Question 1

Net present value:

Accepted Answer

A)  cannot be used when deciding between two mutually exclusive projects.
B)  is more useful to decision makers than the internal rate of return when comparing different sized projects.
C)  is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest s of management.
D)  is not an as widely used tool as payback and discounted payback
E)  is very similar in its methodology to the average accounting return.F) B) and D)
G) A) and C)

Question 2

An investment project has the cash flow stream of £-250,£75,£125,£100,and £50.The cost of capital is 12%.What is the discounted payback period?

Accepted Answer

A)  3.15 years
B)  3.38 years
C)  3.45 years
D)  3.60 years
E)  4.05 yearsF) B) and E)
G) A) and B)

Question 3

Explain the differences and similarities between net present value (NPV)and the
profitability index (PI).

Accepted Answer

The NPV and PI are basically the same ca...

Question 4

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 13.75%?

Accepted Answer

A)  -£5,474.76
B)  -£1,011.40
C)  -£935.56
D)  £1,011.40
E)  £5,474.76F) A) and B)
G) C) and D)

Question 5

An investment's average net income divided by its average book value defines the average:

Accepted Answer

A)  net present value.
B)  internal rate of return.
C)  accounting return.
D)  profitability index.
E)  payback period.F) B) and D)
G) C) and E)

Question 6

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Accepted Answer

A)  net present value.
B)  internal rate of return.
C)  average accounting return.
D)  profitability index.
E)  profile period.F) B) and C)
G) A) and E)

Question 7

You would like to invest in the following project.   Year  Cad Flow 0−£55,0001£30,0002£37,000\begin{array} { | l | l | } \hline 	ext { Year } & 	ext { Cad Flow } \\hline 0 & -£ 55,000 \\hline 1 & £ 30,000 \\hline 2 & £ 37,000 \\hline\end{array} Year 012​ Cad Flow −£55,000£30,000£37,000​​  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:

Accepted Answer

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% . F) B) and E)
G) All of the above

Question 8

The investment decision rule that relates average net income to average investment is the:

Accepted Answer

A)  discounted cash flow method.
B)  average accounting return method.
C)  average payback method.
D)  average profitability index.
E)  None of the above.F) A) and D)
G) A) and C)

Question 9

What is the net present value of a project that has an initial cash outflow of £12,670 and the following cash inflows? The required return is 11.5%.
  Year  Cash Inflows 1£4,3752£03£8,7504£4,100\begin{array}{|l|l|}\hline 	ext { Year } & 	ext { Cash Inflows } \\hline 1 & £ 4,375 \\hline 2 & £ 0 \\hline 3 & £ 8,750 \\hline 4 & £ 4,100\\hline\end{array} Year 1234​ Cash Inflows £4,375£0£8,750£4,100​​

Accepted Answer

A)  £218.68
B)  £370.16
C)  £768.20
D)  £1,249.65
E)  £1,371.02 F) A) and E)
G) C) and D)

Question 10

The Ziggy Trim and Cut Company can purchase equipment on sale for £4,300.The asset has a three-year life,will produce a cash flow of £1,200 in the first and second year,and £3,000 in the third year.The interest rate is 12%.Calculate the project's Discounted Payback and Profitability Index assuming end of year cash flows.Should the project be taken?
 If the Average Accounting Return was positive,how would this affect your decision?

Accepted Answer

Time 0 - Cash flows = £-4,300,Present Va...

Question 11

The Ziggy Trim and Cut Company can purchase equipment on sale for £4,300.The asset has a three-year life,will produce a cash flow of £1,200 in the first and second year,and £3,000 in the third year.The interest rate is 12%.Calculate the project's payback.Also,calculate project's IRR.Should the project be taken?
 Check your answer by computing the project's NPV.

Accepted Answer

Payback - 2.63 years. IRR = 10...

Question 12

Brounen,de Jong,and Koedijk (2006) found that ___ and ___ were the two most popular capital budgeting methods in the UK.

Accepted Answer

A)  Internal Rate of Return; Payback Period
B)  Internal Rate of Return; Net Present Value
C)  Net Present Value; Payback Period
D)  Modified Internal Rate of Return; Internal Rate of Return
E)  Modified Internal Rate of Return; Net Present ValueF) D) and E)
G) A) and E)

Question 13

The internal rate of return tends to be:

Accepted Answer

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 analysts.
D)  used primarily to differentiate between mutually exclusive projects.
E)  utilized in project analysis only when multiple net present values apply.F) None of the above
G) C) and D)

Question 14

Accepting positive NPV projects benefits the shareholders because:

Accepted Answer

A)  it is the most easily understood valuation process.
B)  the present value of the expected cash flows are equal to the cost.
C)  the present value of the expected cash flows are greater than the cost.
D)  it is the most easily calculated.
E)  None of the above.F) A) and B)
G) B) and D)

