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A project has an initial cost of $27,400 and a market value of $32,600. What is the difference
between these two values called?
net present value
internal return
payback value
profitability index
discounted payback

net present value

Which one of the following methods of project analysis is defined as computing the value of a
project based upon the present value of the project's anticipated cash flows?
constant dividend growth model
discounted cash flow valuation
average accounting return
expected earnings model
internal rate of return

discounted cash flow valuation

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.

payback period.

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

discounted payback period.

A project's average net income divided by its average book value is referred to as the project's
average:
net present value.
internal rate of return.
accounting return.
profitability index.
payback period.

accounting return

The internal rate of return is defined as the:
maximum rate of return a firm expects to earn on a project.
rate of return a project will generate if the project in financed solely with internal
funds.
discount rate that equates the net cash inflows of a project to zero.
discount rate which causes the net present value of a project to equal zero.
discount rate that causes the profitability index for a project to equal zero.

discount rate which causes the net present value of a project to equal zero.

You are viewing a graph that plots the NPVs of a project to various discount rates that could be
applied to the project's cash flows. What is the name given to this graph?
project tract
projected risk profile
NPV profile
NPV route
present value sequence

NPV profile

There are two distinct discount rates at which a particular project will have a zero net present
value. In this situation, the project is said to:
have two net present value profiles.
have operational ambiguity.
create a mutually exclusive investment decision.
produce multiple economies of scale.
have multiple rates of return.

have multiple rates of return.

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.

mutually exclusive.

The present value of an investment's future cash flows divided by the initial cost of the investment
is called the:
net present value.
internal rate of return.
average accounting return.
profitability index.
profile period.

profitability index.

A project has a net present value of zero. Which one of the following best describes this project?
The project has a zero percent rate of return.
The project requires no initial cash investment.
The project has no cash flows.
The summation of all of the project's cash flows is zero.
The project's cash inflows equal its cash outflows in current dollar terms.

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following will decrease the net present value of a project?
increasing the value of each of the project's discounted cash inflows
moving each of the cash inflows back to a later time period
decreasing the required discount rate
increasing the project's initial cost at time zero
increasing the amount of the final cash inflow

increasing the project's initial cost at time zero

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

net present value

If a project has a net present value equal to zero, then:
the total of the cash inflows must equal the initial cost of the project.
the project earns a return exactly equal to the discount rate.
a decrease in the project's initial cost will cause the project to have a negative NPV.
any delay in receiving the projected cash inflows will cause the project to have a
positive NPV.
the project's PI must be also be equal to zero.

the project earns a return exactly equal to the discount rate.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the
project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000
salvage value handled when computing the net present value of the project?

reduction in the cash outflow at time zero
cash inflow in the final year of the project
cash inflow for the year following the final year of the project
cash inflow prorated over the life of the project
not included in the net present value

cash inflow in the final year of the project

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

an increase in the aftertax salvage value of the fixed assets

Net present value:
is the best method of analyzing mutually exclusive projects.
is less useful than the internal rate of return when comparing different sized projects.
is the easiest method of evaluation for non-financial managers to use.
is less useful than the profitability index when comparing mutually exclusive
projects.
is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

Which one of the following is a project acceptance indicator given an independent project with
investing type cash flows?
profitability index less than 1.0
project's internal rate of return less than the required return
discounted payback period greater than requirement
average accounting return that is less than the internal rate of return
modified internal rate of return that exceeds the required return

modified internal rate of return that exceeds the required return

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.

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

Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
IV. arbitrary cutoff point

I and II only
I and III only
II and III only
II and IV only
II, III, and IV only

II and III only

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
Answer cannot be determined based on the information given.

Project A only

A project has a required payback period of three years. Which one of the following statements is
correct concerning the payback analysis of this project?

The cash flows in each of the three years must exceed one-third of the project's initial
cost if the project is to be accepted.
The cash flow in year three is ignored.
The project's cash flow in year three is discounted by a factor of (1 + R)3.
The cash flow in year two is valued just as highly as the cash flow in year one.
The project is acceptable whenever the payback period exceeds three years.

The cash flow in year two is valued just as highly as the cash flow in year one.

A project has a discounted payback period that is equal to the required payback period. Given this,
which of the following statements must be true?
I. The project must also be acceptable under the payback rule.
II. The project must have a profitability index that is equal to or greater than 1.0.
III. The project must have a zero net present value.
IV. The project's internal rate of return must equal the required return.

