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| 1 | |
A firm that only accepts projects for which the internal rate of return (IRR) is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders. |
| | A) | True |
| | B) | False |
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| 2 | |
The net present value (NPV) decision rule is considered the best in theory. |
| | A) | True |
| | B) | False |
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| 3 | |
An advantage of the payback rule is that it is easy to understand. |
| | A) | True |
| | B) | False |
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| 4 | |
Two projects that are mutually exclusive are said to be independent. |
| | A) | True |
| | B) | False |
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| 5 | |
If a project has conventional cash flows, it may also have more than one IRR. |
| | A) | True |
| | B) | False |
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| 6 | |
Which of the following is (are) correct?
I. Net present value (NPV) is one of the two or three most important concepts in finance.
II. NPV is the difference between the market value of an investment and its cost.
III. The financial manager acts in the shareholders' best interests by identifying and taking positive NPV projects.
IV. NPVs can normally be directly observed in the market. |
| | A) | I and II only |
| | B) | II and III only |
| | C) | I and IV only |
| | D) | I, II, and III only |
| | E) | I, III, and IV only |
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| 7 | |
Which one of the following statements accurately describes an advantage of the average accounting return (AAR) method of analysis? |
| | A) | The AAR method incorporates time value of money computations. |
| | B) | The estimation of the appropriate cutoff rate for AAR is straightforward and easy. |
| | C) | AAR relies on net income and not cash flows. |
| | D) | AAR relies on book values and not market values. |
| | E) | AAR is relatively easy to compute. |
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| 8 | |
A project should be accepted according to the average accounting return (AAR) whenever the AAR: |
| | A) | exceeds the firm's required AAR. |
| | B) | exceeds the IRR. |
| | C) | is greater than 100 percent. |
| | D) | is positive. |
| | E) | is less than the IRR. |
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| 9 | |
Your firm's CFO presents you with two capital budgeting proposals: one that involves buying a new delivery truck and one that involves building additional warehouse space. You are to determine which, if either, or both, of these projects should be accepted. This is an example of a decision involving: |
| | A) | mutually exclusive projects. |
| | B) | crossover rates. |
| | C) | interdependent projects. |
| | D) | independent projects. |
| | E) | longitudinal projects. |
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| 10 | |
The management of a firm wishes to accept projects with a high degree of liquidity; wishes to avoid the higher forecasting error associated with cash flows a long way into the future; and wishes to avoid projects that require a large amount of research and development. The firm would be justified in using the _____ to evaluate its projects. |
| | A) | internal rate of return (IRR) |
| | B) | net present value (NPV) |
| | C) | average accounting return (AAR) |
| | D) | payback method |
| | E) | profitability index (PI) |
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| 11 | |
A project that requires an initial cash outlay and for which all remaining cash flows are inflows is said to be: |
| | A) | independent. |
| | B) | conventional. |
| | C) | mutually exclusive. |
| | D) | value-creating. |
| | E) | short term. |
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| 12 | |
A manager will prefer the internal rate of return (IRR) rule over the net present value (NPV) rule if the manager: |
| | A) | prefers to talk in terms of rates of return. |
| | B) | can accurately forecast future cash flows. |
| | C) | dislikes the payback analysis. |
| | D) | also prefers use of payback analysis. |
| | E) | is considering mutually exclusive projects. |
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| 13 | |
You undertake a project that requires an initial investment of $9,000. You expect to receive $3,100 a year for the next 4 years. If the required return is 15 percent, what is the net present value (NPV)? |
| | A) | -$235.26 |
| | B) | -$149.57 |
| | C) | -$7.58 |
| | D) | $4.63 |
| | E) | $9.44 |
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| 14 | |
You are trying to choose between two projects as you do not have sufficient funding to accept both projects. Each project costs $80,000. Project A pays $25,000 a year for 4 years and project B pays $20,000 a year for 5 years. If your required return is 14 percent, which project should you choose and why? |
| | A) | A; because it pays back sooner |
| | B) | A; because it has a higher IRR |
| | C) | B; because it has a higher NPV |
| | D) | You should reject both projects. |
| | E) | You are indifferent between the two projects because each project pays back the same amount. |
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| 15 | |
A project requires an initial investment of $220,000, which will be depreciated on a straight-line basis over 4 years to a zero book value. A 20 percent average accounting return (AAR) and a 15 percent internal rate of return (IRR) have been assigned to the project. The estimated annual net income from the project is $18,100, $20,500, $21,500, and $22,500, respectively. Which one of the following statements is correct concerning this project? |
| | A) | The AAR exceeds the requirement, so the project should be accepted. |
| | B) | The average book value that should be used in the AAR computation is $55,000. |
| | C) | The AAR will be the same regardless of the depreciation method selected. |
| | D) | The project should be accepted because the IRR exceeds the requirement. |
| | E) | The project should be rejected based on the available information. |
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