Question 1

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?

Accepted Answer

A)   3.15 years
B)   3.38 years
C)   3.45 years
D)   3.60 years
E)   4.05 yearsF) A) and B)
G) None of the above B

Question 2

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

Accepted Answer

A)   1 years
B)   2 years
C)   3 years
D)   4 years
E)   neverF) B) and E)
G) C) and D)

Question 3

Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Ginny should _______ this project because the discounted payback period is ______.

Accepted Answer

A)   accept; 2.03 years
B)   accept; 2.97 years
C)   accept; 3.97 years
D)   reject; 3.03 years
E)   reject; 3.97 yearsF) A) and D)
G) A) and C)

Question 4

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?

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.F) A) and B)
G) All of the above

Question 5

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.  Required rate of return 10% 13%
Required payback period 2.0 years 2.0 years
Based upon the internal rate of return (IRR)  and the information provided in the problem,you should:

Accepted Answer

A)   accept both project A and project B.
B)   reject both project A and project B.
C)   accept project A and reject project B.
D)   accept project B and reject project A.
E)   ignore the IRR rule and use another method of analysis.F) A) and E)
G) A) and B)

Question 6

The internal rate of return for a project will increase if:

Accepted Answer

A)   the initial cost of the project can be reduced.
B)   the total amount of the cash inflows is reduced.
C)   each cash inflow is moved such that it occurs one year later than originally projected.
D)   the required rate of return is reduced.
E)   the salvage value of the project is omitted from the analysis.F) B) and E)
G) A) and B) A

Question 7

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

Accepted Answer

A)   Planning to build a warehouse and a retail outlet side by side.
B)   Buying sufficient equipment to manufacture both desks and chairs simultaneously.
C)   Using an empty warehouse for storage or renting it entirely out to another firm.
D)   Using the company sales force to promote sales of both shoes and socks.
E)   Buying both inventory and fixed assets using funds from the same bond issuE.F) A) and E)
G) A) and D)

Question 8

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 IVF) A) and B)
G) A) and C)

Question 9

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

Accepted Answer

A)   net present value profiling
B)   operational ambiguity
C)   mutually exclusive investment decision
D)   issues of scale
E)   multiple rates of returnF) B) and E)
G) A) and D)

Question 10

Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

A)   Yes; because the payback period is 2.94 years.
B)   Yes; because the payback period is 2.02 years.
C)   Yes; because the payback period is 3.80 years.
D)   No; because the payback period is 2.02 years.
E)   No; because the payback period is 3.80 years.F) A) and E)
G) B) and C)

Question 11

The profitability index is the ratio of:

Accepted Answer

A)   average net income to average investment.
B)   internal rate of return to current market interest rate.
C)   net present value of cash flows to internal rate of return.
D)   net present value of cash flows to return on equity.
E)   present value of cash flows to initial investment cost.F) B) and E)
G) A) and D)

Question 12

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

Accepted Answer

A)   3.05 years
B)   3.74 years
C)   3.81 years
D)   3.92 years
E)   neverF) C) and D)
G) A) and B)

Question 13

The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not?

Accepted Answer

At some K,NPV = $0; by definition,when NPV = 0,K = IRR.
Problems occur with IRR due to conflicts with mutually exclusive projects,timing and size problems,multiple sign changes. NPV always the best choice

Question 14

The primary reason that company projects with positive net present values are considered acceptable is that:

Accepted Answer

A)   they create value for the owners of the firm.
B)   the project's rate of return exceeds the rate of inflation.
C)   they return the initial cash outlay within three years or less.
D)   the required cash inflows exceed the actual cash inflows.
E)   the investment's cost exceeds the present value of the cash inflows.F) C) and E)
G) A) and E)

Question 15

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life,will produce a cash flow of $1,200 in the first and second year,and $3,000 in the third year. The interest rate is 12%. Calculate the project's payback. Also,calculate the project's IRR. Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback - 2.63 years.
IRR = 10...

Question 16

Which of the following statement is true?

