C)  Project A should be accepted and project B should be rejected. 
D)  Project A should be rejected and project B should be accepted. 
E)  You should be indifferent to accepting either or both projects. 
A)  Both projects should be accepted. 
B)  Both projects should be rejected. 
C)  Project A should be accepted and project B should be rejected. 
D)  Project A should be rejected and project B should be accepted. 
E)  You should be indifferent to accepting either or both projects.

Question 7

-A project produces annual net income of $46,200,$51,800,and $62,900 over its 3-year life,respectively.The initial cost of the project is $675,000.This cost is depreciated straight-line to a zero book value over three years.What is the average accounting rate of return if the required discount rate is 14.5 percent?

Accepted Answer

A)  15.89 percent 
B)  16.67 percent 
C)  18.98 percent 
D)  20.25 percent 
E)  23.84 percent
  
A)  15.89 percent 
B)  16.67 percent 
C)  18.98 percent 
D)  20.25 percent 
E)  23.84 percent

Question 8

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

Accepted Answer

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

Question 9

Southern Chicken is considering two projects.Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property.Project B would use that outdoor space for creating a drive-thru service window.When trying to decide which project to accept,the firm should rely most heavily on which one of the following analytical methods?

Accepted Answer

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

Question 10

-An investment project has an installed cost of $518,297.The cash flows over the 4-year life of the investment are projected to be $287,636,$203,496,$103,802,and $92,556,respectively.What is the NPV of this project if the discount rate is zero percent?

Accepted Answer

A)  $47,306 
B)  $72,418 
C)  $91,110 
D)  $128,415 
E)  $169,193 
A)  $47,306 
B)  $72,418 
C)  $91,110 
D)  $128,415 
E)  $169,193

Question 11

Samuelson Electronics has a required payback period of three years for all of its projects.Currently,the firm is analyzing two independent projects.Project A has an expected payback period of 2.8 years and a net present value of $6,800.Project B has an expected payback period of 3.1 years with a net present value of $28,400.Which projects should be accepted based on the payback decision rule?

Accepted Answer

A)  Project A only 
B)  Project B only 
C)  Both A and B 
D)  Neither A nor B 
E)  Answer cannot be determined based on the information given. 
A)  Project A only 
B)  Project B only 
C)  Both A and B 
D)  Neither A nor B 
E)  Answer cannot be determined based on the information given.

Question 12

The profitability index is most closely related to which one of the following?

Accepted Answer

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

Question 13

Which one of the following correctly applies to the average accounting rate of return?

Accepted Answer

A)  It considers the time value of money. 
B)  It measures net income as a percentage of the sales generated by a project. 
C)  It is the best method of analyzing mutually exclusive projects from a financial point of view. 
D)  It is the primary methodology used in analyzing independent projects. 
E)  It can be compared to the return on assets ratio. 
A)  It considers the time value of money. 
B)  It measures net income as a percentage of the sales generated by a project. 
C)  It is the best method of analyzing mutually exclusive projects from a financial point of view. 
D)  It is the primary methodology used in analyzing independent projects. 
E)  It can be compared to the return on assets ratio.

Question 14

-You are analyzing a project and have gathered the following data:  
Based on the payback period of _____ years for this project,you should _____ the project.

Accepted Answer

A)  2.79;accept 
B)  3.79;accept 
C)  2.46;reject 
D)  2.79;reject 
E)  3.79;reject
  
A)  2.79;accept 
B)  3.79;accept 
C)  2.46;reject 
D)  2.79;reject 
E)  3.79;reject

Question 15

-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 IRR 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 internal rate of return 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 internal rate of return analysis.

Question 16

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I.exclusion of time value of money considerations
II.need of a cutoff rate
III.easily obtainable information for computation
IV.based on accounting values

Accepted Answer

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

Question 17

Which one of the following statements related to the internal rate of return (IRR)is correct?

Accepted Answer

A)  The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B)  A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C)  The IRR is equal to the required return when the net present value is equal to zero. 
D)  Financing type projects should be accepted if the IRR exceeds the required return. 
E)  The average accounting return is a better method of analysis than the IRR from a financial point of view. 
A)  The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B)  A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C)  The IRR is equal to the required return when the net present value is equal to zero. 
D)  Financing type projects should be accepted if the IRR exceeds the required return. 
E)  The average accounting return is a better method of analysis than the IRR from a financial point of view.

Question 18

-You are considering two independent projects with the following cash flows.The required return for both projects is 16 percent.Given this information,which one of the following statements is correct?

Accepted Answer

A)  You should accept Project A and reject Project B based on their respective NPVs. 
B)  You should accept Project B and reject Project A based on their respective NPVs. 
C)  You should accept Project A and reject Project B based on their respective IRRs. 
D)  You should accept Project B and reject Project A based on their respective IRRs. 
E)  You should accept both projects based on both the NPV and IRR decision rules. 
A)  You should accept Project A and reject Project B based on their respective NPVs. 
B)  You should accept Project B and reject Project A based on their respective NPVs. 
C)  You should accept Project A and reject Project B based on their respective IRRs. 
D)  You should accept Project B and reject Project A based on their respective IRRs. 
E)  You should accept both projects based on both the NPV and IRR decision rules.

Question 19

Net present value:

Accepted Answer

A)  is the best method of analyzing mutually exclusive projects. 
B)  is less useful than the internal rate of return when comparing different sized projects. 
C)  is the easiest method of evaluation for non-financial managers to use. 
D)  is less useful than the profitability index when comparing mutually exclusive projects. 
E)  is very similar in its methodology to the average accounting return. 
A)  is the best method of analyzing mutually exclusive projects. 
B)  is less useful than the internal rate of return when comparing different sized projects. 
C)  is the easiest method of evaluation for non-financial managers to use. 
D)  is less useful than the profitability index when comparing mutually exclusive projects. 
E)  is very similar in its methodology to the average accounting return.

Question 20

-Based on the profitability index rule,should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

Accepted Answer

A)  Yes;The PI is 0.96. 
B)  Yes;The PI is 0.80. 
C)  Yes;The PI is 1.08. 
D)  No;The PI is 0.96. 
E)  No;The PI is 0.80. 
A)  Yes;The PI is 0.96. 
B)  Yes;The PI is 0.80. 
C)  Yes;The PI is 1.08. 
D)  No;The PI is 0.96. 
E)  No;The PI is 0.80.

Exam 9: Net Present Value and Other Investment Criteria

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

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

Which one of the following is an advantage of the average accounting return method of analysis?

Mutually exclusive projects are best defined as competing projects which:

-Cool Water Drinks is considering a proposed project with the following cash flows.Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

-An investment project has an installed cost of $518,297.The cash flows over the 4-year life of the investment are projected to be $287,636,$203,496,$103,802,and $92,556,respectively.What is the NPV of this project if the discount rate is zero percent?

The profitability index is most closely related to which one of the following?

Which one of the following correctly applies to the average accounting rate of return?

-You are analyzing a project and have gathered the following data: Based on the payback period of _____ years for this project,you should _____ the project.

-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 IRR analysis?

Which of the following are considered weaknesses in the average accounting return method of project analysis? I.exclusion of time value of money considerations II.need of a cutoff rate III.easily obtainable information for computation IV.based on accounting values

Which one of the following statements related to the internal rate of return (IRR)is correct?

-You are considering two independent projects with the following cash flows.The required return for both projects is 16 percent.Given this information,which one of the following statements is correct?

Net present value:

-Based on the profitability index rule,should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

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

-You are analyzing a project and have gathered the following data: Based on the payback period of _ years for this project,you should _ the project.