A project has an initial cost of $26,000, a discount rate of 11.7 percent, a life of 5 years, and an NPV of $11,216. Given this, you know that the project is expected to earn a return:

A) equal to 11.7 percent of $26,000 plus an additional $11,216.

C) equal to 11.7 percent of $37,216 (= $26,000 + 11,216).

When a firm commences a positive net present value project, you know:

E) the stockholders' value in the firm is expected to increase

A) the project will pay back within the required payback period.

B) the present value of the expected cash flows is equal to the project's cost.

C) the inherent risks within the project have been ignored.

D) that all the projected cash flows will occur as expected.

The net present value method of capital budgeting analysis does all of the following except:

E) provide a specific anticipated rate of return

A) incorporate risk into the analysis.

B) consider all relevant cash flow information.

C) discount all future cash flows to their current value.

D) consider the initial cost of the project.

The payback method of analysis:

C) considers all project cash flows.

D) applies an industry-standard recoupment period.

D) applies mainly to projects where the actual results will be known relatively soon.

A) is the most frequently used method of capital budgeting analysis.

B) is a more sophisticated method of analysis than the profitability index.

C) considers the time value of money.

E) generally results in decisions that conflict with the decision suggested by NPV analysis.

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the ________ method of analysis.

C) modified internal rate of return

Payback is frequently used to analyze independent projects because:

C) it is easy and quick to calculate.

A) it considers the time value of money.

B) all relevant cash flows are included in the analysis.

D) it is the most desirable of all the available analytical methods from a financial perspective.

E) it produces better decisions than those made using either NPV or IRR

One characteristic of the payback method of project analysis is the:

A) use of variable discount rates.

B) standardized cutoff point for cash flow consideration.

D) consideration of the risk level of each project.

E) discounting of all cash flows

All else equal, the payback period for a project will decrease whenever the:

D) cash inflows are moved earlier in time.

B) required return for a project increases.

C) assigned discount rate decreases.

E) duration of a project is lengthened.

An investment is acceptable if the payback period:

A) is less than some pre-specified period of time.

B) exceeds the life of the investment.

D) is equal to or greater than some pre-specified period of time.

E) is equal to, and only if it is equal to, the investment's life.

Which method(s) of project analysis is(are) best suited for use by a department manager who has no knowledge of time value of money but can estimate the cash flows of small projects with short lives fairly accurately?

E) Either payback or profitability index

C) requires an arbitrary choice of a cutoff point.

A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule.

B) determines a cutoff point equal to the point where all initial capital investments have been fully depreciated.

D) varies the cutoff point with the market rate of interest.

E) is irrelevant to the accept/reject decision

Which of the following methods of project analysis are biased towards short-term projects?

B) Discounted payback and payback

A) Profitability index and internal rate of return

C) Net present value and payback

D) Payback and profitability index

E) Profitability index and discounted payback

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

B) discounted net present value.

D) discounted profitability index.

The discounted payback period of a project will decrease whenever the:

D) amount of each cash inflow is increased.

A) discount rate applied to the project is increased.

B) initial cash outlay of the project is increased.

C) time period of the project is increased.

E) costs of the fixed assets utilized in the project increase

The discounted payback method:

A) considers the time value of money.

D) is preferred to the NPV method.

The discounted payback rule may cause:

E) some positive net present value projects to be rejected.

A) projects with discounted payback periods in excess of the project's life to be accepted.

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.

For investment projects, the internal rate of return (IRR):

B) is the rate generated solely by the cash flows of the investment.

A) rule indicates acceptance of an investment when the IRR is less than the discount rate.

C) is used primarily to rank projects of varying sizes.

D) is the rate that causes the net present value of a project to equal the project's initial cost.

E) can effectively be used to compare all types and sizes of mutually exclusive projects.

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

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 discount rate is increased.

You are considering an investment project with an internal rate of return of 8.7 percent, a net present value of $393, and a payback period of 2.44 years. Which one of the following is correct given this information?

A) The discount rate used in computing the net present value was less than 8.7 percent.

B) The discounted payback period will be less than 2.44 years.

C) The discount rate used to compute the net present value is equal to the internal rate of return.

D) The required payback period must be greater than 2.44 years.

E) This project should be rejected based on the net present value.

The internal rate of return is:

C) computed using a project's cash flows as the only source of inputs.

A) more reliable than net present value whenever you are considering mutually exclusive projects.

B) equivalent to the discount rate that makes the net present value equal to 1.0.

D) dependent on the interest rates offered in the marketplace.

E) a better methodology than net present value when dealing with unconventional cash flows

The internal rate of return tends to be:

A) easier for managers to comprehend than the net present value.

B) extremely accurate even when cash flow estimates are faulty.

C) ignored by most financial managers.

D) used primarily to differentiate between mutually exclusive projects.

E) utilized in project analysis only when multiple net present values apply

Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is:

B) equal to or greater than the discount rate.

A) equal to, and only if it is equal to, the discount rate.

C) less than the discount rate.

The internal rate of return for an investment project is best defined as the:

A) discount rate that causes the net present value to equal zero.

B) difference between the market rate of interest and the discount rate.

C) market rate of interest less the risk-free rate.

D) minimum project acceptance rate set by management.

E) maximum rate that can be earned for a project to be accepted

Which one of the following statements is true?

A) You must know the discount rate to compute the NPV but not the IRR.

