Question 1

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 2

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 3

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.

Question 4

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 5

An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has:

Accepted Answer

A)  a large initial investment with moderate positive cash flows over a very long period of time. 
B)  a very large negative cash flow at the termination of the project. 
C)  most of the cash flow at the beginning of the project. 
D)  All projects approved by the payback period rule will be accepted by the NPV rule. 
E)  The payback period rule and the NPV rule cannot be used to evaluate the same type of projects.

Question 6

If there is a conflict between mutually exclusive projects due to the IRR,one should:

Accepted Answer

A)  drop the two projects immediately. 
B)  spend more money on gathering information. 
C)  depend on the NPV as it will always provide the most value. 
D)  depend on the AAR because it does not suffer from these same problems.

Question 7

A mutually exclusive project is a project whose:

Accepted Answer

A)  acceptance or rejection has no effect on other projects. 
B)  NPV is always negative. 
C)  IRR is always negative. 
D)  acceptance or rejection effects other projects.

Question 8

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively.What is the discounted payback period if the required rate of return is 8%?

Accepted Answer

A)  2.05 years 
B)  2.13 years 
C)  2.33 years 
D)  3.00 years 
E)  never

Question 9

The Carnation Chemical Company is investing in an incinerator to dispose of PCB waste.The incinerator costs $1.5 million and will generate end of year cash of $1 million for the next 3 years.At the end of 3 years the incinerator will be worthless and must be disposed of at the cost of $500,000.The internal rate of return for this project is:

Accepted Answer

A)  between 10% and 20%. 
B)  between 20% and 30%. 
C)  between 30% and 40%. 
D)  more than 40%.

Question 10

Which one of the following statements is correct concerning the payback period?

Accepted Answer

A)  An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 
B)  An investment should be accepted if the payback is positive and rejected if it is negative. 
C)  An investment should be rejected if the payback is positive and accepted if it is negative. 
D)  An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. 
E)  An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

Question 11

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 12

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Accepted Answer

A)  the discount rate and scale problems. 
B)  timing and scale problems. 
C)  the discount rate and timing problems. 
D)  scale and reversing flow problems. 
E)  timing and reversing flow problems.

Exam 7: Net Present Value and Other Investment Rules