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| 1 | |
An advantage of the payback rule and the average accounting return is that both ignore the time value of money. |
| | A) | True |
| | B) | False |
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| 2 | |
If a project has conventional cash flows, it may also have more than one IRR. |
| | A) | True |
| | B) | False |
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| 3 | |
Which one of the following decision rules is best for evaluating projects for which cash flows beyond a specified point in time and the time value of money can be ignored? |
| | A) | payback |
| | B) | net present value (NPV) |
| | C) | average accounting return (AAR) |
| | D) | profitability index (PI) |
| | E) | internal rate of return (IRR) |
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| 4 | |
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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| 5 | |
Your firm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labor to operate, and another that is manual, requiring a significant amount of labor to operate. This is an example of a decision involving: |
| | A) | independent projects. |
| | B) | working capital projects. |
| | C) | positive NPV projects. |
| | D) | unconventional cash flow projects. |
| | E) | mutually exclusive projects. |
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| 6 | |
You are comparing two projects using an NPV profile. At the point where the net present values of the projects involved are equal, the: |
| | A) | IRR of each is equal to zero. |
| | B) | IRR of each is equal to the cost of capital. |
| | C) | interest rate that makes them equal is called the crossover rate. |
| | D) | projects both have NPVs equal to zero. |
| | E) | AAR exceeds the cost of capital. |
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| 7 | |
A project, with conventional cash flows and a 5-year life, has a required return of 15 percent. One of your fellow students made the following comments on this project. Which one of these statements is inconsistent with the other four? |
| | A) | The payback period is less than five years. |
| | B) | The profitability index (PI) is zero. |
| | C) | The net present value (NPV) is zero. |
| | D) | The internal rate of return (IRR) is 15 percent. |
| | E) | The present value of the future cash flows equals the initial cash outlay. |
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| 8 | |
A project costs $525 and has annual cash flows of $100 for the first four years and $75 in each of the project's last five years. What is the payback period of the project? |
| | A) | The project never pays back. |
| | B) | 4.75 years |
| | C) | 5.33 years |
| | D) | 5.67 years |
| | E) | 6.00 years |
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| 9 | |
Which of the following are correct statements concerning problems associated with the internal rate of return (IRR)?
I. It ignores the time value of money.
II. It ignores the more distant cash flows.
III. It may lead to faulty decisions when evaluating mutually exclusive projects.
IV. It may have multiple results if some future cash flows are negative. |
| | A) | I only |
| | B) | II only |
| | C) | III and IV only |
| | D) | I, II, and IV only |
| | E) | II, III, and IV only |
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| 10 | |
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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