Accepted Answer

A)   One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate.
B)   One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate.
C)   Payback accounts for time value of money.
D)   There will always be one IRR regardless of cash flows.
E)   Return on equity is the ratio of total assets to total net incomE.F) A) and B)
G) B) and E)

Question 17

A project will have more than one IRR if:

Accepted Answer

A)   the IRR is positive.
B)   the IRR is negative.
C)   the NPV is zero.
D)   the cash flow pattern exhibits more than one sign change.
E)   the cash flow pattern exhibits exactly one sign changE.F) A) and B)
G) A) and E)

Question 18

You are analyzing a project and have prepared the following data:  Required payback period 2.5 years
Required return 8.50%
Based on the payback period of _______ for this project,you should _______ the project.

Accepted Answer

A)   1.87 years; accept
B)   2.87 years; accept
C)   2.87 years; reject
D)   3.13 years; reject
E)   3.87 years; rejectF) All of the above
G) A) and C)

Question 19

An investment is acceptable if its IRR:

Accepted Answer

A)   is exactly equal to its net present value (NPV) .
B)   is exactly equal to zero.
C)   is less than the required return.
D)   exceeds the required return.
E)   is exactly equal to 100%.F) A) and E)
G) B) and E)

Question 20

The discounted payback rule states that you should accept projects:

Accepted Answer

A)   which have a discounted payback period that is greater than some pre-specified period of time.
B)   if the discounted payback is positive and rejected if it is negative.
C)   only if the discounted payback period equals some pre-specified period of time.
D)   if the discounted payback period is less than some pre-specified period of time.
E)   only if the discounted payback period is equal to zero.F) B) and C)
G) B) and D)

Exam 5: Net Present Value and Other Investment Rules

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?

Correct Answer
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B

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

Correct Answer
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Correct Answer
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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?

Correct Answer
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Correct Answer
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The internal rate of return for a project will increase if:

Correct Answer
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A

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

Correct Answer
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Correct Answer
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The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

Correct Answer
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Correct Answer
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The profitability index is the ratio of:

Correct Answer
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Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

Correct Answer
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The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not?

Correct Answer
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At some K,NPV = $0; by definition,when NPV = 0,K = IRR. Problems occur with IRR due to conflicts with mutually exclusive projects,timing and size problems,multiple sign changes. NPV always the best choice

The primary reason that company projects with positive net present values are considered acceptable is that:

Correct Answer
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Correct Answer
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Payback - 2.63 years.
IRR = 10...
View Answer

Which of the following statement is true?

Correct Answer
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A project will have more than one IRR if:

Correct Answer
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You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required return 8.50% Based on the payback period of _ for this project,you should _ the project.

Correct Answer
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An investment is acceptable if its IRR:

Correct Answer
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The discounted payback rule states that you should accept projects:

Correct Answer
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Exam 5: Net Present Value and Other Investment Rules

An investment project has the cash flow stream of $-250,$75,$125,$100,and $50. The cost of capital is 12%. What is the discounted payback period?

Correct AnswerverifiedB

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The internal rate of return for a project will increase if:

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The profitability index is the ratio of:

Correct AnswerverifiedShow Answer

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

Correct AnswerverifiedShow Answer

The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not?

Correct AnswerverifiedAt some K,NPV = $0; by definition,when NPV = 0,K = IRR. Problems occur with IRR due to conflicts with mutually exclusive projects,timing and size problems,multiple sign changes. NPV always the best choice

The primary reason that company projects with positive net present values are considered acceptable is that:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedPayback - 2.63 years.IRR = 10...View AnswerShow Answer

Which of the following statement is true?

Correct AnswerverifiedShow Answer

A project will have more than one IRR if:

Correct AnswerverifiedShow Answer

You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required return 8.50% Based on the payback period of _______ for this project,you should _______ the project.

Correct AnswerverifiedShow Answer

An investment is acceptable if its IRR:

Correct AnswerverifiedShow Answer

The discounted payback rule states that you should accept projects:

Correct AnswerverifiedShow Answer

Correct Answer
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B

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A

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Correct Answer
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At some K,NPV = $0; by definition,when NPV = 0,K = IRR. Problems occur with IRR due to conflicts with mutually exclusive projects,timing and size problems,multiple sign changes. NPV always the best choice

Correct Answer
verified

Correct Answer
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Payback - 2.63 years.
IRR = 10...
View Answer

Correct Answer
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Correct Answer
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You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required return 8.50% Based on the payback period of _ for this project,you should _ the project.

Correct Answer
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Correct Answer
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Correct Answer
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