I only
I and II only
II and III only
I, III, and IV only
I, II, III, and IV

I and II only

Which one of the following statements related to payback and discounted payback is correct?

Payback is a better method of analysis than is discounted payback.
Discounted payback is used more frequently in business than is payback.
Discounted payback does not require a cutoff point like the payback method does.
Discounted payback is biased towards long-term projects while payback is biased
towards short-term projects.
Payback is used more frequently even though discounted payback is a better method.

Payback is used more frequently even though discounted payback is a better method.

Applying the discounted payback decision rule to all projects may cause:

some positive net present value projects to be rejected.
the most liquid projects to be rejected in favor of the less liquid projects.
projects to be incorrectly accepted due to ignoring the time value of money.
a firm to become more long-term focused.
some projects to be accepted which would otherwise be rejected under the payback
rule.

some positive net present value projects to be rejected.

Which one of the following correctly applies to the average accounting rate of return?

It considers the time value of money.
It measures net income as a percentage of the sales generated by a project.
It is the best method of analyzing mutually exclusive projects from a financial point of
view.
It is the primary methodology used in analyzing independent projects.
It can be compared to the return on assets ratio.

It can be compared to the return on assets ratio.

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

easy availability of information needed for the computation

Which of the following are considered weaknesses in the average accounting return method of
project analysis?
I. exclusion of time value of money considerations
II. need of a cutoff rate
III. easily obtainable information for computation
IV. based on accounting values

I only
I and IV only
II and III only
I, II, and IV only
I, II, III, and IV

I, II, and IV only

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.

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

The internal rate of return:

may produce multiple rates of return when cash flows are conventional.
is best used when comparing mutually exclusive projects.
is rarely used in the business world today.
is principally used to evaluate small dollar projects.
is easy to understand.

is easy to understand.

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of
return is lower than the firm desires. Which one of the following changes to the project would be most
expected to increase the project's internal rate of return?

decreasing the required discount rate
increasing the initial investment in fixed assets
condensing the firm's cash inflows into fewer years without lowering the total
amount of those inflows
eliminating the salvage value
decreasing the amount of the final cash inflow

condensing the firm's cash inflows into fewer years without lowering the total
amount of those inflows

The internal rate of return is:

the discount rate that makes the net present value of a project equal to the initial
cash outlay.
equivalent to the discount rate that makes the net present value equal to one.
tedious to compute without the use of either a financial calculator or a computer.
highly dependent upon the current interest rates offered in the marketplace.
a better methodology than net present value when dealing with unconventional cash
flows.

tedious to compute without the use of either a financial calculator or a computer.

Which of the following statements related to the internal rate of return (IRR) are correct?
I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash flows to equal
zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are easier to
comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

I and II only
III and IV only
I, II, and III only
II, III, and IV only
I, II, III, and IV

I, II, III, and IV

Douglass Interiors is considering two mutually exclusive projects and have determined that the
crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent
and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is
correct?

Project A should be accepted as its IRR is closer to the crossover point than is
Project B's IRR.
Project B should be accepted as it has the higher IRR.
Both projects should be accepted as both of the project's IRRs exceed the
crossover rate.
Neither project should be accepted since both of the project's IRRs exceed the
crossover rate.
You cannot determine which project should be accepted given the information
provided.

You cannot determine which project should be accepted given the information
provided.

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.

always accept project A if the required return exceeds the crossover rate.

Graphing the crossover point helps explain:
Answer why one project is always superior to another project.
how decisions concerning mutually exclusive projects are derived.
how the duration of a project affects the decision as to which project to accept.
how the net present value and the initial cash outflow of a project are related.
how the profitability index and the net present value are related.

how decisions concerning mutually exclusive projects are derived.

A project with financing type cash flows is typified by a project that has which one of the following
characteristics?
conventional cash flows
cash flows that extend beyond the acceptable payback period
a year or more in the middle of a project where the cash flows are equal to zero
a cash inflow at time zero
cash inflows which are equal in amount

a cash inflow at time zero

Which of the following statements generally apply to the cash flows of a financing type project?
I. nonconventional cash flows
II. cash outflows exceed cash inflows prior to any time value adjustments
III. cash for services rendered is received prior to the cash that is spent providing the services
IV. the total of all cash flows must equal zero on an unadjusted basis
I only
I and III only
II and IV only
I, II, and III only
I, II, III, and IV

I, II, and III only

Which one of the following statements is correct in relation to independent projects?

