Question 1

Which of the following statements about the net present value is true?

Accepted Answer

A) It produces a percentage result that is easy to describe. 
B) It has an inadequate reinvestment assumption. 
C) It is likely that there will be more than one NPV for a project. 
D) It may be used to select among projects of different sizes. 
A) It produces a percentage result that is easy to describe. 
B) It has an inadequate reinvestment assumption. 
C) It is likely that there will be more than one NPV for a project. 
D) It may be used to select among projects of different sizes.

Question 2

Arguments against using the net present value and internal rate of return methods include that

Accepted Answer

A) they fail to use accounting profits. 
B) they require detailed long-term forecasts of the incremental benefits and costs. 
C) they fail to consider how the investment project is to be financed. 
D) they fail to use the cash flow of the project. 
A) they fail to use accounting profits. 
B) they require detailed long-term forecasts of the incremental benefits and costs. 
C) they fail to consider how the investment project is to be financed. 
D) they fail to use the cash flow of the project.

Question 3

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

Accepted Answer

A) True 
 B)False

Question 4

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

Accepted Answer

A) True 
 B)False

Question 5

The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

Accepted Answer

A) True 
 B)False

Question 6

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The profitability index for Project A is

Accepted Answer

A) 1.27. 
B) 1.22. 
C) 1.17. 
D) 1.12. 
A) 1.27. 
B) 1.22. 
C) 1.17. 
D) 1.12.

Question 7

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

Accepted Answer

A) True 
 B)False

Question 8

Under what condition would you NOT accept a project that has a positive net present value?

Accepted Answer

A) If the project has a profitability index less than zero. 
B) If two or more projects are mutually inclusive. 
C) If the firm is limited in the capital it has available (capital rationing). 
D) If a project has more than one sign reversal. 
A) If the project has a profitability index less than zero. 
B) If two or more projects are mutually inclusive. 
C) If the firm is limited in the capital it has available (capital rationing). 
D) If a project has more than one sign reversal.

Question 9

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

Accepted Answer

A) True 
 B)False

Question 10

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments

Accepted Answer

A) the payback period for Project W will be longer than 5.6 years. 
B) the payback period for Project W will be shorter than 5.6 years. 
C) the IRR of Project W will increase. 
D) the NPV of Project W will decrease. 
A) the payback period for Project W will be longer than 5.6 years. 
B) the payback period for Project W will be shorter than 5.6 years. 
C) the IRR of Project W will increase. 
D) the NPV of Project W will decrease.

Question 11

When reviewing the net present profile for a project

Accepted Answer

A) the higher the discount rate,the higher the NPV. 
B) the higher the discount rate,the higher the IRR. 
C) the IRR will always be a point on the horizontal axis line where NPV = 0. 
D) the IRR will always be a point on the horizontal axis equal to the required return. 
A) the higher the discount rate,the higher the NPV. 
B) the higher the discount rate,the higher the IRR. 
C) the IRR will always be a point on the horizontal axis line where NPV = 0. 
D) the IRR will always be a point on the horizontal axis equal to the required return.

Question 12

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's profitability index?

Accepted Answer

A) 1.21 
B) 1.26 
C) 1.43 
D) 1.69 
A) 1.21 
B) 1.26 
C) 1.43 
D) 1.69

Question 13

Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

Accepted Answer

A) $540,000 
B) $378,458 
C) $192,369 
D) $112,583 
A) $540,000 
B) $378,458 
C) $192,369 
D) $112,583

Question 14

Which of the following statements about the internal rate of return (IRR)is true?

Accepted Answer

A) It has the most conservative and realistic reinvestment assumption. 
B) It never gives conflicting answers. 
C) It fully considers the time value of money. 
D) It is greater than the modified internal rate of return if the discount rate is higher than the IRR. 
A) It has the most conservative and realistic reinvestment assumption. 
B) It never gives conflicting answers. 
C) It fully considers the time value of money. 
D) It is greater than the modified internal rate of return if the discount rate is higher than the IRR.

Question 15

Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

Accepted Answer

A) -$14,947 
B) $2,892 
C) $7,089 
D) $41,000 
A) -$14,947 
B) $2,892 
C) $7,089 
D) $41,000

Question 16

A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.

Accepted Answer

A) True 
 B)False

Question 17

An infinite-life replacement chain allows projects of different lengths to be compared.

Accepted Answer

A) True 
 B)False

Question 18

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The net present value for Project B is

Accepted Answer

A) $58,097. 
B) $66,363. 
C) $74,538. 
D) $112,000. 
A) $58,097. 
B) $66,363. 
C) $74,538. 
D) $112,000.

Question 19

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

Accepted Answer

A) True 
 B)False

Question 20

The internal rate of return will equal the discount rate when the net present value equals zero.

Accepted Answer

A) True 
 B)False

Which of the following statements about the net present value is true?

Arguments against using the net present value and internal rate of return methods include that

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

Under what condition would you NOT accept a project that has a positive net present value?

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments

When reviewing the net present profile for a project

Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

Which of the following statements about the internal rate of return (IRR)is true?

Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.

An infinite-life replacement chain allows projects of different lengths to be compared.

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

The internal rate of return will equal the discount rate when the net present value equals zero.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 10: Capital-Budgeting Techniques and Practice

Which of the following statements about the net present value is true?

Arguments against using the net present value and internal rate of return methods include that

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

NPV assumes reinvestment of intermediate free cash flows at the cost of capital,while IRR assumes reinvestment of intermediate free cash flows at the IRR.

Under what condition would you NOT accept a project that has a positive net present value?

One positive feature of the payback period is it emphasizes the earliest forecasted free cash flows,which are less uncertain than later cash flows and provide for the liquidity needs of the firm.

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments

When reviewing the net present profile for a project

Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

Which of the following statements about the internal rate of return (IRR)is true?

Design Quilters is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.

An infinite-life replacement chain allows projects of different lengths to be compared.

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

The internal rate of return will equal the discount rate when the net present value equals zero.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters