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

    • I. the present value of the cash inflows exceeds the initial cost of the project.

II. the project produces a rate of return that just equals the rate required to accept the project.

III. the project is expected to produce only the minimally required cash inflows.

IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

  • A. II and III only

  • B. II and IV only

  • C. I, II, and IV only

  • D. II, III, and IV only

  • E. I, II, and III only

    • The advantages of the payback method of project analysis include the:

      • I. application of a discount rate to each separate cash flow.

II. bias towards liquidity.

III. ease of use.

IV. arbitrary cutoff point.

  • A. I and II only

  • B. I and III only

  • C. II and III only

  • D. II and IV only

  • E. II, III, and IV only

    • Given that the net present value (NPV) is generally considered to be the best method of

analysis, why should you still use the other methods?

  • A. You need to use other methods because the net present value method is unreliable when a

project has unconventional cash flows.

  • B. You need to use the other methods since conventional practice dictates that you only

accept projects after you have generated three accept indicators.

  • C. The other methods provide results that are generally easier to understand than a net present

value analysis.

  • D. The average accounting return must always indicate acceptance since this is the best

method from a financial perspective.

  • E. The discounted payback method must always be computed to determine if a project returns

a positive cash flow since NPV does not measure this aspect of a project.

Difficulty level: Medium Topic: Investment Analysis

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  • You are considering a project with the following data:

You are considering a project with the following data: Which one of the following is

Which one of the following is correct given this information?

  • A. The discount rate used in computing the net present value must have been less than 8.7%.

  • B. The discounted payback period will have to be less than 2.44 years.

  • C. The discount rate used to compute the profitability ratio was equal to the internal rate of

return.

  • D. This project should be accepted based on the profitability ratio.

  • E. This project should be rejected based on the internal rate of return.

Difficulty level: Medium Topic: Decision Rules

  • . The two fatal flaws of the internal rate of return rule are:

    • A. arbitrary determination of a discount rate and failure to consider initial expenditures.

    • B. arbitrary determination of a discount rate and failure to correctly analyze mutually

exclusive investment projects.

  • C. arbitrary determination of a discount rate and the multiple rate of return problem.

  • D. failure to consider initial expenditures and failure to correctly analyze mutually exclusive

investment projects.

  • E. failure to correctly analyze mutually exclusive investment projects and the multiple rate of

return problem.

Difficulty level: Medium Topic: Internal Rate of Return

  • The elements that cause problems with the use of the IRR in projects that are mutually

exclusive are:

  • A. the discount rate and scale problems.

  • B. timing and scale problems.

  • C. the discount rate and timing problems.

  • D. scale and reversing flow problems.

  • E. timing and reversing flow problems.

Difficulty level: Medium Topic: Timing and Scale Issues with Internal Rate of Return

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7.
7.

Martin is analyzing a project and has gathered the following data. Based on this data, what

is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset. Assume there are no additional costs after Year 0.

A. 8.08% B. 10.77% C. 21.83% D. 26.17% E. 31.54%
A.
8.08%
B.
10.77%
C.
21.83%
D.
26.17%
E.
31.54%
7. Martin is analyzing a project and has gathered the following data. Based on this data,

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8.
8.

A project will produce cash inflows of $1,750 a year for four years. The project initially

costs $10,600 to get started. In year five, the project will be closed and as a result should

produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 14.75%?

  • A. -$5,474.76

B.

-$1,306.18

  • C. -$935.56

  • D. $1,011.40

  • E. $5,474.76

8. A project will produce cash inflows of $1,750 a year for four years. The project

NPV = -$1,011.40

8. A project will produce cash inflows of $1,750 a year for four years. The project

Difficulty level: Easy Topic: Net Present Value

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9.
9.

You are considering two mutually exclusive projects with the following cash flows. Will

your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so, what should you do?

9. You are considering two mutually exclusive projects with the following cash flows. Will your choice
  • A. Yes; Select A at 8% and B at 11%.

  • B. Yes; Select B at 8% and A at 11%.

  • C. Yes; Select A at 8% and select neither at 11%.

  • D. No; Regardless of the required rate, project A always has the higher NPV.

  • E. No; Regardless of the required rate, project B always has the higher NPV.

