Question 1

An independent project has conventional cash flows and a positive net present value. It can be stated with certainty that the project is acceptable according to the capital budgeting technique known as:

Accepted Answer

A)  Payback. 
B)  Discounted payback. 
C)  The accounting rate of return. 
D)  The crossover method. 
E)  The internal rate of return.

Question 2

The net present value (NPV) rule can be best stated as:

Accepted Answer

A)  An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B)  An investment should be rejected if the NPV is positive and accepted if it is negative. 
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)  An investment should be accepted if it equals its depreciation value.

Question 3

For most projects, the average accounting return (AAR) should be less than the IRR.

Accepted Answer

A) True 
 B)False

Question 4

Using the profitability index, which of the following projects would you choose if you have limited funds?

Accepted Answer

A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  Project 4 
E)  Project 5

Question 5

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the IRR of the project.

Accepted Answer

A)  19.19% 
B)  20.20% 
C)  21.21% 
D)  22.22% 
E)  23.23%

Question 6

Which capital investment evaluation technique is described by the following characteristics? (1) Closely related to NPV; (2) Easy to understand and communicate; (3) May lead to incorrect decisions when comparing mutually exclusive investments; (4) May be useful when the available investment funds are limited.

Accepted Answer

A)  NPV 
B)  IRR 
C)  AAR 
D)  Payback period 
E)  PI

Question 7

An investment is acceptable if it's 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 %.

Question 8

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.

Question 9

Without using formulas, provide a definition of payback period.

Accepted Answer

The answer of Without using formulas, provide a definition of...

Question 10

Your required return is 15%. Should you accept a project with the following cash flows?

Accepted Answer

A)  No, because the IRR is 13.9%. 
B)  No, because the IRR is 14.7%. 
C)  Yes, because the IRR is 16.2%. 
D)  Yes, because the IRR is 17.2%. 
E)  Yes, because the IRR is 19.2%.

Question 11

It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a year for three years. After the three years, the cart is expected to be worthless as that is the expected life of the heating system. What is the payback period of the hot dog cart?

Accepted Answer

A)  .87 year 
B)  .92 year 
C)  1.03 year 
D)  1.09 year 
E)  1.14 year

Question 12

Project A has a five-year life and an initial cost of $1,600 and annual cash flows of $600 per year. Project B also has a five-year life and an initial cost of $2,500 with annual cash flows of $850 per year. Given this information, calculate the IRR cross-over rate.

Accepted Answer

A)  12.05% 
B)  12.25% 
C)  12.45% 
D)  12.65% 
E)  12.85%

Question 13

You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 %? What if the discount rate is 10 %?

Accepted Answer

A)  Accept project A as it always has the higher NPV. 
B)  Accept project B as it always has the higher NPV. 
C)  Accept A at 7 % and B at 10 %. 
D)  Accept B at 7 % and A at 10 %. 
E)  Accept A at 7 % and neither at 10 %.

Question 14

What is the crossover rate for these two projects?

Accepted Answer

A)  12.2% 
B)  14.0% 
C)  15.4% 
D)  18.3% 
E)  19.1%

Question 15

Ilona is considering two projects both of which have an initial cost of $17,000 and total cash inflows of $21,000. The cash inflows of project A are $6,000, $5,000, $5,000, and $5,000 over the next four years, respectively. The cash inflows for project B are $9,000, $7,000, $3,000 and $2,000 over the next four years, respectively. Which one of the following statements is correct if Ilona requires a 12 % rate of return and has a required discounted payback period of 3.5 years?

Accepted Answer

A)  Both projects should be accepted. 
B)  Neither project ever pays back. 
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)  Both projects should be rejected even though Project B does pay back.

Question 16

You are looking at an investment which has an initial cost of $400,000 and a salvage value of zero after five years. What is the average accounting return for this investment given the following annual net incomes:

Accepted Answer

A)  1% 
B)  36% 
C)  44% 
D)  48% 
E)  55%

Question 17

In comparing two projects using an NPV profile, at the point where the net present value of the projects involved are equal, ______________________.

Accepted Answer

A)  The IRR of each is equal to zero. 
B)  The IRR of each is equal to the cost of capital. 
C)  The discount rate that equates them is called the crossover rate. 
D)  The projects both have NPVs equal to zero. 
E)  The AAR exceeds the cost of capital.

Question 18

Without using formulas, provide a definition of average accounting return (AAR).

Accepted Answer

The answer of Without using formulas, provide a definition of...

Question 19

If an investment has a(n) ___________ of 1.2 it can be said that the investment generates $1.20 in present value benefits for each dollar of invested costs.

Accepted Answer

A)  Profitability index. 
B)  Net present value. 
C)  Internal rate of return. 
D)  Payback period. 
E)  Average accounting return.

Question 20

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.

Accepted Answer

A)  NPV 
B)  IRR 
C)  AAR 
D)  Payback period 
E)  Discounted payback

Exam 9: Net Present Value and Other Investment Criteria

An independent project has conventional cash flows and a positive net present value. It can be stated with certainty that the project is acceptable according to the capital budgeting technique known as:

The net present value (NPV) rule can be best stated as:

For most projects, the average accounting return (AAR) should be less than the IRR.

Using the profitability index, which of the following projects would you choose if you have limited funds?

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the IRR of the project.

An investment is acceptable if it's IRR:

No matter how many forms of investment analysis you do:

Without using formulas, provide a definition of payback period.

Your required return is 15%. Should you accept a project with the following cash flows?

It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a year for three years. After the three years, the cart is expected to be worthless as that is the expected life of the heating system. What is the payback period of the hot dog cart?

Project A has a five-year life and an initial cost of $1,600 and annual cash flows of $600 per year. Project B also has a five-year life and an initial cost of $2,500 with annual cash flows of $850 per year. Given this information, calculate the IRR cross-over rate.

You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 %? What if the discount rate is 10 %?

What is the crossover rate for these two projects?

You are looking at an investment which has an initial cost of $400,000 and a salvage value of zero after five years. What is the average accounting return for this investment given the following annual net incomes:

In comparing two projects using an NPV profile, at the point where the net present value of the projects involved are equal, ______________________.

Without using formulas, provide a definition of average accounting return (AAR).

If an investment has a(n) ___________ of 1.2 it can be said that the investment generates $1.20 in present value benefits for each dollar of invested costs.

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.