B) You must have a discount rate to compute, NPV, IRR, PI, and discounted payback.

C) Payback uses the same discount rate as that applied in the NPV calculation.

D) Financing projects can only ever have one IRR.

E) Financing projects are acceptable if the NPV is negative.

A financing project is acceptable if its internal rate of return is:

D) less than the discount rate.

A) exactly equal to its net present value.

C) greater than the discount rate.

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

A) discount rate and scale problems.

C) discount rate and timing problems.

D) scale and reversing flow problems.

E) timing and reversing flow problems.

Assume you use all available methods to evaluate projects. If there is a conflict in the indicated accept/reject decision between two mutually exclusive projects due to the IRR-based indicator, you should:

C) ignore the IRR and rely on the decision indicated by the NPV method.

A) accept both projects if both are acceptable according to NPV.

B) combine both projects into one larger project.

D) base the final decision on the payback method.

E) reject both projects due to ambiguity in the decision-making process

The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as:

A) net present value profiling.

C) the mutually exclusive investment decision.

A situation in which accepting one investment prevents the acceptance of another investment is called the:

C) mutually exclusive investment decision.

B) operational ambiguity decision.

E) multiple rates of return decision

The modified internal rate of return:

D) is computed by combining cash flows until only one change in sign remains.

A) is used as the discount rate for all NPV calculations.

B) applies only to profitability calculations.

C) is used to make accept/reject decisions when no discount rate can be assigned.

E) assumes all projects are financing projects

A mutually exclusive project is a project whose:

D) acceptance or rejection affects the acceptance of other projects.

A) acceptance or rejection has no effect on the acceptance of other projects.

E) cash flow pattern exhibits more than one sign change.

A project will have more than one IRR if, and only if, the:

D) cash flow pattern exhibits more than one sign change.

E) cash flow pattern exhibits exactly one sign change

You are trying to determine whether to accept Project A or Project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining the:

E) internal rate of return for the differences in the cash flows of the two projects

A) internal rate of return for the cash flows of each project.

B) net present value of each project using the internal rate of return as the discount rate.

C) discount rate that equates the discounted payback periods for each project.

D) discount rate that makes the net present value of each project equal to 1.0.

Comparing the NPV profile of an investment project to that of a financing project demonstrates why the:

B) IRR decision rule for investment projects is the opposite of the rule for financing projects.

A) incremental IRR is computed differently for financing projects than for investment projects.

C) life span of a project affects the decision as to which project to accept.

D) NPV rule for financing projects is the opposite of the rule for investment projects.

E) profitability index and the net present value are related.

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

C) Renting out a company warehouse or selling it outright

A) Planning to build a warehouse and a retail outlet side by side

B) Buying sufficient equipment to manufacture both desks and chairs simultaneously

D) Using the company's sales force to promote sales of both shoes and socks

E) Buying both inventory and fixed assets using funds from the same bank loan

How should a profitability index of zero be interpreted?

D) The project's cash flows subsequent to the initial cash flow have a present value of zero.

A) The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow).

B) The project has an internal rate of return equal to the discount rate.

C) The project produces a net income of zero for every year of its life.

E) The project also has a net present value of zero

CF Chap 5

Authored by Dung Ngọc

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MULTIPLE CHOICE QUESTION

30 sec • 10 pts

The difference between the present value of an investment's future cash flows and its initial cost is the:

A) net present value.

B) internal rate of return.

C) payback period.

D) profitability index.

E) discounted payback period

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

If a project is assigned a required rate of return of zero, then:

A) the timing of the project's cash flows has no bearing on the value of the project.

B) the project will always be accepted.

C) the project will always be rejected.

D) whether the project is accepted or rejected will depend on the timing of the cash flows.

E) the project can never add value for the shareholders

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

A) A financing project should be accepted if, and only if, the NPV is exactly equal to zero.

B) An investment project should be accepted only if the NPV is equal to the initial cash flow.

C) Any type of project should be accepted if the NPV is positive and rejected if it is negative.

D) Any type of project with greater total cash inflows than total cash outflows, should always be accepted.

E) An investment project that has positive cash flows for every time period after the initial investment should be accepted

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

All else constant, the net present value of a typical investment project increases when:

A) the discount rate increases.

B) each cash inflow is delayed by one year.

C) the initial cost of a project increases.

D) the required rate of return decreases.

E) all cash inflows occur during the last year instead of periodically throughout the project's life.

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

Proposed projects should be accepted when those projects:

A) create value for the owners of the firm.

B) have a positive rate of return.

C) return the initial cash outlay within the life of the project.

D) have required cash inflows that exceed the actual cash inflows.

E) have an initial cost that exceeds the present value of the future cash flows

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

If a project has a net present value equal to zero, then:

A) the initial cost of the project exceeds the present value of the project's subsequent cash flows.

B) the internal rate of return exceeds the discount rate.

C) the project produces cash inflows that exceed the minimum required inflows.

D) any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

E) the discount rate exceeds the internal rate of return

MULTIPLE CHOICE QUESTION

30 sec • 10 pts

Net present value:

A) cannot be relied upon when deciding between two mutually exclusive projects.

B) rule for project acceptance must be modified when comparing projects of varying sizes.

C) is less commonly used in business than the profitability index method of analysis.

D) is not as widely used in practice as payback and discounted payback.

E) provides the means for considering the risks associated with a specific project

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