Question 1

The payback period rule:

Accepted Answer

A) discounts cash flows. 
B) ignores initial cost. 
C) always uses all possible cash flows in its calculation. 
D) Both A and C. 
E) None of the above.

Question 2

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?

Accepted Answer

The answer of The IRR rule is said to be...

Question 3

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

Accepted Answer

A) equal to the cutoff point. 
B) greater than the cutoff point. 
C) less than the cutoff point. 
D) positive. 
E) None of the above.

Question 4

Using internal rate of return,a conventional project should be accepted if the internal rate of return is:

Accepted Answer

A) equal to the discount rate. 
B) greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) positive.

Question 5

No matter how many forms of investment analysis you perform:

Accepted Answer

A) a project will never be accepted unless the payback period is met. 
B) the internal rate of return will always produce the most reliable results. 
C) the actual results from a project may vary significantly from the expected results. 
D) only the first three years of a project ever affect its final outcome. 
E) the initial costs will generally vary considerably from the estimated costs.

Question 6

If you want to compare the present value of the future cash inflows of a project with its initial cost,you should use the _______ method of analysis.

Accepted Answer

A) payback 
B) incremental IRR 
C) profitability index 
D) average accounting return 
E) internal rate of return

Question 7

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 8

You are considering a project with the following data:  Which one of the following is correct given this information?

Accepted Answer

A) The discount rate used in computing the net present value must have been less than 8.7%. 
B) The discounted payback period will have to be less than 2.44 years. 
C) The discount rate used to compute the profitability ratio was equal to the internal rate of return. 
D) This project should be accepted based on the profitability ratio. 
E) This project should be rejected based on the internal rate of return.

Question 9

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300.The asset has a three-year life,will produce a cash flow of $1,200 in the first and second year,and $3,000 in the third year.The interest rate is 12%.Calculate the project's Discounted Payback and Profitability Index assuming end of year cash flows.Should the project be taken?
 If the Average Accounting Return was positive,how would this affect your decision?

Accepted Answer

The answer of The Ziggy Trim and Cut Company can...

Question 10

A project has an initial cost of $8,500 and produces cash inflows of $2,700,$4,800,and $1,600 over the next three years,respectively.What is the discounted payback period if the required rate of return is 8%?

Accepted Answer

A) 2.13 years 
B) 2.33 years 
C) 2.67 years 
D) 2.91 years 
E) Never

Question 11

The two fatal flaws of the internal rate of return rule are:

Accepted Answer

A) arbitrary determination of a discount rate and failure to consider initial expenditures. 
B) arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects. 
C) arbitrary determination of a discount rate and the multiple rate of return problem. 
D) failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects. 
E) failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

Question 12

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50.The cost of capital is 12%.What is the discounted payback period?

Accepted Answer

A) 3.15 years 
B) 3.38 years 
C) 3.45 years 
D) 3.60 years 
E) 4.05 years

Question 13

Based on the net present value of ____ for this project,you should _____ the project.

Accepted Answer

A) -$2,405; reject 
B) -$3,958; reject 
C) $13,454; accept 
D) $14,029; accept 
E) $17,796; accept

Question 14

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 12.5%.

Accepted Answer

A) $-218.68 
B) $-124.46 
C) $-76.10 
D) $549.65 
E) $671.02

Question 15

What is the profitability index for an investment with the following cash flows given a 9% required return?

Accepted Answer

A) .96 
B) .98 
C) 1.00 
D) 1.02 
E) 1.04

Question 16

Which one of the following statements concerning net present value (NPV)is correct?

Accepted Answer

A) An investment should be accepted if, and only if, the NPV is exactly equal to zero. 
B) An investment should be accepted only if the NPV is equal to the initial cash flow. 
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) Any project that has positive cash flows for every time period after the initial investment should be accepted.

Question 17

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) rejected because the net present value is negative. 
C) rejected because the internal rate of return is negative. 
D) accepted because the profitability index is negative. 
E) accepted because the profitability index is greater than 1.

Question 18

It will cost $2,600 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Accepted Answer

A) .86 years 
B) 1.46 years 
C) 1.86 years 
D) 2.46 years 
E) 2.86 years

Question 19

Based upon the profitability index (PI)and the information provided in the problem,you should:

Accepted Answer

A) disregard the PI method in this case. 
B) accept project A and reject project B. 
C) accept project B and reject project A. 
D) reject both project A and project B. 
E) accept both project A and project B.

Question 20

The investment decision rule that relates average net income to average investment is the:

Accepted Answer

A) average payback method. 
B) average profitability index. 
C) discounted cash flow method. 
D) average accounting return method. 
E) None of the above.

Exam 7: Net Present Value and Other Investment Rules