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Fundamentals of Corporate Finance, 4/c/e
Fundamentals of Corporate Finance, 4/e
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University
Net Present Value and Other Investment Criteria

Quick Quiz 2

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.



1

If financial managers only invest in projects that have a profitability index greater than one,
I. firm value will be maximized.
II. shareholder wealth will be maximized.
III. share price will be maximized.
A)I only
B)II only
C)III only
D)I, II and III
E)I and III only
2

If a firm uses the __________ as an investment criterion, one of the risks it takes is that it may ignore some future cash flows.
A)AAR
B)NPV
C)payback rule
D)profitability index
E)IRR
3

A project has a required return of 15% and a five year life. Which of the following is inconsistent with the other four?
A)The discounted payback is five years
B)IRR = 15%
C)NPV = $0
D)PI = 0
E)The present value of the future cash flows equals the initial outlay
4

Which of the following does NOT incorporate discounted cash flow (DCF) valuation in its calculation?
A)Discounted payback
B)Average accounting return
C)Net present value
D)Internal rate of return
E)Profitability index
5

For which capital investment evaluation technique is the following the most complete list of disadvantages when compared to NPV analysis? (1) Ignores cash flows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV projects.
A)Discounted payback
B)ARR
C)IRR
D)Payback period
E)NPV
6

Suppose a project costs $300 and produces cash flows of $100 over each of the following six years. What is the IRR of the project?
A)10.0%
B)24.3%
C)34.9%
D)38.1%
E)There is not enough information; a discount rate is required.
7

You are evaluating two mutually exclusive projects, A and B. Project A costs $350 and has cash flows of $250 in each of the next 2 years. Project B costs $300 and generates cash flows of $300 and $100 for the next 2 years, respectively. What is the crossover rate for these projects?
A)83.48%
B)61.80%
C)30.28%
D)27.47%
E)26.38%
8

Would you accept a project which is expected to pay $10,000 a year for 7 years if the initial investment is $40,000 and your required return is 15%?
A)Yes; the NPV is $4,238
B)Yes; the NPV is $1,446
C)Yes; the NPV is $1,604
D)No; the NPV is -$1,369
E)No; the NPV is -$2,783
9

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for 4 years while investment B pays $30,000 a year for 5 years. If your required return is 13%, which should you choose?
A)A because it pays back sooner.
B)A because its IRR exceeds 13%.
C)A because it has a higher IRR.
D)B because it has a higher NPV.
E)B because its IRR exceeds 13%.
10

You have a choice between 2 mutually exclusive investments. If you require a 14% return, which investment should you choose?
AB
YearCash FlowCash Flow
0-$150,000-$120,000
150,00072,000
290,00050,000
370,00040,000
A)Project B because it has a smaller initial investment.
B)Project A because it has a higher NPV.
C)Either one, because they have the same profitability indexes.
D)Project B because it has the higher internal rate of return.
E)Project B because it pays back faster.




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