9. You are considering two mutually exclusive projects with the following cash flows. Will your choice

; NPV A,8% = $17,995.48

9. You are considering two mutually exclusive projects with the following cash flows. Will your choice

; NPV A,11% = -$2,362.80 (negative)

9. You are considering two mutually exclusive projects with the following cash flows. Will your choice

; NPV B,8% = $11,045.50

9. You are considering two mutually exclusive projects with the following cash flows. Will your choice
9. You are considering two mutually exclusive projects with the following cash flows. Will your choice

; NPV B,11% = $1,682.28

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10
10

. An investment has the following cash flows. Should the project be accepted if it has been

assigned a required return of 9.5%? Why or why not?

10 . An investment has the following cash flows. Should the project be accepted if it
  • A. Yes; because the IRR exceeds the required return by about 0.39%

  • B. Yes; because the IRR is less than the required return by about 3.9%

  • C. Yes; because the IRR is positive

  • D. No; because the IRR exceeds the required return by about 3.9%

  • E. No; because the IRR is 9.89%

10 . An investment has the following cash flows. Should the project be accepted if it

The project should be accepted because the IRR of 9.89% exceeds the required return of 9.5%.

Difficulty level: Medium Topic: Internal Rate of Return

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11
11

. You are considering two independent projects with the following cash flows. The required

return for both projects is 10%. Given this information, which one of the following statements is correct?

11 . You are considering two independent projects with the following cash flows. The required return
  • A. You should accept project B since it has the higher IRR and reject project A because you

can not accept both projects.

  • B. You should accept project A because it has the lower NPV and reject project B.

  • C. You should accept project A because it has the higher NPV and you can not acceptboth

projects.

  • D. You should accept project B because it has the higher IRR and reject project A.

  • E. You should accept both projects if the funds are available to do so since both NPV's are >

0.

11 . You are considering two independent projects with the following cash flows. The required return

Since these are independent projects and both the IRR and NPV rules say accept, you should accept both projects if there are sufficient funds to do so.

Difficulty level: Medium Topic: Internal Rate of Return and Net Present Value

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12
12

. You are considering two independent projects both of which have been assigned a

discount rate of 8%. Based on the profitability index, what is your recommendation concerning these projects?

12 . You are considering two independent projects both of which have been assigned a discount
  • A. You should accept both projects since both of their PIs are positive.

  • B. You should accept project A since it has the higher PI.

  • C. You should accept both projects since both of their PIs are greater than 1.

  • D. You should only accept project B since it has the largest PI and the PI exceeds 1.

  • E. Neither project is acceptable.

12 . You are considering two independent projects both of which have been assigned a discount
12 . You are considering two independent projects both of which have been assigned a discount
12 . You are considering two independent projects both of which have been assigned a discount
12 . You are considering two independent projects both of which have been assigned a discount

Because the projects are independent and their PIs exceed 1.0, both projects

Difficulty level: Medium Topic: Profitabiility Index

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13.
13.

You would like to invest in the following project.

13. You would like to invest in the following project. Victoria, your boss, insists that only

Victoria, your boss, insists that only projects that can return at least $1.10 in today's dollars

for every $1 invested can be accepted. She also insists on applying a 10% discount rate to all cash flows. Based on these criteria, you should:

  • A. accept the project because it returns almost $1.22 for every $1 invested.

  • B. accept the project because it has a positive PI.

  • C. accept the project because the NPV is $2,851.

  • D. reject the project because the PI is 1.05.

  • E. reject the project because the IRR exceeds 10%.

13. You would like to invest in the following project. Victoria, your boss, insists that only
13. You would like to invest in the following project. Victoria, your boss, insists that only
13. You would like to invest in the following project. Victoria, your boss, insists that only

You should reject the project since the PI of 1.05 is less than Victoria's requirement of 1.10. It is worth mentioning that the NPV of this project is $2,851.24 and the IRR is 13.71%, both of which would normally indicate project acceptance. However, neither the NPV nor the IRR meet the requirement of returning $1.10 for every $1 spent.

Difficulty level: Challenge Topic: Profitability Index

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  • Jack is considering adding toys to his general store. He estimates that the cost of inventory

will be $4,200. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,300, $1,600, $1,700, 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?

  • 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 3.63 years

  • D. No; because the payback period is 2.02 years

  • E. No; because the payback period is 3.63 years

Jack is considering adding toys to his general store. He estimates that the cost of

Jack should reject the toy project because the payback period exceeds 3 years.

Difficulty level: Medium Topic: Payback Period

  • . A project has an initial cost of $8,500 and produces cash inflows of $2,700, $4,800, and

$1,600 over the next three years, respectively. What is the discounted payback period if the required rate of return is 8%?