Question 15

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

Accepted Answer

A)  Planning to build a warehouse and a retail outlet side by side.
B)  Buying sufficient equipment to manufacture both desks and chairs simultaneously.
C)  Using an empty warehouse for storage or renting it entirely out to another firm.
D)  Using the company sales force to promote sales of both shoes and socks.
E)  Buying both inventory and fixed assets using funds from the same bond issue.F) A) and B)
G) None of the above

Question 16

You are analyzing a project and have prepared the following data:   Year  Cad Flow 0−£169,0001£46,2002£87,3003£41,0004£39,000\begin{array} { | l | l | } \hline 	ext { Year } & 	ext { Cad Flow } \\hline 0 & -£ 169,000 \\hline 1 & £ 46,200 \\hline 2 & £ 87,300 \\hline 3 & £41,000 \\hline 4 & £ 39,000 \\hline\end{array} Year 01234​ Cad Flow −£169,000£46,200£87,300£41,000£39,000​​  Required payback period: 2.5 years
Required AAR: 7.25%
Required return: 8.50%
Based on the internal rate of return of _____for this project,you should _____ the project.

Accepted Answer

A)  8.95%; accept
B)  10.75%; accept
C)  8.44%; reject
D)  9.67%; reject
E)  10.33%; reject F) A) and C)
G) C) and D)

Question 17

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

Accepted Answer

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.F) B) and C)
G) A) and E)

Question 18

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 _____ this project because the discounted payback period is _____.

Accepted Answer

A)  accept; 2.03 years
B)  accept; 2.97 years
C)  accept; 3.97 years
D)  reject; 3.03 years
E)  reject; 3.97 yearsF) B) and D)
G) A) and C)

Question 19

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

Accepted Answer

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.F) None of the above
G) B) and E)

Question 20

A mutually exclusive project is a project whose:

Accepted Answer

A)  acceptance or rejection has no effect on other projects.
B)  NPV is always negative.
C)  IRR is always negative.
D)  acceptance or rejection affects other projects.
E)  cash flow pattern exhibits more than one sign change.F) A) and E)
G) B) and C)

Exam 6: Net Present Value and Other Investment Rules

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

Correct Answer
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Accepting positive NPV projects benefits the shareholders because:

Correct Answer
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Net present value:

Correct Answer
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Correct Answer
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Payback - 2.63 years. IRR = 10...
View Answer

The investment decision rule that relates average net income to average investment is the:

Correct Answer
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Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

Correct Answer
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The NPV and PI are basically the same ca...
View Answer

Correct Answer
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Time 0 - Cash flows = £-4,300,Present Va...
View Answer

A mutually exclusive project is a project whose:

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

Correct Answer
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Brounen,de Jong,and Koedijk (2006) found that _ and _ were the two most popular capital budgeting methods in the UK.

Correct Answer
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Correct Answer
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An investment project has the cash flow stream of £-250,£75,£125,£100,and £50.The cost of capital is 12%.What is the discounted payback period?

Correct Answer
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An investment's average net income divided by its average book value defines the average:

Correct Answer
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The two fatal flaws of the internal rate of return rule are:

Correct Answer
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The internal rate of return tends to be:

Correct Answer
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Correct Answer
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The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Correct Answer
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Correct Answer
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Correct Answer
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Exam 6: Net Present Value and Other Investment Rules

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

Correct AnswerverifiedShow Answer

Accepting positive NPV projects benefits the shareholders because:

Correct AnswerverifiedShow Answer

Net present value:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedPayback - 2.63 years. IRR = 10...View AnswerShow Answer

The investment decision rule that relates average net income to average investment is the:

Correct AnswerverifiedShow Answer

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

Correct AnswerverifiedThe NPV and PI are basically the same ca...View AnswerShow Answer

Correct AnswerverifiedTime 0 - Cash flows = £-4,300,Present Va...View AnswerShow Answer

A mutually exclusive project is a project whose:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Brounen,de Jong,and Koedijk (2006) found that ___ and ___ were the two most popular capital budgeting methods in the UK.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investment project has the cash flow stream of £-250,£75,£125,£100,and £50.The cost of capital is 12%.What is the discounted payback period?

Correct AnswerverifiedShow Answer

An investment's average net income divided by its average book value defines the average:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The internal rate of return tends to be:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Payback - 2.63 years. IRR = 10...
View Answer

Correct Answer
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Correct Answer
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The NPV and PI are basically the same ca...
View Answer

Correct Answer
verified
Time 0 - Cash flows = £-4,300,Present Va...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Brounen,de Jong,and Koedijk (2006) found that _ and _ were the two most popular capital budgeting methods in the UK.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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