Question 1

What is the key reason why a positive NPV project should be accepted?

Accepted Answer

A) The project is expected to increase shareholder value. 
B) The present value of the expected cash flows equals the project's cost. 
C) The project will produce positive cash flows in the future. 
D) The project's payback will be positive during its life. 
E) The project's PI will be less than 1,which indicates acceptance. 
A) The project is expected to increase shareholder value. 
B) The present value of the expected cash flows equals the project's cost. 
C) The project will produce positive cash flows in the future. 
D) The project's payback will be positive during its life. 
E) The project's PI will be less than 1,which indicates acceptance. A

Question 2

The average accounting return method

Accepted Answer

A) ignores some project years. 
B) ignores the timing of net income. 
C) properly discounts all values. 
D) is preferred by financial analysts over the alternative methods. 
E) is never used in practice. 
A) ignores some project years. 
B) ignores the timing of net income. 
C) properly discounts all values. 
D) is preferred by financial analysts over the alternative methods. 
E) is never used in practice. B

Question 3

Net present value

Accepted Answer

A) considers only cash flows occurring during the first 5 years of a project. 
B) is based on projected annual net income for each year of a project's life. 
C) calculations consider the risk of each project. 
D) ignores the time value of money. 
E) assumes all projects are risk-free. 
A) considers only cash flows occurring during the first 5 years of a project. 
B) is based on projected annual net income for each year of a project's life. 
C) calculations consider the risk of each project. 
D) ignores the time value of money. 
E) assumes all projects are risk-free. C

Question 4

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

Accepted Answer

A) Accepted,because the IRR is less than the discount rate. 
B) Rejected,because the IRR is less than the discount rate. 
C) Accepted,because the IRR is greater than the discount rate. 
D) Rejected,because the IRR is greater than the discount rate. 
E) Accepted,because the IRR equals the discount rate. 
A) Accepted,because the IRR is less than the discount rate. 
B) Rejected,because the IRR is less than the discount rate. 
C) Accepted,because the IRR is greater than the discount rate. 
D) Rejected,because the IRR is greater than the discount rate. 
E) Accepted,because the IRR equals the discount rate.

Question 5

A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?

Accepted Answer

A) The project's total cash inflows minus its cash outflows equals $1,200. 
B) The project is expected to return $1,200 in Time 0 dollars over and above the discount rate. 
C) The project would also have a positive net present value if Year 4 was omitted. 
D) The project's cash inflows exceed its outflows by $1,200 over the 4 years. 
E) The project is expected to return $1,200 in Year 4 dollars over and above the initial investment. 
A) The project's total cash inflows minus its cash outflows equals $1,200. 
B) The project is expected to return $1,200 in Time 0 dollars over and above the discount rate. 
C) The project would also have a positive net present value if Year 4 was omitted. 
D) The project's cash inflows exceed its outflows by $1,200 over the 4 years. 
E) The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.

Question 6

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

Accepted Answer

A) The lack of use in the business world 
B) The lack of a clear-cut decision rule 
C) The degree of the calculation difficulty 
D) The degree of estimation involved with the initial cost 
E) The use of net income rather than cash flows 
A) The lack of use in the business world 
B) The lack of a clear-cut decision rule 
C) The degree of the calculation difficulty 
D) The degree of estimation involved with the initial cost 
E) The use of net income rather than cash flows

Question 7

The modified internal rate of return is designed primarily to analyze projects that

Accepted Answer

A) are financing rather than investing projects. 
B) are mutually exclusive. 
C) have positive and then negative cash flows following the initial cash flow. 
D) have significantly different sizes. 
E) are both mutually exclusive and have significantly different lives. 
A) are financing rather than investing projects. 
B) are mutually exclusive. 
C) have positive and then negative cash flows following the initial cash flow. 
D) have significantly different sizes. 
E) are both mutually exclusive and have significantly different lives.

Question 8

A proposed project has an initial cost of $200,000 and cash flows of -$13,200,$124,500,and $187,900 for Years 1 to 3,respectively.Victoria,the boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a discount rate of 14 percent to all cash flows.Based on these criteria,the project should be

Accepted Answer

A) accepted because the PI is 0.89. 
B) rejected because the PI exceeds 1. 
C) accepted because the PI is 1.17. 
D) rejected because the PI is 1.06. 
E) rejected because the PI is 0.95. 
A) accepted because the PI is 0.89. 
B) rejected because the PI exceeds 1. 
C) accepted because the PI is 1.17. 
D) rejected because the PI is 1.06. 
E) rejected because the PI is 0.95.

Question 9

You are considering a project with conventional cash flows.The IRR is 12.6 percent,NPV is -$198,and the payback period is 2.87 years.Which one of the following statements is correct given this information?

Accepted Answer

A) The discount rate used in computing the net present value was less than 12.6 percent. 
B) The discounted payback period will have to be less than 2.87 years. 
C) The project life must be 2.87 years. 
D) This project should be accepted based on the internal rate of return. 
E) The required rate of return must be greater than 12.6 percent. 
A) The discount rate used in computing the net present value was less than 12.6 percent. 
B) The discounted payback period will have to be less than 2.87 years. 
C) The project life must be 2.87 years. 
D) This project should be accepted based on the internal rate of return. 
E) The required rate of return must be greater than 12.6 percent.

Question 10

Dorian International has $75,000 that it can invest for 2.5 years.After that,the funds are needed to repay an outstanding bond issue.The company has two potential projects that are within the funding limit.Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2 years.Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years.If the required rate of return on both projects is 12 percent,what is your recommendation?

Accepted Answer

A) Accept Project A and reject Project B 
B) Reject Project A and accept Project B 
C) Accept either Project A or Project B,but not both 
D) Reject both projects 
E) Accept both projects 
A) Accept Project A and reject Project B 
B) Reject Project A and accept Project B 
C) Accept either Project A or Project B,but not both 
D) Reject both projects 
E) Accept both projects

Question 11

The discounted payback method

Accepted Answer

A) discounts a project's initial cost. 
B) is simpler and more reliable than the payback period. 
C) is as reliable as NPV because both methods use discounted cash flo. 
D) uses an arbitrary cutoff period. 
E) ignores a project's initial costs. 
A) discounts a project's initial cost. 
B) is simpler and more reliable than the payback period. 
C) is as reliable as NPV because both methods use discounted cash flo. 
D) uses an arbitrary cutoff period. 
E) ignores a project's initial costs.

Question 12

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

Accepted Answer

A) 11.86% 
B) 12.37% 
C) 20.08% 
D) 13.92% 
E) 19.10% 
A) 11.86% 
B) 12.37% 
C) 20.08% 
D) 13.92% 
E) 19.10%

Question 13

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

Accepted Answer

A) Accepted,because this is a financing project and the IRR is less than the discount rate. 
B) Rejected,because this is an investing project and the IRR is less than the discount rate. 
C) Accepted,because this is a financing project and the IRR is greater than the discount rate. 
D) Rejected,because this is an investing project and the IRR is greater than the discount rate. 
E) Accepted,because the IRR equals the discount rate. 
A) Accepted,because this is a financing project and the IRR is less than the discount rate. 
B) Rejected,because this is an investing project and the IRR is less than the discount rate. 
C) Accepted,because this is a financing project and the IRR is greater than the discount rate. 
D) Rejected,because this is an investing project and the IRR is greater than the discount rate. 
E) Accepted,because the IRR equals the discount rate.

Question 14

The Depot is considering a project with an initial cost for fixed assets of $279,900 and annual sales of $284,000 for four years.The profit margin is 6.72 percent,and the tax rate is 34 percent.The fixed assets will be depreciated straight-line over the life of the project to a zero book value.The required average accounting rate of return is 14.5 percent.Should this project be accepted or rejected? What is the AAR?

Accepted Answer

A) Rejected; 14.81% 
B) Rejected; 13.68% 
C) Rejected; 15.03% 
D) Accepted; 14.81% 
E) Accepted; 13.68% 
A) Rejected; 14.81% 
B) Rejected; 13.68% 
C) Rejected; 15.03% 
D) Accepted; 14.81% 
E) Accepted; 13.68%

Question 15

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRRB-A?

Accepted Answer

A) 2.89% 
B) 4.07% 
C) 5.91% 
D) 6.75% 
E) 7.90% 
A) 2.89% 
B) 4.07% 
C) 5.91% 
D) 6.75% 
E) 7.90%

Question 16

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

Accepted Answer

A) .92 
B) 1.05 
C) .99 
D) 1.01 
E) .96 
A) .92 
B) 1.05 
C) .99 
D) 1.01 
E) .96

Question 17

You are considering two independent projects.The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B.Project A has an initial cost of $51,400 and cash inflows of $21,400,$24,900,and $22,200 for Years 1 to 3,respectively.Project B has an initial cost of $38,300 and cash inflows of $23,000 a year for 2 years.Which project(s),if either,should you accept?

Accepted Answer

A) Accept both A and B 
B) Reject both A and B 
C) Accept A and reject B 
D) Accept B and reject A 
E) Accept either A or B but not both A and B 
A) Accept both A and B 
B) Reject both A and B 
C) Accept A and reject B 
D) Accept B and reject A 
E) Accept either A or B but not both A and B

Question 18

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?

Accepted Answer

A) 14.66% 
B) 13.22% 
C) 12.73% 
D) 18.67% 
E) 15.70% 
A) 14.66% 
B) 13.22% 
C) 12.73% 
D) 18.67% 
E) 15.70%

Question 19

Analysis using the profitability index

Accepted Answer

A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) offers no real value when making capital structure decisions. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results that typically are difficult to comprehend or apply. 
A) frequently conflicts with the accept and reject decisions generated by the application of the net present value rule. 
B) is useful as a decision tool when investment funds are limited. 
C) offers no real value when making capital structure decisions. 
D) utilizes the same basic variables as those used in the average accounting return. 
E) produces results that typically are difficult to comprehend or apply.

Question 20

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?

Accepted Answer

A) 17.77% 
B) 18.13% 
C) 18.66% 
D) 17.04% 
E) 16.98% 
A) 17.77% 
B) 18.13% 
C) 18.66% 
D) 17.04% 
E) 16.98%

What is the key reason why a positive NPV project should be accepted?

The average accounting return method

Net present value

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

The modified internal rate of return is designed primarily to analyze projects that

You are considering a project with conventional cash flows.The IRR is 12.6 percent,NPV is -$198,and the payback period is 2.87 years.Which one of the following statements is correct given this information?

The discounted payback method

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR_B-A?

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?

Analysis using the profitability index

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

Exam 7: Net Present Value and Other Investment Rules

What is the key reason why a positive NPV project should be accepted?

The average accounting return method

Net present value

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

The modified internal rate of return is designed primarily to analyze projects that

You are considering a project with conventional cash flows.The IRR is 12.6 percent,NPV is -$198,and the payback period is 2.87 years.Which one of the following statements is correct given this information?

The discounted payback method

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRRB-A?

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?

Analysis using the profitability index

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR_B-A?