Question 1

You would like to invest in the following project.  Sis,your boss,insists that only projects returning at least $1.06 in today's dollars for every $1 invested can be accepted.She also insists on applying a 14 percent discount rate to all cash flows.Based on these criteria,you should:

Accepted Answer

A) accept the project because the PI is 0.90. 
B) accept the project because the PI is 1.07. 
C) accept the project because the PI is 1.11. 
D) reject the project because the PI is 0.90. 
E) reject the project because the PI is 1.07.

Question 2

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows.What is the name given to this graph?

Accepted Answer

A) project tract 
B) projected risk profile 
C) NPV profile 
D) NPV route 
E) present value sequence

Question 3

A project has a discounted payback period that is equal to the required payback period.Given this,which of the following statements must be true?
I.The project must also be acceptable under the payback rule.
II.The project must have a profitability index that is equal to or greater than 1.0.
III.The project must have a zero net present value.
IV.The project's internal rate of return must equal the required return.

Accepted Answer

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

Question 4

Based on the profitability index rule,should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

Accepted Answer

A) Yes; The PI is 0.96. 
B) Yes; The PI is 0.80. 
C) Yes; The PI is 1.08. 
D) No; The PI is 0.96. 
E) No; The PI is 0.80.

Question 5

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

Accepted Answer

A) initial cost of each project 
B) timing of the cash inflows 
C) total cash inflows of each project 
D) required rate of return 
E) length of each project's life

Question 6

You are considering a project with conventional cash flows and the following characteristics:  Which of the following statements is correct given this information?
I.The discount rate used in computing the net present value was less than 11.63 percent.
II.The discounted payback period must be more than 2.98 years.
III.The discount rate used in the computation of the profitability ratio was 11.63 percent.
IV.This project should be accepted as the internal rate of return exceeds the required return.

Accepted Answer

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

Question 7

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Accepted Answer

A) -$3,383.25 
B) -$2,784.62 
C) -$2,481.53 
D) $52,311.08 
E) $66,416.75

Question 8

Which two methods of project analysis are the most biased towards short-term projects?

Accepted Answer

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

Question 9

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
I.positive net present value
II.profitability index greater than zero
III.internal rate of return greater than the required rate
IV.positive internal rate of return

Accepted Answer

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

Question 10

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

Accepted Answer

The answer of How does the net present value (NPV)decision...

Question 11

Which one of the following statements related to payback and discounted payback is correct?

Accepted Answer

A) Payback is a better method of analysis than is discounted payback. 
B) Discounted payback is used more frequently in business than is payback. 
C) Discounted payback does not require a cutoff point like the payback method does. 
D) Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. 
E) Payback is used more frequently even though discounted payback is a better method.

Question 12

A project has an initial cost of $18,400 and produces cash inflows of $7,200,$8,900,and $7,500 over three years,respectively.What is the discounted payback period if the required rate of return is 16 percent?

Accepted Answer

A) 2.31 years 
B) 2.45 years 
C) 2.55 years 
D) 2.62 years 
E) never

Question 13

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value.  Should you accept or reject these projects based on the profitability index?

Accepted Answer

A) accept Project A and reject Project B 
B) reject Project A and accept Project B 
C) accept both Projects A and B 
D) reject both Projects A and B 
E) You cannot make this decision based on the profitability index.

Question 14

A project has an initial cost of $32,000 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 $1,200,$2,300,and $1,800 a year for the next 3 years,respectively.What is the average accounting return?

Accepted Answer

A) 8.72 percent 
B) 11.04 percent 
C) 11.26 percent 
D) 14.69 percent 
E) 15.14 percent

Question 15

Graphing the crossover point helps explain:

Accepted Answer

A) why one project is always superior to another project. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the net present value and the initial cash outflow of a project are related. 
E) how the profitability index and the net present value are related.

Question 16

You are analyzing the following two mutually exclusive projects and have developed the following information.What is the crossover rate?

Accepted Answer

A) 13.17 percent 
B) 13.33 percent 
C) 14.32 percent 
D) 14.60 percent 
E) 15.20 percent

Question 17

The length of time a firm must wait to recoup,in present value terms,the money it has in invested in a project is referred to as the:

Accepted Answer

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

Question 18

In actual practice,managers frequently use the:
I.average accounting return method because the information is so readily available.
II.internal rate of return because the results are easy to communicate and understand.
III.discounted payback because of its simplicity.
IV.net present value because it is considered by many to be the best method of analysis.

Accepted Answer

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

Question 19

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 20

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

Exam 9: Net Present Value and Other Investment Criteria

You would like to invest in the following project. Sis,your boss,insists that only projects returning at least $1.06 in today's dollars for every $1 invested can be accepted.She also insists on applying a 14 percent discount rate to all cash flows.Based on these criteria,you should: