MBA - Lecture 8

Which statement below describes risk in finance?

• Risk in finance is defined as measurable variation in outcomes

• Risk in finance is defined as the unmeasurable variation in outcomes

• Risk in finance can never be measured with any degree of confidence

• None of the options explain risk in finance

What is the first step in making an investment decision?

• Collection of data

• Identification of all available investment alternatives

• Interpretation of results

• Selection of a decision-support tool

One method of investment decision making that is appealing to managers is the accounting rate of return (ARR). This method measures the average profit over a period as a percentage of the

• net cash flow

• average investment

• net cash inflow

• opportunity cost

Which of the following is incorrect about the annual

rate of return technique?

• 1. The calculation is simple

• 1. The accounting terms used are familiar to man-

     agement

• 1. The timing of the cash inflows is not considered

• 1. The time value of money is considered

What is an advantage of the payback period method of investment decision making?

• It ignores cash flows after the initial investment is paid back

• It is simple to calculate

• It considers the time value of money

• It is difficult to understand

The decision rule with PP varies among entities, but most entities

• have minimum periods before which they would not invest

• prefer a greater risk because of the inherent greater reward

• have maximum periods beyond which they would not invest

• none of the options are correct

The investment decision rule for net present value calculations is to invest

• in the project with the lowest NPV

• in the project with the lowest discount rate

• in the project with the highest discount rate

• in the project with the highest positive NPV

Which of the below is a disadvantage of the NPV method?

• The timing of cash flows is not considered

• It does not take into account all of the expected cash flows

• The actual return in terms of the percentage of the investment outlay is not revealed

• All of the options are disadvantages of the NPV method

1.              The ARR uses the same methodology as which measure of profitability?

• Return on equity

• Cash flow to sales

• Gross profit margin

• Return on assets

The opportunity cost of making an investment is

• not relevant when applying the NPV method

• equal to the required discount rate

• the cost of forgoing a benefit from an alternative investment

• the initial cash outlay of the investment