Question 1

An investment is acceptable if its average accounting return (AAR)

Accepted Answer

A) exceeds the target AAR. 
B) is less than the target AAR. 
C) exceeds the firm's return on equity (RO
E) . 
D) is less than the firm's return on assets (RO
A) . 
E) is equal to zero.

Question 2

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?

Accepted Answer

A) $2,405.66 
B) $1,608.14 
C) $1,919.08 
D) $2,134.85 
E) $2,671.02

Question 3

When two projects can share the same economic resource,the projects are generally considered to be

Accepted Answer

A) mutually exclusive. 
B) independent. 
C) underfunded. 
D) inferior. 
E) financially equivalent.

Question 4

A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project.If the firm requires a minimum average accounting return of 11.65 percent,what must be the minimum average net income for the project to be accepted?

Accepted Answer

A) $7,572.50 
B) $8,001.29 
C) $3,786.25 
D) $4,029.14 
E) $5,504.73

Question 5

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2.Project R has an initial cost of $345,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2.The discount rate is 12.2 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?

Accepted Answer

A) Accept both Project Q and R 
B) Reject both Project Q and R 
C) Accept Project Q and reject Project R 
D) Accept Project R and reject Project Q 
E) Accept either Project R or Project Q,but not both

Question 6

A project initially costs $40,500 and will not produce any cash flows for the first 2 years.Starting in Year 3,it will produce cash flows of $34,500 a year for 2 years.In Year 6,the project will end and should produce a final cash inflow of $12,000.What is the net present value of this project if the required rate of return is 18.5 percent?

Accepted Answer

A) $2,474.76 
B) $2,063.19 
C) $1,935.56 
D) $1,865.95 
E) $2,647.76

Question 7

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) have positive and then negative cash flows following the initial cash flow. 
D) have significantly different sizes. 
E) are both mutually exclusive and have significantly different lives.

Question 8

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.

Question 9

An investment is acceptable if the profitability index (PI)of the investment is

Accepted Answer

A) greater than one. 
B) less than one. 
C) greater than the internal rate of return (IRR). 
D) less than the net present value (NPV). 
E) greater than a prespecified rate of return.

Question 10

The two most commonly used methods of capital budgeting analysis are the

Accepted Answer

A) internal rate of return and net present value methods. 
B) net present value and payback methods. 
C) profitability index and the internal rate of return methods. 
D) net present value and discounted payback methods. 
E) average accounting return and discounted payback methods.

Question 11

Miller's is considering a 2-year expansion project that will require $398,000 up front.The project will produce cash flows of $361,000 and $114,000 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? Should it be accepted if the discount rate is 17 percent?

Accepted Answer

A) Yes;Yes,because the PI is 1.2 
B) Yes;No,because the PI is 0.98 
C) No;Yes,because the PI is 0.98 
D) No;No,because the PI is 1.2 
E) Yes;Yes,because the PI is 1.19

Question 12

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?

Accepted Answer

A) 3)70 years 
B) 3)91 years 
C) 3)82 years 
D) 3)64 years 
E) Never

Question 13

All else constant,the net present value of a typical investment project increases when

Accepted Answer

A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows are moved to the last year of the project.

Question 14

A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?

Accepted Answer

A) The project's total cash inflows minus its cash outflows equals $1,200. 
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 4 years. 
E) The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.

Question 15

You are considering two independent projects that have a required return of 15 percent.Project A has an initial cost of $198,700 and cash inflows of $67,200,$109,600,and $88,700 for Years 1 to 3,respectively.Project B has an initial cost of $102,000 and cash inflows of $37,600 and $91,200 for Years 1 and 2,respectively.Given this information,which one of the following statements is correct based on the NPV and IRR methods of analysis?

Accepted Answer

A) You should accept both projects. 
B) You should accept Project A and reject Project B. 
C) You should accept Project B and reject Project A. 
D) NPV indicates accept Project A while IRR indicates accepting Project B. 
E) You should reject both projects.

Question 16

A project has an initial cost of $12,100 and cash flows of -$2,100,$5,800,$16,600,and -$800 for Years 1 to 4,respectively.How many IRRs will this project have?

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) 4

Question 17

A firm should accept projects with positive net present values primarily because those projects will

Accepted Answer

A) produce cash inflows that exceed the cash outflows. 
B) return the firm's initial cash outlay within 1 year. 
C) create value for the firm's current stockholders. 
D) produce only positive cash flows after the initial investment period. 
E) increase the current liquidity of the firm.

Question 18

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the

Accepted Answer

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

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.

Question 20

A project has an initial cost of $16,780 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?

Accepted Answer

A) 28.56% 
B) 34.13% 
C) 14.28% 
D) 27.11% 
E) 32.18%

Exam 7: Net Present Value AMCQ Other Investment Rules