Question 1

The payback period rule:

Accepted Answer

A)  determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. 
B)  determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year. 
C)  requires an arbitrary choice of a cutoff point. 
D)  varies the cutoff point with the interest rate.

Question 2

The internal rate of return tends to be:

Accepted Answer

A)  easier for managers to comprehend than the net present value. 
B)  extremely accurate even when cash flow estimates are faulty. 
C)  ignored by most financial analysts. 
D)  used primarily to differentiate between mutually exclusive projects.

Question 3

The NPV rule and PI give the same results when there is no conflict. In the case of capital rationing, explain the potential conflict and the way it should be solved with supporting examples.

Accepted Answer

The answer of The NPV rule and PI give the...

Question 4

An investment that requires initial cash outlay of $100,000 has a useful life of 3 years. In each of these years the before-tax cash flow is $40,000. If the tax rate is 34% and straight-line depreciation is used, the average accounting return is:

Accepted Answer

A)  40%. 
B)  26.4%. 
C)  13.34%. 
D)  8.8%.

Question 5

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

Accepted Answer

A)  2.5 years. 
B)  2.7 years. 
C)  3.38 years. 
D)  1.40 years. 
E)  1.25 years.

Question 6

Which of the following correctly orders the investment rules of average accounting return (AAR), internal rate of return (IRR), and net present value (NPV) from the most desirable to the least desirable?

Accepted Answer

A)  AAR, IRR, NPV. 
B)  AAR, NPV, IRR. 
C)  IRR, AAR, NPV. 
D)  NPV, AAR, IRR. 
E)  NPV, IRR, AAR.

Question 7

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 8

You have a choice between two projects, Project1 pays $12,000 back at the end of 1 period on an investment of $10,000. Project 2 pays back $6,500 at the end of 1 period on an investment of $5,000. Which project should be chosen and what is the problem that you must be concerned with in this choice?

Accepted Answer

A)  Project 1; discount rate 
B)  Project 2; discount rate 
C)  Project 1; project scales 
D)  Project 2; project scales 
E)  Project 1, cashflow timings

Question 9

A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is not true?

Accepted Answer

A)  NPV is positive if the interest rate is less than 10%. 
B)  NPV is negative if the interest rate is less than 10%. 
C)  NPV is zero if the interest rate is equal to 10%.

Question 10

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

Accepted Answer

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

Question 11

An investment with an initial cost of $16,000 produces cash flows of $5000 annually. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years.

Accepted Answer

A)  4.55 
B)  4.05 
C)  3.20 
D)  3.52

Question 12

Suppose that a project has a cash flow pattern (-$2,000, $25,000,- $25000). For its modified IRR at a discount rate of 10%, the relevant numbers are

Accepted Answer

A)  (-$2,000, $25,000) 
B)  (-$2,000, $2129) 
C)  (-$5,000, $5000) 
D)  (-$2,000, $2192.23)

Question 13

The discounted payback rule states that you should accept projects:

Accepted Answer

A)  which have a discounted payback period that is greater than some pre-specified period of time. 
B)  if the discounted payback is positive and rejected if it is negative. 
C)  only if the discounted payback period equals some pre-specified period of time. 
D)  if the discounted payback period is less than some pre-specified period of time.

Question 14

The Walker Landscaping Company can purchase a piece of equipment for $3,600. The asset has a two-year life, will produce a cashflow of $600 in the first year and $4200 in the second year. The interest rate is 15%. Calculate the project's discounted payback and Profitability Index assuming steady cashflows. Should the project be taken? If the accounting rate of return was positive, how would this affect your decision?

Accepted Answer

The answer of The Walker Landscaping Company can purchase a...

Question 15

A project will have more than one IRR if:

Accepted Answer

A)  the IRR is positive. 
B)  the IRR is negative. 
C)  the NPV is zero. 
D)  the cash flow pattern exhibits more than one sign change. 
E)  the cash flow pattern exhibits exactly one sign change.

Question 16

The internal rate of return for a project will increase if:

Accepted Answer

A)  the initial cost of the project can be reduced. 
B)  the total amount of the cash inflows is reduced. 
C)  each cash inflow is moved such that it occurs one year later than originally projected. 
D)  the required rate of return is reduced.

Question 17

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

Accepted Answer

A)  discounted cash flow rule. 
B)  average accounting rate of return method. 
C)  average payback rule. 
D)  average profitability index.

Question 18

A project will have only one internal rate of return if:

Accepted Answer

A)  all cash flows after the initial expense are positive. 
B)  average accounting return is positive. 
C)  net present value is negative. 
D)  net present value is positive. 
E)  net present value is zero.

Question 19

Payback is frequently used to analyze independent projects because:

Accepted Answer

A)  nit considers the time value of money. 
B)  all relevant cash flows are included in the analysis. 
C)  it is easy and quick to calculate. 
D)  it is the most desirable of all the available analytical methods from a financial perspective.

Question 20

Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.

Accepted Answer

A)  3.18 
B)  3.82 
C)  4.55 
D)  4.00

Exam 7: Net Present Value and Other Investment Rules