Question 1

What is the internal rate of return's assumption about how cash flows are reinvested?

Accepted Answer

A)  They are reinvested at the firm's discount rate. 
B)  They are reinvested at the required rate of return. 
C)  They are reinvested at the project's internal rate of return. 
D)  They are only reinvested at the end of the project.

Question 2

A significant advantage of the payback period is that it

Accepted Answer

A)  places emphasis on time value of money. 
B)  allows for the proper ranking of projects. 
C)  tends to reduce firm risk because it favors projects that generate early, less uncertain returns. 
D)  gives proper weighting to all cash flows.

Question 3

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.Which project would you recommend using the replacement chain method to evaluate the projects with different lives?

Accepted Answer

A)  Project B because its NPV is higher than Project A's replacement chain NPV of $47,623. 
B)  Project A because its replacement chain NPV is $76,652, which exceeds the NPV for Project B. 
C)  Project A because its replacement chain NPV is $45,642, which is less than the NPV for Project B. 
D)  Both projects will be valued the same since they are now both four year projects.

Question 4

If two projects are mutually exclusive then the IRR is more important than the NPV in deciding the project that should be chosen.

Accepted Answer

A) True 
 B)False

Question 5

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

Accepted Answer

A) True 
 B)False

Question 6

The internal rate of return will equal the discount rate when the net present value equals zero.

Accepted Answer

A) True 
 B)False

Question 7

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

Accepted Answer

A) True 
 B)False

Question 8

Many financial managers believe the payback period is of limited usefulness because it ignores the time value of money; hence,it is referred to as the discounted payback period.

Accepted Answer

A) True 
 B)False

Question 9

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

Accepted Answer

A) True 
 B)False

Question 10

One of the disadvantages of the payback method is that it ignores time value of money.

Accepted Answer

A) True 
 B)False

Question 11

An independent project should be accepted if it

Accepted Answer

A)  produces a net present value that is greater than or equal to zero. 
B)  produces a net present value that is greater than the equivalent IRR. 
C)  has only one sign reversal. 
D)  produces a profitability index greater than or equal to zero.

Question 12

A project with a NPV of zero should be rejected since even the returns on U.S.Treasury bill are greater than zero.

Accepted Answer

A) True 
 B)False

Question 13

The Bolster Company is considering two mutually exclusive projects:
  The required rate of return on these projects is 12 percent.
a.What is each project's payback period?
b.What is each project's discounted payback period?
c.What is each project's net present value?
d.What is each project's internal rate of return?
e.Fully explain the results of your analysis.Which project do you prefer,and why?

Accepted Answer

The answer of The Bolster Company is considering two mutually...

Question 14

The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

Accepted Answer

A) True 
 B)False

Question 15

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Accepted Answer

A) True 
 B)False

Question 16

The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.

Accepted Answer

A) True 
 B)False

Question 17

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project A is

Accepted Answer

A)  31.43%. 
B)  29.42%. 
C)  25.88%. 
D)  19.45%.

Question 18

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The equivalent annual annuity amount for project B,rounded to the nearest dollar,is

Accepted Answer

A)  $17,385. 
B)  $20,936. 
C)  $22,789. 
D)  $26,551.

Question 19

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.

Accepted Answer

A) True 
 B)False

Question 20

Consider the following two projects:
  a.Calculate the net present value of each of the above projects,assuming a 14 percent discount rate.
b.What is the internal rate of return for each of the above projects?
c.Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above.
d.If 14 percent is the required rate of return,and these projects are independent,what decision should be made?
e.If 14 percent is the required rate of return,and the projects are mutually exclusive,what decision should be made?

Accepted Answer

The answer of Consider the following two projects:
  a.Calculate...

Exam 10: Capital-Budgeting Techniques and Practice

What is the internal rate of return's assumption about how cash flows are reinvested?

A significant advantage of the payback period is that it

If two projects are mutually exclusive then the IRR is more important than the NPV in deciding the project that should be chosen.

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

The internal rate of return will equal the discount rate when the net present value equals zero.

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

Many financial managers believe the payback period is of limited usefulness because it ignores the time value of money; hence,it is referred to as the discounted payback period.

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

One of the disadvantages of the payback method is that it ignores time value of money.

An independent project should be accepted if it

A project with a NPV of zero should be rejected since even the returns on U.S.Treasury bill are greater than zero.

The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.