question

The length of time a firm must wait to recoup the money it has invested in a project is called the:
Internal return period.
Payback period.
Profitability period.
Discounted cash period.
Valuation period.

answer

Payback period.

question

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
Net present value period.
Internal return period.
Payback period.
Discounted profitability period.
Discounted payback period.

answer

Discounted payback period.

question

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
Independent.
Interdependent.
Mutually exclusive.
Economically scaled.
Operationally distinct.

answer

Mutually exclusive.

question

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
Net present value.
Discounted payback.
Internal rate of return.
Profitability index.
Payback.

answer

Net present value.

question

Which one of the following increases the net present value of a project?
An increase in the required rate of return.
An increase in the initial capital requirement.
A deferment of some cash inflows until a later year.
An increase in the aftertax salvage value of the fixed assets.
A reduction in the final cash inflow.

answer

An increase in the aftertax salvage value of the fixed assets.

question

Why is payback often used as the sole method of analyzing a proposed small project?
Payback considers the time value of money.
All relevant cash flows are included in the payback analysis.
It is the only method where the benefits of the analysis outweigh the costs of that analysis.
Payback is the most desirable of the various financial methods of analysis.
Payback is focused on the long-term impact of a project.

answer

It is the only method where the benefits of the analysis outweigh the costs of that analysis.

question

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?
Project A only.
Project B only.
Both A and B.
Neither A nor B.
Either, but not both projects.

answer

Project A only.

question

Which one of these statements related to discounted payback is correct?
Payback is a better method of analysis than discounted payback.
Discounted payback is used more frequently in business than payback.
Discounted payback does not require a cutoff point.
Discounted payback is biased towards long-term projects.
The discounted payback period decreases as the discount rate decreases.

answer

The discounted payback period decreases as the discount rate decreases.

question

Which one of the following is an advantage of the average accounting return method of analysis?
Easy availability of information needed for the computation.
Inclusion of time value of money considerations.
The use of a cutoff rate as a benchmark.
The use of pre-tax income in the computation.
Use of real, versus nominal, average income.

answer

Easy availability of information needed for the computation.

question

Which one of the following statements related to the internal rate of return (IRR) is correct?
The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.
A project with an IRR equal to the required return would reduce the value of a firm if accepted.
The IRR is equal to the required return when the net present value is equal to zero.
Financing type projects should be accepted if the IRR exceeds the required return.
The average accounting return is a better method of analysis than the IRR from a financial point of view.

answer

The IRR is equal to the required return when the net present value is equal to zero.

question

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:
Required return.
Zero-sum rate.
Present value rate.
Break-even rate.
Crossover rate.

answer

Crossover rate.

question

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:
Always accept Project A.
Be indifferent to the projects at any discount rate above 13.1 percent.
Always accept Project A if the required return exceeds the crossover rate.
Accept Project B only when the required return is equal to the crossover rate.
Accept Project B if the required return is less than 13.1 percent.

answer

Always accept Project A if the required return exceeds the crossover rate.

question

Assume a project is independent with financing cash flows. Which one of these statements is correct?
The IRR cannot be used to determine the acceptability of the project.
The project is acceptable if the required return exceeds the IRR.
The project is acceptable only if the NPV is zero or negative.
The project's net present value profile is upsloping.
The project is acceptable if the internal rate of return is negative.

answer

The project is acceptable if the required return exceeds the IRR.

question

A project will produce cash inflows of $3,100 a year for 3 years with a final cash inflow of $4,400 in Year 4. The project's initial cost is $10,400. What is the net present value if the required rate of return is 16 percent?
-$311.02
-$1,007.66
$1,650.11
$2,188.98
$1,168.02

answer

-$1,007.66

question

Project A has an initial cost of $80,000 and provides cash inflows of $34,000 a year for three years. Project B has an initial cost of $80,000 and produces a cash inflow of $114,000 in year 3. The projects are mutually exclusive. Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?
Accept A as it always has the higher NPV.
Accept B as it always has the higher NPV.
Accept A at 11.7 percent and B at 13.5 percent.
Accept B at .11.7 percent and A at 13.5 percent.
Accept A at 11.7 percent and neither at 13.5 percent.

answer

Accept A at 11.7 percent and neither at 13.5 percent.

question

Crystal Industries is considering an expansion project with cash flows of -$325,000, $167,500, $216,100, $104,500, and -$92,700 for years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?
Yes; The MIRR is 14.45 percent.
No; The MIRR is 14.45 percent.
Yes; The MIRR is 11.23 percent.
No; The MIRR is 11.23 percent.
No; The MIRR is 17.59 percent.

answer

Yes; The MIRR is 14.45 percent.

question

Home & More is considering a project with cash flows of -$375,000, $133,500, -$35,600, $244,700, and $271,000 for years 0 to 4. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not?
Yes; The MIRR is 14.78 percent.
Yes; The MIRR is 17.42 percent.
No; The MIRR is 12.91 percent.
No; The MIRR is 14.78 percent.
No; The MIRR is 17.42 percent.

answer

Yes; The MIRR is 17.42 percent.

question

A project has an initial cost of $6,700. The cash inflows are $850, $2,400, $3,300, and $4,100 over the next four years, respectively. What is the payback period?
3.73 years
2.51 years
3.04 years
3.51 years
3.94 years

answer

3.04 years

question

A project has an initial cost of $18,400 and is expected to produce cash inflows of $7,200, $8,900, and $7,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 12 percent?
2.31 years
2.45 years
2.55 years
2.91 years
Never

answer

2.91 years

question

A project has an initial cost of $27,000 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,600, $2,200, and $1,700 a year for the next three years, respectively. What is the average accounting return?
6.79 percent
13.58 percent
7.35 percent
14.69 percent
10.14 percent

answer

13.58 percent

question

A project has average net income of $6,250 a year over its 5-year life. The initial cost of the project is $107,400 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimum average accounting return of 11.5 percent. The firm should _____ the project because the AAR is _____ percent.
Accept; 5.71
Accept; 9.90
Accept; 11.64
Reject; 9.90
Reject; 11.64

answer

Accept; 11.64

question

A project has cash flows of -$152,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?
.93; accept
1.07; accept
1.02; accept
.93; reject
1.07 reject

answer

1.02; accept

question

A project has cash flows of -$119,000, $52,800, $60,200, and $33,100 for years 0 to 3, respectively. The required rate of return is 12 percent. Based on the net present value of _____, you should _____ the project.
$230.75; accept
-$1,995.84; reject
$283.60; accept
-$147.60; accept
-$306.15; reject

answer

-$306.15; reject

question

Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for years 0 to 3, respectively. Both projects are independent and use straight-line depreciation to a zero balance over the project life. Neither project has any salvage value and both have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return?
Accept Project A and reject Project B
Reject Project A and accept Project B
Accept both projects
Reject both projects
The AAR cannot be computed.

answer

the ARR cannot be computed (no NI)

question

Assume an investment has cash flows of -$30,000, $21,750, $18,500, and $12,500 for years 0 to 3, respectively. What is the NPV if the required return is 13 percent? Should the project be accepted or rejected?
$15,684.22; reject
$12,399.13; accept
$7,264.95; reject
$9,616.93; accept
$10,011.18; reject

answer

$12,399.13; accept