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1 | |
Marsha is considering three independent projects. The cash flows for each project are: Project A: (-$15,000, $7,500, $10,000).
Project B: (-$12,000, $15,000).
Project C: (-$18,000; $10,000; $15,000). Marsha believes that a discount rate of 14 percent is applicable to all three projects. Given this, she would like to know two things: (1) which projects, if any, are acceptable, and (2) given limited resources, how the projects rank in order of preference. She has hired you to compile this information for her. Your report to her will state that: |
| | A) | All three projects are acceptable and are ranked, in order of preference, as B, A, C. |
| | B) | All three projects are acceptable and are ranked, in order of preference, as C, B, A. |
| | C) | Project A is unacceptable and project B is preferred over C. |
| | D) | Project A is unacceptable and project C is preferred over B. |
| | E) | Project B is unacceptable and project A is preferred over C. |
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2 | |
If an investment has a(n) _____ of 1.2, it can be said the investment generates $1.20 in present value benefits for each dollar invested. |
| | A) | profitability index |
| | B) | net present value |
| | C) | internal rate of return |
| | D) | payback |
| | E) | average accounting return |
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3 | |
One of the advantages of PI is its ability to: |
| | A) | automatically rank mutually exclusive projects of different sizes. |
| | B) | help address the issue of capital rationing. |
| | C) | solve the problem of indivisibilities. |
| | D) | rank projects given the problem of capital rationing over multiple time periods. |
| | E) | rank projects without relying on a discount rate. |
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4 | |
If a project with conventional cash flows has a profitability index (PI) that is less than one, then the: |
| | A) | IRR is greater than the required return. |
| | B) | discounted payback period is greater than the project's life. |
| | C) | AAR is greater than the discount rate. |
| | D) | payback period is less than the maximum acceptable period. |
| | E) | NPV is positive. |
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5 | |
Which capital investment evaluation technique is described by the attributes below? - closely related to net present value
- easy to understand and communicate
- may lead to incorrect decisions in comparing mutually exclusive investments
- may be useful when the available investment funds are limited
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| | A) | net present value |
| | B) | internal rate of return |
| | C) | average accounting return |
| | D) | payback period |
| | E) | profitability index |
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6 | |
Which one of the following statements is correct concerning PI? |
| | A) | An independent project should be accepted when the PI is less than 1.0. |
| | B) | PI considers the size of each project when ranking mutually exclusive projects. |
| | C) | PI addresses all of the issues related to capital rationing and accurately ranks projects under those circumstances. |
| | D) | Assuming that the incremental cash flows are computed by subtracting the smaller project's cash flows from those of the larger project, then an incremental PI greater than 1.0 indicates that the smaller project should be accepted when the projects are mutually exclusive. |
| | E) | A PI greater than 1.0 indicates that the cash inflows of an investment project exceed the cash outflows on a net present value basis, given conventional cash flows. |
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7 | |
You are considering the following projects with cash flows of: Project A: (-$340, $280, $120).
Project B: (-$460, $120, $400). Which one of the following statements concerning the PI is correct if the applicable discount rate for both projects is 14 percent? |
| | A) | The PI of project A is 1.34. |
| | B) | The PI of project B is 1.11. |
| | C) | Based on the PI, only project A should be accepted. |
| | D) | Both projects should be rejected based on the PI criterion. |
| | E) | The project with the smaller initial investment always has the higher PI. |
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8 | |
An investment project has a required return of 15 percent, conventional cash flows, and a 5-year life. Given this, which one of the following statements is inconsistent with the other four statements? |
| | A) | The discounted payback is exactly five years. |
| | B) | The profitability index is zero. |
| | C) | The net present value is zero. |
| | D) | The internal rate of return is 15 percent. |
| | E) | The present value of the future cash flows is equal to the initial outlay. |
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9 | |
Santiago Synergies is faced with two mutually exclusive projects and must decide which project to accept. The project cash flows are: Project A: (-$384,100, $81,400, $102,800, $151,900, $136,500).
Project B: (-$279,900, $117,800, $111,100, $100,000). Based on a discount rate of 8 percent, the firm should accept project _____ because the PI is _____ when the incremental cash flows are computed as project A minus project B. |
| | A) | A; 1.03 |
| | B) | B; 1.03 |
| | C) | A; .97 |
| | D) | B; .97 |
| | E) | A; positive |
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10 | |
Double Face Masks is faced with two mutually exclusive projects and must decide which project to accept based on a discount rate of 15 percent. The project cash flows are: Project A: (-$147,300, $57,800, $51,100, $93,000).
Project B: (-$76,100, $13,400, $49,800, $31,900, $11,500). Based on incremental cash flows computed as project A minus project B, the incremental PI is: |
| | A) | .97. |
| | B) | .99. |
| | C) | 1.03. |
| | D) | 1.06. |
| | E) | 1.08. |
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