Question 1

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

Question 2

Applying the discounted payback decision rule to all projects may cause:

Accepted Answer

A) some positive net present value projects to be rejected. 
B) the most liquid projects to be rejected in favor of the less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) a firm to become more long-term focused. 
E) some projects to be accepted which would otherwise be rejected under the payback rule.

Question 3

Which one of the following increases the net present value of a project?

Accepted Answer

A) an increase in the required rate of return 
B) an increase in the initial capital requirement 
C) a deferment of some cash inflows until a later year 
D) an increase in the aftertax salvage value of the fixed assets 
E) a reduction in the final cash inflow

Question 4

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.

Question 5

Which of the following are advantages of the payback method of project analysis?
I.works well for research and development projects
II.liquidity bias
III.ease of use
IV.arbitrary cutoff point

Accepted Answer

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

Question 6

If a project has a net present value equal to zero,then:

Accepted Answer

A) the total of the cash inflows must equal the initial cost of the project. 
B) the project earns a return exactly equal to the discount rate. 
C) a decrease in the project's initial cost will cause the project to have a negative NPV. 
D) any delay in receiving the projected cash inflows will cause the project to have a positive NPV. 
E) the project's PI must be also be equal to zero.

Question 7

Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?

Accepted Answer

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

Question 8

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.

Question 9

Which of the following statements generally apply to the cash flows of a financing type project?
I.nonconventional cash flows
II.cash outflows exceed cash inflows prior to any time value adjustments
III.cash for services rendered is received prior to the cash that is spent providing the services
IV.the total of all cash flows must equal zero on an unadjusted basis

Accepted Answer

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

Question 10

Colin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. $$\begin{array} { c r r } 
\frac { \text { Year } } { 0 } & \frac { \text { Cash Flow } } { } & \text { Net Income } \
1 & - \$ 285,000 & \text { n/a } \
2 & \$ 83,650 & \$ 12,400 \
3 & \$ 92,850 & \$ 21,600 \
4 & \$ 94,350 & \$ 23,100 \
& \$ 93,250 & \$ 22,000
\end{array}$$

Accepted Answer

A) 6.94 percent 
B) 13.88 percent 
C) 15.66 percent 
D) 27.75 percent 
E) 31.31 percent

Question 11

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery.These projects are considered to be:

Accepted Answer

A) independent. 
B) interdependent. 
C) mutually exclusive. 
D) economically scaled. 
E) operationally distinct.

Question 12

You are considering a project with an initial cost of $7,500.What is the payback period for this project if the cash inflows are $1,100,$1,640,$3,800,and $4,500 a year over the next four years,respectively?

Accepted Answer

A) 3.21 years 
B) 3.28 years 
C) 3.36 years 
D) 4.21 years 
E) 4.29 years

Question 13

A project that provides annual cash flows of $12,600 for 12 years costs $65,000 today.At what rate would you be indifferent between accepting the project and rejecting it?

Accepted Answer

A) 15.28 percent 
B) 15.40 percent 
C) 15.51 percent 
D) 16.18 percent 
E) 16.74 percent

Question 14

Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications.For one project,the cash flows are estimated as follows.Based on the internal rate of return (IRR),should this project be accepted if the required return is 9 percent? $$\begin{array} { c c } 
\frac { \text { Year } } { 0 } & \frac { \text { Cash Flow } } { \$ 5,500 } \
1 & - \$ 5,900
\end{array}$$

Accepted Answer

A) Accept the project. 
B) Reject the project. 
C) The IRR cannot be used to evaluate this type of project. 
D) The firm should be indifferent to either accepting or rejecting this project. 
E) Insufficient information is provided to make a decision based on IRR.

Question 15

The internal rate of return is defined as the:

Accepted Answer

A) maximum rate of return a firm expects to earn on a project. 
B) rate of return a project will generate if the project in financed solely with internal funds. 
C) discount rate that equates the net cash inflows of a project to zero. 
D) discount rate which causes the net present value of a project to equal zero. 
E) discount rate that causes the profitability index for a project to equal zero.

Question 16

Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project.Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Accepted Answer

A) Yes; The MIRR is 6.50 percent. 
B) No; The MIRR is 8.67 percent. 
C) Yes; The MIRR is 8.23 percent. 
D) No; The MIRR is 6.50 percent. 
E) No; The MIRR is 7.59 percent.

Question 17

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.

Question 18

The relevant discount rate for the following set of cash flows is 14 percent.What is the profitability index?

Accepted Answer

A) 0.89 
B) 0.93 
C) 0.99 
D) 1.03 
E) 1.07

Question 19

Explain the differences and similarities between net present value (NPV)and the profitability index.

Accepted Answer

The answer of Explain the differences and similarities between net...

Question 20

Day Interiors is considering a project with the following cash flows.What is the IRR of this project? $$\begin{array} { c r } 
\text { Year } & \text { Cash Flow } \
0 & - \$ 114,600 \
1 & 35,900 \
2 & 50,800 \
3 & 45,000
\end{array}$$

Accepted Answer

A) 6.42 percent 
B) 7.03 percent 
C) 7.48 percent 
D) 8.22 percent 
E) 8.56 percent

Exam 9: Net Present Value and Other Investment Criteria

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