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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 | |
An advantage of the payback rule is that it is easy to understand. |
| | A) | True |
| | B) | False |
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| 3 | |
Net present value (NPV): |
| | A) | is equal to the initial investment in a project. |
| | B) | compares a project's cost to the present value of the project's benefits. |
| | C) | is equal to zero when the discount rate used is less than the internal rate of return (IRR). |
| | D) | is simplified by the fact that future cash flows are easy to estimate. |
| | E) | requires the firm set an arbitrary cutoff point for determining whether an investment is acceptable or not. |
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| 4 | |
The _____ quantifies in dollar terms how stockholder wealth will be affected by undertaking a project under consideration. |
| | A) | net present value (NPV) |
| | B) | average accounting return (AAR) |
| | C) | internal rate of return (IRR) |
| | D) | payback rule |
| | E) | profitability index (PI) |
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| 5 | |
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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| 6 | |
A project whose net present value (NPV) equals zero: |
| | A) | should be rejected. |
| | B) | has a profitability index (PI) that is greater than one. |
| | C) | is expected to yield a return equal to the firm's required return. |
| | D) | has a payback period that is greater than the life of the project. |
| | E) | should be accepted even if the firm has other potential investments with positive NPVs and has limited capital to invest. |
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| 7 | |
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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| 8 | |
A financial manager who consistently underestimates the _____ will tend to incorrectly reject projects that would actually create wealth for the stockholders. |
| | A) | marginal income tax rate |
| | B) | initial cost of projects |
| | C) | future cash outlays |
| | D) | required return |
| | E) | future cash inflows |
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| 9 | |
Which of the following are problems associated with the net present value (NPV)?
I. It ignores the time value of money.
II. It ignores the more distant flows.
III. It may lead to faulty decisions when evaluating mutually exclusive projects.
IV. It may give multiple results if some future cash flows are negative. |
| | A) | I only |
| | B) | II only |
| | C) | III only |
| | D) | IV only |
| | E) | None of these are problems that apply to NPV. |
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| 10 | |
A company spends $40,000 for equipment that will be depreciated straight line to zero over a 4-year life. The annual net income derived from this equipment is estimated as $4,000, $6,000, $4,000, and $6,000, respectively. What is the average accounting return (AAR)? |
| | A) | 10 percent |
| | B) | 13 percent |
| | C) | 25 percent |
| | D) | 33 percent |
| | E) | 50 percent |
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