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| 1 | |
A firm that only accepts projects for which the 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 profitability index is computed using accounting income and accounting book values. |
| | 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 | |
For projects with conventional cash flows and positive discount rates, the payback period will be shorter than the discounted payback period. |
| | A) | True |
| | B) | False |
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| 5 | |
Which of the following consider the time value of money in their computation?I. payback
II. average accounting return
III. profitability index
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| | A) | I only |
| | B) | II only |
| | C) | III only |
| | D) | I and III only |
| | E) | II and III only |
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| 6 | |
The average accounting return (AAR) decision rule states that a project should be accepted whenever the AAR: |
| | A) | is positive. |
| | B) | exceeds the internal rate of return (IRR). |
| | C) | indicates that a project has more than recaptured its initial cost in terms of net income. |
| | D) | exceeds the target AAR. |
| | E) | is less than the IRR. |
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| 7 | |
Which of the following questions are addressed in the capital budgeting process?I. What products or services will we offer or sell?
II. In what markets will we compete?
III. What new products will we introduce?
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| | A) | I only |
| | B) | III only |
| | C) | I and II only |
| | D) | I and III only |
| | E) | I, II, and III |
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| 8 | |
Which one of the following factors can cause a project to have multiple IRRs? |
| | A) | a large initial cash outlay |
| | B) | an initial cash investment followed by positive cash flows for three years and a negative cash flow in the final year |
| | C) | negative cash flows in the first three years of a project but positive cash flows thereafter |
| | D) | conventional cash flows |
| | E) | mutually exclusive investments |
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| 9 | |
You run a small bagel shop and are considering replacing your four sales clerks with automated machines that allow customers to buy their bagels without any human interaction. Of the following, the most difficult task you face in computing the net present value of this project is estimating the: |
| | A) | proposed reduction in wages. |
| | B) | tax shield of the new project. |
| | C) | cost of the new equipment that will be required. |
| | D) | cost of installing the new equipment. |
| | E) | total change in sales. |
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| 10 | |
You are going to choose one of two mutually exclusive investments. Investment A pays $35,000 a year for four years and has an initial cost of $80,000. Investment B pays $60,000 a year for five years and has an initial cost of $170,000. If your required return is 13 percent, which investment should you choose and why? |
| | A) | A; because it costs less initially |
| | B) | A; because its IRR exceeds 13 percent |
| | C) | A; because it has a higher IRR |
| | D) | B; because its IRR exceeds 13 percent |
| | E) | B; because it has a higher NPV |
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