  • A. 2.13 years

  • B. 2.33 years

  • C. 2.67 years

  • D. 2.91 years

  • E. Never

Jack is considering adding toys to his general store. He estimates that the cost of

Difficulty level: Medium Topic: Discounted Payback Period

7-10

  • . 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 discounted payback period is ____.

_____

this project because the

  • A. accept; 2.03 years

  • B. accept; 2.97 years

  • C. accept; 3.97 years

  • D. reject; 3.03 years

  • E. reject; 3.97 years

. Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces
. Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces

= 3.97 years Ginny should reject the project since the payback period of 3.97 years exceeds the required 3 years.

  • A project has average net income of $2,100 a year over its 4-year life. The initial cost of

the project is $65,000 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 minimal average accounting

return of 8.5%. The firm should

_____

the project based on the AAR of ____.

  • A. accept; 6.46%.

  • B. accept; 9.69%.

  • C. accept; 12.92%.

  • D. reject; 6.46%.

  • E. reject; 12.92%.

. Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces

Difficulty level: Medium Topic: Average Accounting Return

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18.
18.

You are analyzing the following two mutually exclusive projects and have developed the

following information. What is the incremental IRR?

A. 11.11% B. 13.01% C. 14.91% D. 16.75% E. 17.90%
A.
11.11%
B.
13.01%
C.
14.91%
D.
16.75%
E.
17.90%
18. You are analyzing the following two mutually exclusive projects and have developed the following information.

Difficulty level: Medium Topic: Incremental Internal Rate of Return

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19
19

. The Winston Co. is considering two mutually exclusive projects with the following cash

flows. The incremental IRR is

then project

and if the required rate is higher than the crossover rate

_____ should be accepted.

_____ A. 13.94%; A B. 13.94%; B C. 15.44%; A D. 15.44%; B E. 15.86%; A
_____
A.
13.94%; A
B.
13.94%; B
C.
15.44%; A
D.
15.44%; B
E.
15.86%; A
19 . The Winston Co. is considering two mutually exclusive projects with the following cash flows.
19 . The Winston Co. is considering two mutually exclusive projects with the following cash flows.

The crossover rate is 13.94%. At a rate higher than the crossover rate, such as 15%, Project B will have the higher NPV and should be accepted.

Difficulty level: Medium Topic: Incremental Internal Rate of Return

7-13

20 . Based on the profitability index of for this project, you should the project. A.
20
20

. Based on the profitability index of

for this project, you should

the project.

  • A. .97; accept

 
  • B. 1.05; accept

C.

1.16; accept

  • D. .97; reject

 
  • E. 1.05; reject

20 . Based on the profitability index of for this project, you should the project. A.

; PV inflows = 3,356.61

20 . Based on the profitability index of for this project, you should the project. A.
20 . Based on the profitability index of for this project, you should the project. A.

= 1.16; You should accept because the PI is greater than 1.

Difficulty level: Easy Topic: Profitability Index

7-14

  • . Based on the internal rate of return of

____

  • A. 10.95%; accept

  • B. 10.75%; accept

  • C. 10.44%; reject

  • D. 15.67%; reject

  • E. 16.88%; accept

for this project, you should

_____

the project.

Based on the net present value of ____ for this project, you should _____ the project.
Based on the net present value of
____
for this project, you should
_____
the project.
  • A. -$2,021.28; reject

  • B. -$406.19; reject

  • C. $7,978.72; accept

  • D. $9,836.74; accept

  • E. $23,356.61 accept

. Based on the internal rate of return of ____ A. 10.95%; accept B. 10.75%;

Difficulty level: Easy Topic: Net Present Value

7-15

  • Based on the payback period of

____

  • A. 1.87 years; accept

  • B. 2.40 years; accept

  • C. 2.87 years; reject

  • D. 3.13 years; reject

  • E. 3.87 years; reject

for this project, you should

_____

the project.

Based on the payback period of ____ A. 1.87 years; accept B. 2.40 years; accept

Difficulty level: Easy Topic: Payback Period

  • A $35 investment produces $38.50 at the end of the year with no risk. Which of the

following is true?

  • A. NPV is positive if the interest rate is less than 10%.

  • B. NPV is negative if the interest rate is less than 10%.

  • C. NPV is zero if the interest rate is equal to 10%.

  • D. Both A and C.

  • E. None of the above.

Based on the payback period of ____ A. 1.87 years; accept B. 2.40 years; accept

Difficulty level: Challenge Topic: Net Present Value

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25.
25.

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for

5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%,

the discounted payback period is

  • A. 3

  • B. 3.2

C.

3.75

  • D. 4

  • E. 5

_____

years.

25. An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for

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