The internal rate of return cannot be used to determine the acceptability of a project
that has financing type cash flows.
A project with investing type cash flows is acceptable if its internal rate of return
exceeds the required return.
A project with financing type cash flows is acceptable if its internal rate of return
exceeds the required return.
The net present value profile is upsloping for projects with both investing and financing
type cash flows.
Projects with financing type cash flows are acceptable only when the internal rate of
return is negative.

A project with investing type cash flows is acceptable if its internal rate of return
exceeds the required return.

The profitability index is most closely related to which one of the following?
payback
discounted payback
average accounting return
net present value
modified internal rate of return

net present value

Roger's Meat Market is considering two independent projects. The profitability index decision rule
indicates that both projects should be accepted. This result most likely does which one of the following?
conflicts with the results of the net present value decision rule
assumes the firm has sufficient funds to undertake both projects
agrees with the decision that would also apply if the projects were mutually
exclusive
bases the accept/reject decision on the same variables as the average accounting
return
fails to provide useful information as the firm must reject at least one of the
projects

assumes the firm has sufficient funds to undertake both projects

Which one of the following methods of analysis provides the best information on the cost-benefit
aspects of a project?
net present value
payback
internal rate of return
average accounting return
profitability index

profitability index

When the present value of the cash inflows exceeds the initial cost of a project, then the project
should be:

accepted because the internal rate of return is positive.
accepted because the profitability index is greater than 1.
accepted because the profitability index is negative.
rejected because the internal rate of return is negative.
rejected because the net present value is negative.

accepted because the profitability index is greater than 1.

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

building a retail store that is attached to a wholesale outlet
producing both plastic forks and spoons on the same assembly line at the same time
using an empty warehouse to store both raw materials and finished goods
promoting two products during the same television commercial
waiting until a machine finishes molding Product A before being able to mold
Product B

waiting until a machine finishes molding Product A before being able to mold
Product B

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area
on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a
drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on
which one of the following analytical methods?
Answer profitability index
internal rate of return
payback
net present value
accounting rate of return

net present value

Mutually exclusive projects are best defined as competing projects which:

would commence on the same day.
have the same initial start-up costs.
both require the total use of the same limited resource.
both have negative cash outflows at time zero.
have the same life span.

both require the total use of the same limited resource.

The final decision on which one of two mutually exclusive projects to accept ultimately depends
upon which one of the following?

initial cost of each project
timing of the cash inflows
total cash inflows of each project
required rate of return
length of each project's life

required rate of return

Which one of the following statements would generally be considered as accurate given
independent projects with conventional cash flows?

The internal rate of return decision may contradict the net present value decision.
Business practice dictates that independent projects should have three distinct accept
indicators before a project is actually implemented.
The payback decision rule could override the net present value decision rule should
cash availability be limited.
The profitability index rule cannot be applied in this situation.

The payback decision rule could override the net present value decision rule should cash availability be limited.

In actual practice, managers frequently use the:
I. average accounting return method because the information is so readily available.
II. internal rate of return because the results are easy to communicate and understand.
III. discounted payback because of its simplicity.
IV. net present value because it is considered by many to be the best method of analysis.

I and III only
II and III only
I, II, and IV only
II, III, and IV only
I, II, III, and IV

I, II, and IV only

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has
just started college and has no experience or background in business finance. To get her started, Kristi is
going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.
Which method is Kristi most apt to ask Amy to use in making her initial decisions?
discounted payback
profitability index
internal rate of return
payback
average accounting return

payback

Which two methods of project analysis were the most widely used by CEO's as of 1999?

net present value and payback
internal rate of return and payback
net present value and average accounting return
internal rate of return and net present value
payback and average accounting return

internal rate of return and net present value

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1
percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback
period is 3.0 years. Which one of the following statements correctly applies to this project?

The net present value indicates accept while the internal rate of return indicates reject.
Payback indicates acceptance.
The payback decision rule could override the accept decision indicated by the net
present value.
The payback rule will automatically be ignored since both the net present value and
the internal rate of return indicate an accept decision.
The net present value decision rule is the only rule that matters when making the final
decision.

The payback decision rule could override the accept decision indicated by the net
present value.

Which of the following are definite indicators of an accept decision for an independent project with
conventional cash flows?
I. positive net present value
II. profitability index greater than zero
III. internal rate of return greater than the required rate
IV. positive internal rate of return

I and III only
II and IV only
I, II, and III only
II, III, and IV only
I, II, III, and IV

I and III only

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