Question 1

If a project has a profitability index greater than 1

Accepted Answer

A) the npv will also be positive. 
B) the irr will be higher than the required rate of return. 
C) the present value of future cash flows will exceed the amount invested in the project. 
D) all of the above. 
A) the npv will also be positive. 
B) the irr will be higher than the required rate of return. 
C) the present value of future cash flows will exceed the amount invested in the project. 
D) all of the above.

Question 2

Which of the following factors is least important to capital budgeting decisions?

Accepted Answer

A) The time value of money 
B) The risk-return tradeoff 
C) Net income based on accrual accounting principles 
D) Cash flows directly resulting from the decision 
A) The time value of money 
B) The risk-return tradeoff 
C) Net income based on accrual accounting principles 
D) Cash flows directly resulting from the decision

Question 3

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
Year 1 $12,000 $10,000
Year 2 $8,000 $10,000
Year 3 $6,000 0
Year 4 $2,000 0
Year 5 $2,000 0
-Discounted payback periods for projects Y and Z are

Accepted Answer

A) 1.64 and 1.71 years. 
B) 3.14 years and never. 
C) 2 years and 2 years. 
D) 5 years and never. 
A) 1.64 and 1.71 years. 
B) 3.14 years and never. 
C) 2 years and 2 years. 
D) 5 years and never.

Question 4

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

Accepted Answer

A) True 
 B)False

Question 5

Two projects are under consideration by the same company at the same time.Project Alpha has a NPV of $20 million and an estimated useful life of 10 years.Project Beta has a NPV of $12 million and also an estimated useful life of 10 years.What should the company's decision be
a)if the project's involve unrelated expansion decisions or
b)if the project's are mutually exclusive because they would have to occupy the same space?

Accepted Answer

If the projects involve unrelated expans

Question 6

Whenever the IRR on a project equals that project's required rate of return

Accepted Answer

A) the NPV equals 0. 
B) The NPV equals the initial investment. 
C) The profitability index equals 0. 
D) The NPV equals 1. 
A) the NPV equals 0. 
B) The NPV equals the initial investment. 
C) The profitability index equals 0. 
D) The NPV equals 1.

Question 7

Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000,$40,000,and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000,$40,000,and $50,000.If the required rate of return is greater than 0% and the projects are mutually exclusive

Accepted Answer

A) H will always be preferable to T. 
B) T will always be preferable to H. 
C) H and T are equally attractive. 
D) The project rankings will change with different discount rates. 
A) H will always be preferable to T. 
B) T will always be preferable to H. 
C) H and T are equally attractive. 
D) The project rankings will change with different discount rates.

Question 8

When various capital budgeting techniques rank mutually exclusive projects differently,which of the following is theoretically most reliable?

Accepted Answer

A) IRR 
B) Equivalent annual cost (EA
C) . 
C) NPV 
D) Discounted payback 
A) IRR 
B) Equivalent annual cost (EA
C) . 
C) NPV 
D) Discounted payback

Question 9

What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for Years 3 through 5?

Accepted Answer

A) 3 1/2 
B) 4 1/2 
C) 4 2/3 
D) 5 
A) 3 1/2 
B) 4 1/2 
C) 4 2/3 
D) 5

Question 10

Project November requires an initial investment of $500,000.The present value of operating cash flows is $550,000.Project December requires an initial investment of $750,000.The present value of operating cash flows is $810,000.
a.Compute the profitability index for each project.
b.If the projects are mutually exclusive,does the profitability index rank them correctly?

Accepted Answer

a.The PI for November is 550,000/500,000

Question 11

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).

Accepted Answer

A) All possible IRR's for this project are negative. 
B) It is not possible to compute an IRR for this project. 
C) This project might have more than one IRR,but only one MIRR. 
D) The project is unacceptable at any required rate of return.This project might have more than one IRR. 
A) All possible IRR's for this project are negative. 
B) It is not possible to compute an IRR for this project. 
C) This project might have more than one IRR,but only one MIRR. 
D) The project is unacceptable at any required rate of return.This project might have more than one IRR.

Question 12

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
Year 1 $12,000 $10,000
Year 2 $8,000 $10,000
Year 3 $6,000 0
Year 4 $2,000 0
Year 5 $2,000 0
-Payback for Project Y is

Accepted Answer

A) two years. 
B) one year. 
C) three years. 
D) four years. 
A) two years. 
B) one year. 
C) three years. 
D) four years.

Question 13

Which of the following is a correct EXCEL formula to solve for the net present value of a project.

Accepted Answer

A) =NPV (k,CF1, CF2,...CFn)+CF0 
B) =NPV (k,CF0,CF1, CF2,...CFn) 
C) =NPV (CF0,CF1, CF2,...CFn) 
D) =NPV (CF1, CF2,...CFn)+CF0 
A) =NPV (k,CF1, CF2,...CFn)+CF0 
B) =NPV (k,CF0,CF1, CF2,...CFn) 
C) =NPV (CF0,CF1, CF2,...CFn) 
D) =NPV (CF1, CF2,...CFn)+CF0

Question 14

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
Year 1 $12,000 $10,000
Year 2 $8,000 $10,000
Year 3 $6,000 0
Year 4 $2,000 0
Year 5 $2,000 0
-What is payback for Project Z?

Accepted Answer

A) Two years 
B) One year 
C) Zero years 
D) Project Z does not payback the original investment. 
A) Two years 
B) One year 
C) Zero years 
D) Project Z does not payback the original investment.

Question 15

Project Sigma requires an investment of $1 million and has a NPV of $10.Project Delta requires an investment of $500,000 and has a NPV of $150,000.The projects involve unrelated new product lines.

Accepted Answer

A) Both projects should be accepted because they have positive NPV's. 
B) Neither project should be accepted because they might compete with one another. 
C) Only project Delta should be accepted.Alpha's NPV is too low for the investment. 
D) The company should look at other investment criteria,not just NPV. 
A) Both projects should be accepted because they have positive NPV's. 
B) Neither project should be accepted because they might compete with one another. 
C) Only project Delta should be accepted.Alpha's NPV is too low for the investment. 
D) The company should look at other investment criteria,not just NPV.

Question 16

The equivalent annual cost (EAC)method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act.

Accepted Answer

A) True 
 B)False

Question 17

Aroma Candles,Inc.is evaluating a project with the following cash flows.Calculate the IRR of the project.(Round to the nearest whole percentage. )
Year Cash Flows
0 ($120,000)
1 $30,000
2 $70,000
3 $90,000

Accepted Answer

A) 18% 
B) 23% 
C) 28% 
D) 33% 
A) 18% 
B) 23% 
C) 28% 
D) 33%

Question 18

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a discount rate of 8%.Would you accept or reject the investment?

Accepted Answer

After-tax PVIF Present
Year Cash Flow at

Question 19

With respect to the capital budgeting practices of large U.S.corporations

Accepted Answer

A) the profitability index has been gaining in popularity. 
B) IRR and NPV have been gaining in popularity. 
C) payback and discounted payback have been gaining in popularity. 
D) IRR and NPV have declined in popularity. 
A) the profitability index has been gaining in popularity. 
B) IRR and NPV have been gaining in popularity. 
C) payback and discounted payback have been gaining in popularity. 
D) IRR and NPV have declined in popularity.

Question 20

Capital budgeting is the decision-making process with respect to investment in working capital.

Accepted Answer

A) True 
 B)False

If a project has a profitability index greater than 1

Which of the following factors is least important to capital budgeting decisions?

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

Whenever the IRR on a project equals that project's required rate of return

When various capital budgeting techniques rank mutually exclusive projects differently,which of the following is theoretically most reliable?

What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for Years 3 through 5?

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).

Which of the following is a correct EXCEL formula to solve for the net present value of a project.

Project Sigma requires an investment of $1 million and has a NPV of $10.Project Delta requires an investment of $500,000 and has a NPV of $150,000.The projects involve unrelated new product lines.

The equivalent annual cost (EAC)method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act.

Aroma Candles,Inc.is evaluating a project with the following cash flows.Calculate the IRR of the project.(Round to the nearest whole percentage. ) Year Cash Flows 0 ($120,000) 1 $30,000 2 $70,000 3 $90,000

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a discount rate of 8%.Would you accept or reject the investment?

With respect to the capital budgeting practices of large U.S.corporations

Capital budgeting is the decision-making process with respect to investment in working capital.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 11: Investment Decision Criteria

If a project has a profitability index greater than 1

Which of the following factors is least important to capital budgeting decisions?

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

Whenever the IRR on a project equals that project's required rate of return

When various capital budgeting techniques rank mutually exclusive projects differently,which of the following is theoretically most reliable?

What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for Years 3 through 5?

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).

Which of the following is a correct EXCEL formula to solve for the net present value of a project.

Project Sigma requires an investment of $1 million and has a NPV of $10.Project Delta requires an investment of $500,000 and has a NPV of $150,000.The projects involve unrelated new product lines.

The equivalent annual cost (EAC)method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act.

Aroma Candles,Inc.is evaluating a project with the following cash flows.Calculate the IRR of the project.(Round to the nearest whole percentage. ) Year Cash Flows 0 ($120,000) 1 $30,000 2 $70,000 3 $90,000

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a discount rate of 8%.Would you accept or reject the investment?

With respect to the capital budgeting practices of large U.S.corporations

Capital budgeting is the decision-making process with respect to investment in working capital.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters