Question 1

The discounted payback rule can be best stated as:

Accepted Answer

A)  An investment is acceptable if its discounted payback period is greater than some pre- speciﬁed number of years. 
B)  An investment should be accepted if the discounted payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the discounted payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its discounted payback period is less than some pre- speciﬁed number of years.

Question 2

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

Accepted Answer

A)  The other methods help validate whether or not the results from the net present value analysis are reliable. 
B)  You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. 
C)  You need to use other methods because the net present value method is unreliable when a project has unconventional cash ﬂows. 
D)  The average accounting return must always indicate acceptance since this is the best method from a ﬁnancial perspective. 
E)  The discounted payback method must always be computed to determine if a project returns a positive cash ﬂow since NPV does not measure this aspect of a project.

Question 3

An investment's average net income divided by its average book value deﬁnes the average:

Accepted Answer

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

Question 4

Ranking conﬂicts can arise if one relies on IRR instead of NPV when:

Accepted Answer

A)  The ﬁrst cash ﬂow is negative and the remaining cash ﬂows are positive. 
B)  Projects are independent of one another. 
C)  A project has more than one NPV. 
D)  Projects are mutually exclusive. 
E)  The proﬁtability index is greater than one.

Question 5

You are considering an investment which has the following cash ﬂows. If you require a four year payback period, should you take the investment?

Accepted Answer

A)  Yes, the payback is 1.000 years. 
B)  Yes, the payback is 2.675 years. 
C)  Yes, the payback is 3.375 years. 
D)  No, the payback is 4.125 years. 
E)  No, the payback is 5.500 years.

Question 6

Without using formulas, provide a deﬁnition of net present value (NPV).

Accepted Answer

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

Question 7

AAR is biased in favour of liquid investments.

Accepted Answer

A) True 
 B)False

Question 8

What is the net present value of a project that has an initial cash outﬂow of $21,000 and the following cash inﬂows? The required return is 12 percent.

Accepted Answer

A)  -$130.09 
B)  -$29.67 
C)  $28.16 
D)  $130.09 
E)  $228.16

Question 9

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate,
then the project will have a negative net present value.

Accepted Answer

A) True 
 B)False

Question 10

Which one of the following statements is correct?

Accepted Answer

A)  A negative net present value indicates that a project is acceptable. 
B)  A proﬁtability index that is less than 1.0 indicates that a project is acceptable. 
C)  A project with a net present value of zero is earning exactly the required rate of return. 
D)  When the internal rate of return is less than the required rate, the project should be accepted. 
E)  If the accounting rate of return exceeds the required discount rate, the project should be accepted.

Question 11

The __________ decision rule is considered the "best" in principle.

Accepted Answer

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

Question 12

The payback calculation takes the time value of money into account.

Accepted Answer

A) True 
 B)False

Question 13

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate
The payback of the project.

Accepted Answer

A)  2.25 years 
B)  2.75 years 
C)  3.25 years 
D)  3.75 years 
E)  4.25 years

Question 14

Calculate the proﬁtability index of a 20-year project with a cost of $400,000 and annual cash ﬂows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Accepted Answer

A)  0.92 
B)  0.98 
C)  1.02 
D)  1.08 
E)  1.15

Question 15

Net present value is highly independent of the rate of return assigned to a particular project.

Accepted Answer

A) True 
 B)False

Question 16

When comparing the payback and discounted payback, the discounted payback is more diﬃcult to
compute and thus is not as widely used as the payback method.

Accepted Answer

A) True 
 B)False

Question 17

You are comparing two mutually exclusive projects. The crossover point is 9 percent. You determine
that you should accept project A if the required return is 6 percent. This implies that you should
always reject project B if the required return is 6 percent.

Accepted Answer

A) True 
 B)False

Question 18

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate
The discounted payback of the project.

Accepted Answer

A)  5.5 years 
B)  5.70 years 
C)  5.90 years 
D)  6.10 years 
E)  6.30 years

Question 19

Project A and B have 4 year timelines. Project A has an initial investment of $100,000 and cash inﬂows of $60,000, $50,000 $40,000 and $40,000. Project B has an initial investment of $75,000
And cash inﬂows of $50,000, $40,000, $30,000 and $30,000. At what rate of interest would a
Company be indifferent at choosing project A or B?

Accepted Answer

A)  17.95% 
B)  19.01% 
C)  21.86% 
D)  23.88% 
E)  24.44%

Question 20

You are analyzing a project and have prepared the following data:  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

Exam 9: Net Present Value and Other Investment Criteria

The discounted payback rule can be best stated as:

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

An investment's average net income divided by its average book value deﬁnes the average:

Ranking conﬂicts can arise if one relies on IRR instead of NPV when:

You are considering an investment which has the following cash ﬂows. If you require a four year payback period, should you take the investment?

Without using formulas, provide a deﬁnition of net present value (NPV).

AAR is biased in favour of liquid investments.

What is the net present value of a project that has an initial cash outﬂow of $21,000 and the following cash inﬂows? The required return is 12 percent.

If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5% discount rate, then the project will have a negative net present value.

Which one of the following statements is correct?

The __________ decision rule is considered the "best" in principle.

The payback calculation takes the time value of money into account.

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate The payback of the project.

Calculate the proﬁtability index of a 20-year project with a cost of $400,000 and annual cash ﬂows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Net present value is highly independent of the rate of return assigned to a particular project.

When comparing the payback and discounted payback, the discounted payback is more diﬃcult to compute and thus is not as widely used as the payback method.

You are comparing two mutually exclusive projects. The crossover point is 9 percent. You determine that you should accept project A if the required return is 6 percent. This implies that you should always reject project B if the required return is 6 percent.

A 25- year project has a cost of $1,500,000 and has annual cash ﬂows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate The discounted payback of the project.

You are analyzing a project and have prepared the following data: Based on the net present value of _ for this project, you should _ the project.