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ch. 8
| Question | Answer |
|---|---|
| 1. The net present value is best defined as the difference between an investment’s: | market value and its cost. |
| 2. The process of valuing an investment by discounting its future cash flows is called: | discounted cash flow valuation. |
| 3. The period of time it takes an investment to generate sufficient cash flows to recover its initial cost is called the: | payback period. |
| 4. Which one of the following correctly defines the average accounting return? | average net income divided by average book value |
| 5. The internal rate of return is the: | discount rate that causes the net present value of a project to equal zero. |
| 6. The net present value profile is a graphical relationship of an investment’s: | discount rate and its net present value. |
| 7. The possibility that more than one discount rate can cause the net present value of a project to equal zero is referred to as: | multiple rates of return |
| 8. A mutually exclusive investment decision is defined as a situation where: | an investment in project A prohibits you from investing in project B |
| 9. The present value of an investment’s cash inflows divided by the investment’s initial cost is called the: | profitability index |
| 10. Which of the following indicate that a project will produce a return equal to or greater than the required rate of return for that project? I. a positive NPV II. an NPV of zero III. a PI less than 1.0 IV. a positive accounting rate of return | I and II only |
| 11. The net present value rule states that you should accept a project if the NPV: | is positive. |
| 12. The net present value: | I and III only |
| 13. Of the following methods used to evaluate investments, the overall best method is the: | net present value. |
| 14. Net present value is: | equal to zero when the discount rate used is the IRR. |
| 15. A net present value of zero implies that an investment: | has no expected impact on shareholders. |
| 16. A project has a net present value of $2,500 and an initial cash outlay of $2,500. This project’s: | required return is less than its internal rate of return. |
| 17. The president of a firm is most concerned with creating value for the firm’s shareholders. Given this concern, the best method he or she should use to evaluate all proposed projects is: | net present value. |
| 18. Which one of the following statements is correct concerning the payback rule? | The rule is flawed because it ignores all cash flows after some arbitrary point in time. |
| 19. The payback rule works best in evaluating which one of the following? | low cost project which pays back rapidly |
| 20. The payback rule: | I, II, and IV only |
| 21. Payback ignores the: | time value of money. |
| 22. Which one of the following methods can be applied without the use of an interest rate? | payback |
| 23. Which one of the following methods is biased towards liquidity and requires an arbitrary cutoff date? | payback |
| 24. Which one of the following methods has the least value from a financial point of view? | average accounting return |
| 25Angie is evaluating a proposed project and wants to answer 2 questions. 1st what is the market value of the project? 2nd, how much profit will the project produce in relation to its book value? To answer these 2 ?s Angie should use which 1 of the follow | net present value and average accounting return |
| 26.The avg accnting return: I.specifically states how the required return is to be computed. II.ignores time value. III.is really a financial measure, not an accounting measure. IV.states that a project should be accepted if the computed return is | II only |
| 27. Which one of the following methods is based on net income rather than cash flows? | accounting rate of return |
| 28. The _____ can be interpreted as the breakeven financing rate that leads to a profitable project. | internal rate of return |
| 29. The internal rate of return can lead to faulty decisions: I. if the cash flows are conventional. II. if more than one cash flow is positive. III. if a project’s life exceeds 3 years. IV. if two projects are mutually exclusive. | IV only |
| 30. You are considering a project which has an internal rate of return that is equal to the required return. This means that the: | project is returning the minimal amount that is acceptable to you. |
| 31. The internal rate of return is: | the minimal rate that produces an accept decision given the net present value rule. |
| 32. If a project has an internal rate of return that exceeds the required discount rate, then the project: | should be accepted because the net present value is positive. |
| 33. The internal rate of return is best used to evaluate: | a project with all positive cash inflows after the initial cash outlay. |
| 34. If a project has conventional cash flows and a net present value equal to 1.0, then the internal rate of return _____ the required rate of return. | must be greater than |
| 35. Which one of the following best expresses two mutually exclusive investments? | building either a gas station or a restaurant on a corner lot |
| 36. When evaluating two mutually exclusive investments, the best method to use is the: | net present value |
| 37. You are using a net present value profile to compare two projects. At the point where the net present value of the two projects intersect, the: | relevant discount rate is called the crossover rate. |
| 38. For a project with conventional cash flows, a profitability index greater than 1.0 means that the: | net present value is positive. |
| 39. If managers only invest in projects that have a profitability index greater than 1.0, the: | firm will increase in value. |
| 40. If a project with conventional cash flows has a profitability index equal to 1.0, the project: | a. I and II only |
| 41. Which one of the following will reveal the amount of cash in today’s dollars that a project will return for each dollar originally invested? | c. profitability index |
| 42. Project selection ambiguity can arise if you rely on the internal rate of return instead of the net present value when: | c. there are multiple internal rates of return. |
| 43. Rank the following decision rules from best to worst in terms of their overall usefulness in capital budgeting analysis for a project with conventional cash flows. I.internal rate of return II.payback III.average accounting rate of return IV.n | d. IV, I, II, III |
| 44. Which one of the following methods is most appropriate for a low-level manager, who has no financial training, to use when evaluating small projects? | e. payback |
| 45. The payback method of analysis is the most beneficial in which one of the following situations? | d. A firm has free cash which can be invested but must be returned in time to meet a bond obligation two years from now. |
| 46. Which one of the following is correct concerning the rules related to project analysis? | c.The internal rate of return can lead to faulty decisions if two mutually exclusive projects are of different sizes. |
Created by:
martin.2021