Question 1

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 2

A project has average net income of £2,100 a year over its 4-year life.The initial cost of the project is £65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimal average accounting return of 8.5%.The firm should _____ the project based on the AAR of _____.

Accepted Answer

A) accept; 6.46% 
B) accept; 9.69% 
C) accept; 12.92% 
D) reject; 6.46% 
E) reject; 12.92%

Question 3

Larry's Lanterns is considering a project which will produce sales of £240,000 a year for the next five years.The profit margin is estimated at 6% .The project will cost £290,000 and be depreciated straight-line to a book value of zero over the life of the project.Larry's has a required accounting return of 8%.This project should be _____ because the AAR is _____.

Accepted Answer

A) rejected; 4.14% 
B) rejected; 6% 
C) rejected; 8.28% 
D) accepted; 8.28% 
E) accepted; 9.93%

Question 4

You are considering a project with the following data: Internal rate of return: 8.7%
Profitability ratio: 0.98
Net present value: -£393
Payback period: 2.44 years
Required return: 9.5%
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 5

Which of the following does not characterize NPV?

Accepted Answer

A) NPV does not explicitly incorporate risk into the analysis. 
B) NPV incorporates all relevant cash flow information. 
C) NPV uses all of the project's cash flows. 
D) NPV discounts all future cash flows. 
E) Using NPV will lead to decisions that maximize shareholder wealth.

Question 6

Which of the following methods of project analysis are biased towards short-term projects?
I.internal rate of return
II.accounting rate of return
III.payback
IV.discounted payback

Accepted Answer

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

Question 7

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 8% ? Why or why not?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline  0& -£ 18,600 \
\hline 1 & £ 10,000 \
\hline 2 & £ 7,300 \
\hline 3 & £ 3,700\
\hline 
\end{array}$

Accepted Answer

A) yes; because the PI is 1.008 
B) yes; because the PI is .992 
C) yes; because the PI is .999 
D) no; because the PI is 1.008 
E) no; because the PI is .992

Question 8

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

Accepted Answer

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

Question 9

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) internal rate of return. 
C) payback period. 
D) profitability index. 
E) discounted cash period.

Question 10

The internal rate of return (IRR): I.rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II.is the rate generated solely by the cash flows of an investment.
III.is the rate that causes the net present value of a project to exactly equal zero.
IV.can effectively be used to analyze all investment scenarios.

Accepted Answer

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

Question 11

Yancy is considering a project which will produce cash inflows of £900 a year for 4 years.The project has a 9% required rate of return and an initial cost of £2,800.What is the discounted payback period?

Accepted Answer

A) 3.11 years. 
B) 3.18 years. 
C) 3.82 years. 
D) 4.18 years. 
E) never.

Question 12

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 13

The profitability index is the ratio of:

Accepted Answer

A) average net income to average investment. 
B) internal rate of return to current market interest rate. 
C) net present value of cash flows to internal rate of return. 
D) net present value of cash flows to average accounting return. 
E) present value of cash flows to initial investment cost.

Question 14

The difference between the present value of an investment and its cost is the:

Accepted Answer

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

Question 15

Martin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.
$\begin{array}{|l|l|l|}
\hline \text { Year } & \text { Cash Flow } & \text { Net Income } \
\hline 0 & -£ 642,000 & \mathrm{n} / \text { a } \
\hline 1 & £ 170,000 & £ 9,500 \
\hline 2 & £ 240,000 & £ 79,500 \
\hline 3 & £ 205,000 & £ 44,500 \
\hline 4 & £ 195,000 & £ 34,500 \
\hline
\end{array}$

Accepted Answer

A) 13.08% 
B) 15.77% 
C) 21.83% 
D) 26.17% 
E) 31.54%

Question 16

You are analyzing a project and have prepared the following data: $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}$$ Required payback period: 2.5 years
Required AAR: 7.25%
Required return: 8.50%
Based on the payback period of _____for this project,you should _____ the project.

Accepted Answer

A) 1.87 years; accept 
B) 2.87 years; accept 
C) 2.87 years; reject 
D) 3.13 years; reject 
E) 3.87 years; reject

Question 17

What is the net present value of a project with the following cash flows and a required return of 12%?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 28,900 \
\hline 1 & £ 12,450 \
\hline 2 & £ 19,630 \
\hline 3 & £ 2,750\
\hline
\end{array}$

Accepted Answer

A) -£287.22 
B) -£177.62 
C) £177.62 
D) £204.36 
E) £287.22

Question 18

The internal rate of return may be defined as:

Accepted Answer

A) the discount rate that makes the NPV cash flows equal to zero. 
B) the difference between the market rate of interest and the NPV. 
C) the market rate of interest less the risk-free rate. 
D) the project acceptance rate set by management. 
E) None of the above.

Question 19

In actual practice,managers may use the: I.AAR because the necessary accounting numbers are readily available.
II.IRR because the results are easy to communicate and understand.
III.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,III,and IV only. 
D) II,III,and IV only. 
E) I,II,III,and IV.

Question 20

An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 24,000 \
\hline 1 & £ 8,000 \
\hline 2 & £ 12,000 \
\hline 3 & £ 9,000\
\hline
\end{array}$

Accepted Answer

A) yes; because the IRR exceeds the required return by about 0.39%. 
B) yes; because the IRR is less than the required return by about 3.9%. 
C) yes; because the IRR is positive. 
D) no; because the IRR exceeds the required return by about 3.9%. 
E) no; because the IRR is 9.89%.

Exam 6: Net Present Value and Other Investment Rules

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

You are considering a project with the following data: Internal rate of return: 8.7% Profitability ratio: 0.98 Net present value: -£393 Payback period: 2.44 years Required return: 9.5% Which one of the following is correct given this information?