Question 1

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%. B

Question 2

Accepting positive NPV projects benefits the stockholders because:

Accepted Answer

A)   it most easily understood valuation process.
B)   the value of the expected cashflows are equal to the cost.
C)   the value of the expected cashflows are greater than the cost.
D)   it is the most easily calculated. C

Question 3

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. A

Question 4

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

Question 5

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 6

The two fatal flaws of the internal rate of return rule are:

Accepted Answer

A)   arbitrary determination of a discount rate and failure to consider initial expenditures.
B)   arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
C)   arbitrary determination of a discount rate and the multiple rate of return problem.
D)   failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
E)   failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

Question 7

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

Accepted Answer

A)   only equal to the current weighted average cost of capital.
B)   greater than the current weighted average cost of capital.
C)   less than the current weighted average cost of capital.
D)   negative.
E)   positive.

Question 8

Suppose that a project has a cash flow pattern (-$2,000,$25,000,-$25000)Its IRR is given by:

Accepted Answer

A)   12.20%
B)   9.61% or 1040.39%
C)   25.25% or 250.52%
D)   4100.11%

Question 9

The IRR decision rule can be reversed because:

Accepted Answer

A)   the NPV rule is not the same as the IRR.
B)   the IRR is based on a mutually exclusive investment.
C)   instead of an investment project it is a financing project.
D)   the IRR is greater than 100%.

Question 10

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 11

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?

Accepted Answer

The answer of The IRR rule is said to be...

Question 12

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 payback assuming steady cashflows.Also calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

Accepted Answer

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

Question 13

The problem of multiple IRRs can occur when:

Accepted Answer

A)   there is only one sign change in the cash flows.
B)   the first cash flow is always positive.
C)   the cash flows decline over the life of the project.
D)   there is more than one sign change in the cash flows.

Question 14

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)   40.00%.
B)   26.40%.
C)   13.34%.
D)   8.80%.

Question 15

Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

Accepted Answer

The answer of Given the goal of maximization of firm...

Question 16

Ginny is considering an investment which will cost her $120,000.The investment produces no cash flows for the first year.In the second year the cash inflow is $35,000.This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently.Ginny requires a 10% rate of return and has a required discounted payback period of three years.Ginny should _______ this project because the discounted payback period is ______.

Accepted Answer

A)   accept; 2.03 years
B)   accept; 2.97 years
C)   accept; 3.97 years
D)   reject; 3.03 years
E)   reject; 3.97 years

Question 17

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 cut-off point.
D)   varies the cut-off point with the interest rate.

Question 18

If a project is assigned a required rate of return equal to zero,then:

Accepted Answer

A)   the timing of the project's cash flows has no bearing on the value of the project.
B)   the project will always be accepted.
C)   the project will always be rejected.
D)   whether the project is accepted or rejected will depend on the timing of the cash flows.

Question 19

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

Accepted Answer

A)   greater than or equal to the cut-off point.
B)   greater than the cut-off point.
C)   less than the cut-off point.
D)   positive.

Question 20

The discounted payback period rule:

Accepted Answer

A)   considers the time value of money.
B)   discounts the cutoff point.
C)   ignores uncertain cash flows.
D)   is preferred to the NPV rule.

Exam 7: Net Present Value and Other Investment Rules