Chapter 7 Quiz

ID:__________________ Name:__________________

c 1. Which one of the following statements concerning net present value (NPV) is
correct?

a.

An investment should be accepted if, and only if, the NPV is exactly equal to zero.

b.

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

c.

An investment should be accepted if the NPV is positive and rejected if it is

negative.

d.

An investment with greater cash inflows than cash outflows, regardless of when the
cash flows occur, will always have a positive NPV and therefore should always be
accepted.

e.

Any project that has positive cash flows for every time period after the initial
investment should be accepted.

2.

Which one of the following statements is correct concerning the payback period?

a.

An investment is acceptable if its calculated payback period is greater than some

pre-specified period of time.

b.

An investment should be accepted if the payback is positive and rejected if it is

negative.

c.

An investment should be rejected if the payback is positive and accepted if it is

negative.

d.

An investment is acceptable if its calculated payback period is less than some prespecified period of time.

3.

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

a.

payback period.

c.

net present value..

e.

internal rate of return.

4.

The discount rate that makes the net present value of an investment exactly equal to

b.

discounted payback period.

d.

discounted profitability index.

zero is called the:

a.

external rate of return.

b.

c.

average accounting return.

e.

equalizer.

5.

The possibility that more than one discount rate will make the NPV of an
investment equal to zero is called the _____ problem.

d.

internal rate of return.

profitability index.

a.

multiple rates of return

c.

mutually exclusive investment decision

e.

net present value profiling

d. 6.
I.

b.

scale
d.

operational ambiguity

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

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

d.

II, III, and IV only

7.

The internal rate of return (IRR):

I.

rule states that a typical investment project with an IRR that is less than the required
rate should be accepted.

e.

c. I, II, and IV only

I, II, and III only

II. is the rate generated solely by the cash flows of an investment.

III. is the rate that causes the net present value of a project to exactly equal zero.
IV. can effectively be used to analyze all investment scenarios.

a.

I and IV only

b. II and III only

d.

II, III, and IV only

8.

If you want to compare the present value of the future cash inflows of a project with
its initial cost, you should use the _______ method of analysis.

a.

payback

c.

profitability index

e.

internal rate of return

9.

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.

e.

b.

III. ease of use.

IV. arbitrary cutoff point.

c. I, II, and III only

I, II, III, and IV

incremental IRR
d.

average accounting return

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

10. The possibility that more than one discount rate will make the NPV of an
investment equal to zero is called the _____ problem.
a.

multiple rates of return

b.

c.

mutually exclusive investment decision

e.

net present value profiling

scale
d.

operational ambiguity