Question 1

Accepting positive NPV projects benefits the stockholders because:

Accepted Answer

A)  it is the most easily understood valuation process.
B)  the present value of the expected cash flows are equal to the cost.
C)  the present value of the expected cash flows are greater than the cost.
D)  it is the most easily calculated.
E)  None of the above.

Question 2

The internal rate of return may be defined as:

Accepted Answer

A)  the discount rate that makes the NPV equal to zero.
B)  the difference between the market rate of interest and the NPV.
C)  the market rate of interest less the risk-free rate.
D)  the project acceptance rate set by management.
E)  None of the above.

Question 3

Based on the profitability index (PI)  rule, should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?   Year ‾ Cash Flow ‾0−$18,6001$10,0002$7,3003$3,700\begin{array} { c c } \underline{	ext { Year }} &\underline{ 	ext { Cash Flow }} \ 0 & - \$ 18,600 \1 & \$ 10,000 \2 & \$ 7,300 \3 & \$3,700\end{array} Year ​0123​ Cash Flow ​−$18,600$10,000$7,300$3,700​

Accepted Answer

A)  yes; because the PI is 1.008.
B)  yes; because the PI is .992.
C)  yes; because the PI is .999.
D)  no; because the PI is 1.008.
E)  no; because the PI is .992.

Question 4

The Walker Landscaping Company can purchase a piece of equipment for $3,600.The asset has a two-year life, and will produce a cash flow of $600 in the first year and $4,200 in the second year.The interest rate is 15%.Calculate the project's payback assuming steady cash flows.Also calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

Accepted Answer

Payback = 1.714 year...

Question 5

Based on the profitability index of _____ for this project, you should _____ the project.

Accepted Answer

A)  .97; accept
B)  1.05; accept
C)  1.18; accept
D)  .97; reject
E)  1.05; reject

Question 6

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.

Accepted Answer

The advantages of the rule are its close...

Question 7

The internal rate of return (IRR) :
I.rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II.is the rate generated solely by the cash flows of an investment.
III.is the rate that causes the net present value of a project to exactly equal zero.
IV.can effectively be used to analyze all investment scenarios.

Accepted Answer

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

Question 8

A mutually exclusive project is a project whose:

Accepted Answer

A)  acceptance or rejection has no effect on other projects.
B)  NPV is always negative.
C)  IRR is always negative.
D)  acceptance or rejection affects other projects.
E)  cash flow pattern exhibits more than one sign change.

Question 9

It will cost $2,600 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Accepted Answer

A)  .86 years
B)  1.46 years
C)  1.86 years
D)  2.46 years
E)  2.86 years

Question 10

You are considering an investment with the following cash flows.If the required rate of return for this investment is 13.5%, should you accept it based solely on the internal rate of return rule? Why or why not?   Year ‾ Cash Flow‾0−$12,0001$5,5002$8,0003−$1,500\begin{array}{ll}\underline{	ext { Year }} & \underline{	ext { Cash Flow} } \0& -\$ 12,000 \1 & \$ 5,500 \2 & \$ 8,000 \3 & -\$ 1,500\end{array} Year ​0123​ Cash Flow​−$12,000$5,500$8,000−$1,500​

Accepted Answer

A)  Yes; because the IRR exceeds the required return.
B)  Yes; because the IRR is a positive rate of return.
C)  No; because the IRR is less than the required return.
D)  No; because the IRR is a negative rate of return.
E)  You can not apply the IRR rule in this case because there are multiple IRRs.

Question 11

The two fatal flaws of the internal rate of return rule are:

Accepted Answer

A)  arbitrary determination of a discount rate and failure to consider initial expenditures.
B)  arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
C)  arbitrary determination of a discount rate and the multiple rate of return problem.
D)  failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
E)  failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

Question 12

The Liberty Co.is considering two projects.Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center.Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center.When trying to decide whether to build the book outlet or the restaurant, management should rely most heavily on the analysis results from the _____ method of analysis.

Accepted Answer

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

Question 13

You are considering two independent projects both of which have been assigned a discount rate of 8%.Based on the profitability index, what is your recommendation concerning these projects?

Accepted Answer

A)  You should accept both projects since both of their PIs are positive.
B)  You should accept project A since it has the higher PI.
C)  You should accept both projects since both of their PIs are greater than 1.
D)  You should only accept project B since it has the largest PI and the PI exceeds 1.
E)  Neither project is acceptable.

