Question 1

An investment project provides cash flows of $1,190 per year for 10 years.If the initial cost is $8,000,what is the payback period?

Accepted Answer

A) 3.36 years 
B) 5.28 years 
C) 6.72 years 
D) 8.13 years 
E) never

Question 2

A project has a net present value of zero.Which one of the following best describes this project?

Accepted Answer

A) The project has a zero percent rate of return. 
B) The project requires no initial cash investment. 
C) The project has no cash flows. 
D) The summation of all of the project's cash flows is zero. 
E) The project's cash inflows equal its cash outflows in current dollar terms.

Question 3

It will cost $6,000 to acquire an ice cream cart.Cart sales are expected to be $3,600 a year for three years.After the three years,the cart is expected to be worthless as the expected life of the refrigeration unit is only three years.What is the payback period?

Accepted Answer

A) 1.48 years 
B) 1.67 years 
C) 1.82 years 
D) 1.95 years 
E) 2.00 years

Question 4

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Accepted Answer

A) conflicts with the results of the net present value decision rule 
B) assumes the firm has sufficient funds to undertake both projects 
C) agrees with the decision that would also apply if the projects were mutually exclusive 
D) bases the accept/reject decision on the same variables as the average accounting return 
E) fails to provide useful information as the firm must reject at least one of the projects

Question 5

Why is payback often used as the sole method of analyzing a proposed small project?

Accepted Answer

A) Payback considers the time value of money. 
B) All relevant cash flows are included in the payback analysis. 
C) It is the only method where the benefits of the analysis outweigh the costs of that analysis. 
D) Payback is the most desirable of the various financial methods of analysis. 
E) Payback is focused on the long-term impact of a project.

Question 6

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A) building a retail store that is attached to a wholesale outlet 
B) producing both plastic forks and spoons on the same assembly line at the same time 
C) using an empty warehouse to store both raw materials and finished goods 
D) promoting two products during the same television commercial 
E) waiting until a machine finishes molding Product A before being able to mold Product B

Question 7

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I.exclusion of time value of money considerations
II.need of a cutoff rate
III.easily obtainable information for computation
IV.based on accounting values

Accepted Answer

A) I only 
B) I and IV only 
C) II and III only 
D) I, II, and IV only 
E) I, II, III, and IV

Question 8

You are considering a project with an initial cost of $7,500.What is the payback period for this project if the cash inflows are $1,100,$1,640,$3,800,and $4,500 a year over the next four years,respectively?

Accepted Answer

A) 3.21 years 
B) 3.28 years 
C) 3.36 years 
D) 4.21 years 
E) 4.29 years

Question 9

A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?

Accepted Answer

A) net present value 
B) internal return 
C) payback value 
D) profitability index 
E) discounted payback

Question 10

Which one of the following statements is correct in relation to independent projects?

Accepted Answer

A) The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. 
B) A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. 
C) A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. 
D) The net present value profile is upsloping for projects with both investing and financing type cash flows. 
E) Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

Question 11

The Square Box is considering two projects,both of which have an initial cost of $35,000 and total cash inflows of $50,000.The cash inflows of project A are $5,000,$10,000,$15,000,and $20,000 over the next four years,respectively.The cash inflows for project B are $20,000,$15,000,$10,000,and $5,000 over the next four years,respectively.Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years?

Accepted Answer

A) Both projects should be accepted. 
B) Both projects should be rejected. 
C) Project A should be accepted and project B should be rejected. 
D) Project A should be rejected and project B should be accepted. 
E) You should be indifferent to accepting either or both projects.

Question 12

You are considering the following two mutually exclusive projects.The required rate of return is 14.6 percent for project A and 13.8 percent for project B.Which project should you accept and why?

Accepted Answer

A)  project A; because it has the higher required rate of return 
B)  project A; because its NPV is about $4,900 more than the NPV of project B 
C)  project B; because it has the largest total cash inflow 
D)  project B; because it has the largest cash inflow in year one 
E)  project B; because it has the lower required return

Question 13

The profitability index is most closely related to which one of the following?

Accepted Answer

A) payback 
B) discounted payback 
C) average accounting return 
D) net present value 
E) modified internal rate of return

Question 14

A project has an initial cost of $6,500.The cash inflows are $900,$2,200,$3,600,and $4,100 over the next four years,respectively.What is the payback period?

Accepted Answer

A) 1.73 years 
B) 2.51 years 
C) 2.94 years 
D) 3.51 years 
E) 3.94 years

Question 15

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?

Accepted Answer

A) The net present value indicates accept while the internal rate of return indicates reject. 
B) Payback indicates acceptance. 
C) The payback decision rule could override the accept decision indicated by the net present value. 
D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. 
E) The net present value decision rule is the only rule that matters when making the final decision.

Question 16

A project has average net income of $5,900 a year over its 6-year life.The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimum average accounting return of 11.5 percent.The firm should _____ the project because the AAR is _____ percent.

Accepted Answer

A) accept; 5.71 
B) accept; 9.90 
C) accept; 12.04 
D) reject; 5.71 
E) reject; 12.04

Question 17

A firm evaluates all of its projects by applying the IRR rule.The required return for the following project is 21 percent.The IRR is _____ percent and the firm should ______ the project.

Accepted Answer

A) 16.05 percent; reject 
B) 16.05 percent; accept 
C) 24.26 percent; reject 
D) 26.30 percent; accept 
E) 26.30 percent; reject

Question 18

Explain the differences and similarities between net present value (NPV)and the profitability index.

Accepted Answer

The answer of Explain the differences and similarities between net...

Question 19

Consider the following two mutually exclusive projects:  What is the crossover rate for these two projects?

Accepted Answer

A) 8.22 percent 
B) 8.48 percent 
C) 8.71 percent 
D) 8.75 percent 
E) 8.94 percent

Question 20

A project's average net income divided by its average book value is referred to as the project's average:

Accepted Answer

A) net present value. 
B) internal rate of return. 
C) accounting return. 
D) profitability index. 
E) payback period.

Exam 9: Net Present Value and Other Investment Criteria