Question 1

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.

Accepted Answer

A) True 
 B)False

Question 2

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

Accepted Answer

IRR = 1.69% from Excel Spreads

Question 3

The required rate of return reflects the costs of funds needed to finance a project.

Accepted Answer

A) True 
 B)False

Question 4

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

Accepted Answer

A) True 
 B)False

Question 5

What is the net present value's assumption about how cash flows are reinvested?

Accepted Answer

A) They are reinvested at the IRR. 
B) They are reinvested at the APR. 
C) They are reinvested at the firm's discount rate. 
D) They are reinvested only at the end of the project. 
A) They are reinvested at the IRR. 
B) They are reinvested at the APR. 
C) They are reinvested at the firm's discount rate. 
D) They are reinvested only at the end of the project.

Question 6

A significant disadvantage of the internal rate of return is that it

Accepted Answer

A) does not fully consider the time value of money. 
B) does not give proper weight to all cash flows. 
C) may have an unrealistic reinvestment assumption. 
D) is expressed as a percentage. 
A) does not fully consider the time value of money. 
B) does not give proper weight to all cash flows. 
C) may have an unrealistic reinvestment assumption. 
D) is expressed as a percentage.

Question 7

One drawback of the payback method is that some cash flows may be ignored.

Accepted Answer

A) True 
 B)False

Question 8

Project LMK requires an initial outlay of $400,000 and has a profitability index of 1.5.The project is expected to generate equal annual cash flows over the next twelve years.The required return for this project is 20%.What is project LMK's net present value?

Accepted Answer

A) $600,000 
B) $150,000 
C) $120,000 
D) $80,000 
A) $600,000 
B) $150,000 
C) $120,000 
D) $80,000

Question 9

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 equivalent annual annuity amount for project A is

Accepted Answer

A) $12,989. 
B) $13,357. 
C) $15,024. 
D) $18,532 
A) $12,989. 
B) $13,357. 
C) $15,024. 
D) $18,532

Question 10

Your firm is considering investing in one of two mutually exclusive projects.Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years.Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years.The appropriate discount rate for your firm is 12% and it is not subject to capital rationing.Assuming both projects can be replaced with a similar investment at the end of their respective lives,compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.

Accepted Answer

A) $2,232 and $85 
B) $5,000 and $1,500 
C) $2,865 and $94 
D) $3,528 and $136 
A) $2,232 and $85 
B) $5,000 and $1,500 
C) $2,865 and $94 
D) $3,528 and $136

Question 11

The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

Accepted Answer

A) True 
 B)False

Question 12

Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.

Accepted Answer

A) True 
 B)False

Question 13

All of the following are criticisms of the payback period criterion EXCEPT

Accepted Answer

A) time value of money is not accounted for. 
B) cash flows occurring after the payback are ignored. 
C) it deals with accounting profits as opposed to cash flows. 
D) none of the above; they are all criticisms of the payback period criteria. 
A) time value of money is not accounted for. 
B) cash flows occurring after the payback are ignored. 
C) it deals with accounting profits as opposed to cash flows. 
D) none of the above; they are all criticisms of the payback period criteria.

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

The required rate of return reflects the costs of funds needed to finance a project.

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

What is the net present value's assumption about how cash flows are reinvested?

A significant disadvantage of the internal rate of return is that it

One drawback of the payback method is that some cash flows may be ignored.

Project LMK requires an initial outlay of $400,000 and has a profitability index of 1.5.The project is expected to generate equal annual cash flows over the next twelve years.The required return for this project is 20%.What is project LMK's net present value?

The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.

All of the following are criticisms of the payback period criterion EXCEPT

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

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Exam 10: Capital-Budgeting Techniques and Practice

Whenever the internal rate of return on a project equals that project's required rate of return,the net present value equals zero.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

The required rate of return reflects the costs of funds needed to finance a project.

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

What is the net present value's assumption about how cash flows are reinvested?

A significant disadvantage of the internal rate of return is that it

One drawback of the payback method is that some cash flows may be ignored.

Project LMK requires an initial outlay of $400,000 and has a profitability index of 1.5.The project is expected to generate equal annual cash flows over the next twelve years.The required return for this project is 20%.What is project LMK's net present value?

The modified internal rate of return represents the project's internal rate of return assuming that intermediate cash flows from the project can be reinvested at the project's required return.

Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.

All of the following are criticisms of the payback period criterion EXCEPT

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