Question 14

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data.Both projects have 5 year lives.   Project A Project B  Net present value $15,090$14,693 Payback period 2.76 years 2.51 years  Required return 8.3%8.0%\begin{array} { l l l } & \frac { 	ext { Project } \mathrm { A } } { } & \frac { 	ext { Project B } } { } \	ext { Net present value } & \$ 15,090 & \$ 14,693 \	ext { Payback period } & 2.76 	ext { years } & 2.51 	ext { years } \	ext { Required return } & 8.3 \% & 8.0 \%\end{array} Net present value  Payback period  Required return ​ Project A​$15,0902.76 years 8.3%​ Project B ​$14,6932.51 years 8.0%​  Matt has been asked for his best recommendation given this information.His recommendation should be to accept:

Accepted Answer

A)  project B because it has the shortest payback period.
B)  both projects as they both have positive net present values.
C)  project A and reject project B based on their net present values.
D)  project B and reject project A based on other criteria not mentioned in the problem.
E)  project B and reject project A based on both the payback period and the average accounting return.

Question 15

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Accepted Answer

A)  the discount rate and scale problems.
B)  timing and scale problems.
C)  the discount rate and timing problems.
D)  scale and reversing flow problems.
E)  timing and reversing flow problems.

Question 16

The discounted payback rule may cause:

Accepted Answer

A)  some positive net present value projects to be rejected.
B)  the most liquid projects to be rejected in favor of less liquid projects.
C)  projects to be incorrectly accepted due to ignoring the time value of money.
D)  some projects with negative net present values to be accepted.
E)  Both A and D.

Question 17

Graham and Harvey (2001)  found that ___ and ___ were the two most popular capital budgeting methods.

Accepted Answer

A)  Internal Rate of Return; Payback Period
B)  Internal Rate of Return; Net Present Value
C)  Net Present Value; Payback Period
D)  Modified Internal Rate of Return; Internal Rate of Return
E)  Modified Internal Rate of Return; Net Present Value

Exam 5: Net Present Value and Other Investment Rules

Graham and Harvey (2001) found that _ and _ were the two most popular capital budgeting methods.

Correct Answer
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You are considering two independent projects both of which have been assigned a discount rate of 8%.Based on the profitability index, what is your recommendation concerning these projects?

Correct Answer
verified

Based on the profitability index of _ for this project, you should _ the project.

Correct Answer
verified

Correct Answer
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Payback = 1.714 year...
View Answer

Correct Answer
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List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.

Correct Answer
verified
The advantages of the rule are its close...
View Answer

Correct Answer
verified

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Correct Answer
verified

The two fatal flaws of the internal rate of return rule are:

Correct Answer
verified

Accepting positive NPV projects benefits the stockholders because:

Correct Answer
verified

A mutually exclusive project is a project whose:

Correct Answer
verified

The discounted payback rule may cause:

Correct Answer
verified

The internal rate of return may be defined as:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

It will cost $2,600 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Correct Answer
verified

Correct Answer
verified

Exam 5: Net Present Value and Other Investment Rules

Graham and Harvey (2001) found that ___ and ___ were the two most popular capital budgeting methods.

Correct AnswerverifiedShow Answer

You are considering two independent projects both of which have been assigned a discount rate of 8%.Based on the profitability index, what is your recommendation concerning these projects?

Correct AnswerverifiedShow Answer

Based on the profitability index of _____ for this project, you should _____ the project.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedPayback = 1.714 year...View AnswerShow Answer

Correct AnswerverifiedShow Answer

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule.

Correct AnswerverifiedThe advantages of the rule are its close...View AnswerShow Answer

Correct AnswerverifiedShow Answer

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Correct AnswerverifiedShow Answer

The two fatal flaws of the internal rate of return rule are:

Correct AnswerverifiedShow Answer

Accepting positive NPV projects benefits the stockholders because:

Correct AnswerverifiedShow Answer

A mutually exclusive project is a project whose:

Correct AnswerverifiedShow Answer

The discounted payback rule may cause:

Correct AnswerverifiedShow Answer

The internal rate of return may be defined as:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

It will cost $2,600 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Graham and Harvey (2001) found that _ and _ were the two most popular capital budgeting methods.

Correct Answer
verified

Correct Answer
verified

Based on the profitability index of _ for this project, you should _ the project.

Correct Answer
verified

Correct Answer
verified
Payback = 1.714 year...
View Answer

Correct Answer
verified

Correct Answer
verified
The advantages of the rule are its close...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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