Question 1

The disadvantage of the IRR method is that

Accepted Answer

A) the IRR deals with cash flows. 
B) the IRR gives equal regard to all returns within a project's life. 
C) the IRR will always give the same project accept/reject decision as the NPV. 
D) the IRR requires long,detailed cash flow forecasts. 
A) the IRR deals with cash flows. 
B) the IRR gives equal regard to all returns within a project's life. 
C) the IRR will always give the same project accept/reject decision as the NPV. 
D) the IRR requires long,detailed cash flow forecasts.

Question 2

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

Accepted Answer

A) the net present value 
B) the payback 
C) the internal rate of return 
D) the equivalent annual annuity 
A) the net present value 
B) the payback 
C) the internal rate of return 
D) the equivalent annual annuity

Question 4

For any individual project,if the project is acceptable based on its internal rate of return,then the project will also be acceptable based on its modified internal rate of return.

Accepted Answer

A) True 
 B)False

Question 5

If the NPV (Net Present Value)of a project with multiple sign reversals is positive,then the project's required rate of return ________ its calculated IRR (Internal Rate of Return).

Accepted Answer

A) must be less than 
B) must be greater than 
C) could be greater or less than 
D) cannot be determined without actual cash flows 
A) must be less than 
B) must be greater than 
C) could be greater or less than 
D) cannot be determined without actual cash flows

Question 6

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

Accepted Answer

A) 3.33 years 
B) 3.16 years 
C) 2.67 years 
D) 2.33 years 
A) 3.33 years 
B) 3.16 years 
C) 2.67 years 
D) 2.33 years

Question 7

The net present value always provides the correct decision provided that

Accepted Answer

A) cash flows are constant over the asset's life. 
B) the required rate of return is greater than the internal rate of return. 
C) capital rationing is not imposed. 
D) the internal rate of return is positive. 
A) cash flows are constant over the asset's life. 
B) the required rate of return is greater than the internal rate of return. 
C) capital rationing is not imposed. 
D) the internal rate of return is positive.

Question 8

Capital rationing may be imposed because of all of the following EXCEPT

Accepted Answer

A) capital market conditions are poor. 
B) management has a fear of debt. 
C) stockholder control problems prevent issuance of additional stock. 
D) the company's stock price is at an historically high level. 
A) capital market conditions are poor. 
B) management has a fear of debt. 
C) stockholder control problems prevent issuance of additional stock. 
D) the company's stock price is at an historically high level.

Question 9

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

Accepted Answer

A) True 
 B)False

Question 10

All of the following are sufficient indications to accept a project EXCEPT (assume that there is no capital rationing constraint,and no consideration is given to payback as a decision tool)

Accepted Answer

A) the net present value of an independent project is positive. 
B) the profitability index of an independent project exceeds one. 
C) the IRR of a mutually exclusive project exceeds the required rate of return. 
D) the NPV of a mutually exclusive project is positive and exceeds that of all other projects. 
A) the net present value of an independent project is positive. 
B) the profitability index of an independent project exceeds one. 
C) the IRR of a mutually exclusive project exceeds the required rate of return. 
D) the NPV of a mutually exclusive project is positive and exceeds that of all other projects.

Question 11

An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one.

Accepted Answer

A) True 
 B)False

Question 12

A significant disadvantage of the payback period is that it

Accepted Answer

A) is complicated to explain. 
B) increases firm risk. 
C) does not properly consider the time value of money. 
D) provides a measure of liquidity 
A) is complicated to explain. 
B) increases firm risk. 
C) does not properly consider the time value of money. 
D) provides a measure of liquidity

Question 13

The net present value method

Accepted Answer

A) is consistent with the goal of shareholder wealth maximization. 
B) recognizes the time value of money. 
C) uses all of a project's cash flows. 
D) all of the above. 
A) is consistent with the goal of shareholder wealth maximization. 
B) recognizes the time value of money. 
C) uses all of a project's cash flows. 
D) all of the above.

Question 14

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 modified internal rate of return for Project A is

Accepted Answer

A) 19.19%. 
B) 24.18%. 
C) 26.89%. 
D) 29.63%. 
A) 19.19%. 
B) 24.18%. 
C) 26.89%. 
D) 29.63%.

Question 15

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 internal rate of return?

Accepted Answer

A) 27.28% 
B) 21.26% 
C) 20.53% 
D) 15.98% 
A) 27.28% 
B) 21.26% 
C) 20.53% 
D) 15.98%

Question 16

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

Accepted Answer

A) True 
 B)False

Question 17

The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.

Accepted Answer

A) True 
 B)False

Question 18

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

Accepted Answer

A) True 
 B)False

Question 19

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

Accepted Answer

A) True 
 B)False

Question 20

If a project's profitability index is less than one then the project should be rejected.

Accepted Answer

A) True 
 B)False

The disadvantage of the IRR method is that

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

For any individual project,if the project is acceptable based on its internal rate of return,then the project will also be acceptable based on its modified internal rate of return.

If the NPV (Net Present Value)of a project with multiple sign reversals is positive,then the project's required rate of return ________ its calculated IRR (Internal Rate of Return).

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

The net present value always provides the correct decision provided that

Capital rationing may be imposed because of all of the following EXCEPT

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

All of the following are sufficient indications to accept a project EXCEPT (assume that there is no capital rationing constraint,and no consideration is given to payback as a decision tool)

An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one.

A significant disadvantage of the payback period is that it

The net present value method

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

If a project's profitability index is less than one then the project should be rejected.

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

The disadvantage of the IRR method is that

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

For any individual project,if the project is acceptable based on its internal rate of return,then the project will also be acceptable based on its modified internal rate of return.

If the NPV (Net Present Value)of a project with multiple sign reversals is positive,then the project's required rate of return ________ its calculated IRR (Internal Rate of Return).

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

The net present value always provides the correct decision provided that

Capital rationing may be imposed because of all of the following EXCEPT

The mutually exclusive project with the highest positive NPV will also have the highest IRR.

All of the following are sufficient indications to accept a project EXCEPT (assume that there is no capital rationing constraint,and no consideration is given to payback as a decision tool)

An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one.

A significant disadvantage of the payback period is that it

The net present value method

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.

A project that is very sensitive to the selection of a discount rate will have a steep net present value profile.

The size disparity problem occurs when mutually exclusive projects of unequal size are being examined.

If a project's profitability index is less than one then the project should be rejected.

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