Question 1

All of the following are strengths of payback EXCEPT:

Accepted Answer

A) its benchmark is not determined by a relevant external constraint. 
B) it incorporates the time value of money. 
C) it uses a conservative reinvestment rate. 
D) none of the options. 
A) its benchmark is not determined by a relevant external constraint. 
B) it incorporates the time value of money. 
C) it uses a conservative reinvestment rate. 
D) none of the options.

Question 2

Which of the following best describes the NPV profile?

Accepted Answer

A) A graph of a project's NPV as a function of possible IRRs. 
B) A graph of a project's NPV over time. 
C) A graph of a project's NPV as a function of possible capital costs. 
D) None of the statements are correct. 
A) A graph of a project's NPV as a function of possible IRRs. 
B) A graph of a project's NPV over time. 
C) A graph of a project's NPV as a function of possible capital costs. 
D) None of the statements are correct.

Question 3

Which of the following tools is suitable for choosing between mutually exclusive projects?

Accepted Answer

A) NPV 
B) IRR 
C) MIRR 
D) None are suitable 
A) NPV 
B) IRR 
C) MIRR 
D) None are suitable

Question 4

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000 \
\hline
\end{array}$$

Accepted Answer

A) 1.23 years, Accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject 
A) 1.23 years, Accept 
B) 2.45 years, accept 
C) 2.77 years, accept 
D) 5.36 years, reject

Question 5

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 75 & - 75 & 0 & 100 & 75 & 50 \
\hline
\end{array}$$

Accepted Answer

A) 3.67 years, accept 
B) 4.67 years, accept 
C) 3.67 years, reject 
D) 4.67 years, reject 
A) 3.67 years, accept 
B) 4.67 years, accept 
C) 3.67 years, reject 
D) 4.67 years, reject

Question 6

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the NPV decision to evaluate this project; should it be accepted or rejected? 
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 5 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 &
\end{array}$$

Accepted Answer

A) NPV = $1,766.55; accept the project 
B) NPV =-$892.19; reject the project 
C) NPV = $1,288.94; accept the project 
D) NPV = -$3,577.90; reject the project 
A) NPV = $1,766.55; accept the project 
B) NPV =-$892.19; reject the project 
C) NPV = $1,288.94; accept the project 
D) NPV = -$3,577.90; reject the project

Question 7

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \
\hline
\end{array}$$

Accepted Answer

A) 0.23 years, accept 
B) 1.77 years, accept 
C) 2 years, accept 
D) 4.33 years, reject 
A) 0.23 years, accept 
B) 1.77 years, accept 
C) 2 years, accept 
D) 4.33 years, reject

Question 8

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array} { l c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 1,000 & \$ 300 & \$ 1,480 & - \$ 500 & \$ 300 & - \$ 100 \
\hline
\end{array}$$

Accepted Answer

A)  The project's MIRR is 14.77 percent and the project should be accepted. 
B)  The project's MIRR is 9.29 percent and the project should be rejected. 
C)  The project's MIRR is 13.76 percent and the project should be accepted. 
D)  The project's MIRR is 15.31 percent and the project should be accepted. 
A)  The project's MIRR is 14.77 percent and the project should be accepted. 
B)  The project's MIRR is 9.29 percent and the project should be rejected. 
C)  The project's MIRR is 13.76 percent and the project should be accepted. 
D)  The project's MIRR is 15.31 percent and the project should be accepted.

Question 9

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

Accepted Answer

A) Internal rate of return (IRR) 
B) Modified internal rate of return (MIRR) 
C) Profitability index (PI) 
D) Net present value (NPV) 
A) Internal rate of return (IRR) 
B) Modified internal rate of return (MIRR) 
C) Profitability index (PI) 
D) Net present value (NPV)

Question 10

A project's IRR is the interest rate that:

Accepted Answer

A) causes the project's NPV to equal zero. 
B) is used to discount cash flows when computing the project's NPV. 
C) is used to determine which one of two mutually exclusive projects should be accepted. 
D) is used to compute the project's discounted payback period. 
A) causes the project's NPV to equal zero. 
B) is used to discount cash flows when computing the project's NPV. 
C) is used to determine which one of two mutually exclusive projects should be accepted. 
D) is used to compute the project's discounted payback period.

Question 11

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent. 
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & \mathbf { 1 } & \mathbf { 2 } & \mathbf { 3 } & \mathbf { 4 } & \mathbf { 5 } \
\hline \text { Cash flow: } & - \mathbf { 1 , 0 0 0 } & - \mathbf { 7 5 } & \mathbf { 1 0 0 } & \mathbf { 1 0 0 } & 0 & 2,000 \
\hline
\end{array}$$

Accepted Answer

A) (-$639.96) 
B) $360.04 
C) $392.44 
D) $486.29 
A) (-$639.96) 
B) $360.04 
C) $392.44 
D) $486.29

Question 12

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Accepted Answer

A) MIRR. 
B) profitability index. 
C) IRR. 
D) NPV. 
A) MIRR. 
B) profitability index. 
C) IRR. 
D) NPV.

Question 13

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

Accepted Answer

A) Project B because it has the higher NPV. 
B) Project B because it has the higher IRR. 
C) Project A because it has the higher NPV. 
D) Project A because it has the higher IRR. 
A) Project B because it has the higher NPV. 
B) Project B because it has the higher IRR. 
C) Project A because it has the higher NPV. 
D) Project A because it has the higher IRR.

Question 14

A company is considering two mutually exclusive projects, A and B Project A requires an initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50, and $230. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

Accepted Answer

A) 15.45 percent 
B) 15.12 percent 
C) 13.57 percent 
D) 12.71 percent 
A) 15.45 percent 
B) 15.12 percent 
C) 13.57 percent 
D) 12.71 percent

Question 15

How many possible IRRs could you find for the following set of cash flows? $$\begin{array} { l c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 \
\text { Cash Flow } & - \$ 10,000 & \$ 5,350 & \$ 4,180 & \$ 1,520 & \$ 2,000
\end{array}$$

Accepted Answer

A) 1 
B) 2 
C) 3 
D) Unable to determine unless we have the cost of capital. 
A) 1 
B) 2 
C) 3 
D) Unable to determine unless we have the cost of capital.

Question 16

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3  \
\hline \text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000 \
\hline
\end{array}$$
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 17

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000 \
\hline
\end{array}$$

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B 
A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 18

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 1,000 & 500 & 480 & 400 & 300 & 150 \
\hline
\end{array}$$

Accepted Answer

A) 2.49 years, accept 
B) 2.98 years, accept 
C) 3.49 years, reject 
D) 4.98 years, reject 
A) 2.49 years, accept 
B) 2.98 years, accept 
C) 3.49 years, reject 
D) 4.98 years, reject

Question 19

The MIRR statistic is different from the IRR statistic in that:

Accepted Answer

A) the MIRR assumes that the cash inflows can be reinvested at the cost of capital. 
B) the MIRR assumes that the cash inflows can be reinvested at the IRR. 
C) the MIRR uses weighted-average dollars. 
D) the MIRR uses input from the NPV whereas the IRR does not. 
A) the MIRR assumes that the cash inflows can be reinvested at the cost of capital. 
B) the MIRR assumes that the cash inflows can be reinvested at the IRR. 
C) the MIRR uses weighted-average dollars. 
D) the MIRR uses input from the NPV whereas the IRR does not.

Question 20

We accept projects with a positive NPV because it means that:

Accepted Answer

A) we have recovered all our costs. 
B) we are creating wealth for shareholders. 
C) the project's expected return exceeds the cost of capital. 
D) all of the options. 
A) we have recovered all our costs. 
B) we are creating wealth for shareholders. 
C) the project's expected return exceeds the cost of capital. 
D) all of the options.

All of the following are strengths of payback EXCEPT:

Which of the following best describes the NPV profile?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 300 \ 1,480 -\ 500 \ 300 -\ 100

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

A project's IRR is the interest rate that:

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent. Time: 0 Cash flow: - - 0 2,000

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -\ 10,000 \ 5,350 \ 4,180 \ 1,520 \ 2,000

The MIRR statistic is different from the IRR statistic in that:

We accept projects with a positive NPV because it means that:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

All of the following are strengths of payback EXCEPT:

Which of the following best describes the NPV profile?

Which of the following tools is suitable for choosing between mutually exclusive projects?

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 300 \ 1,480 -\ 500 \ 300 -\ 100

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

A project's IRR is the interest rate that:

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent. Time: 0 Cash flow: - - 0 2,000

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -\ 10,000 \ 5,350 \ 4,180 \ 1,520 \ 2,000

The MIRR statistic is different from the IRR statistic in that:

We accept projects with a positive NPV because it means that:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters