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1、| CHAPTER 7 Net Present Value and Other Investment Rules Multiple Choice Questions: I.DEFINITIONS NET PRESENT VALUE a1.The difference between the present value of an investment and its cost is the: present value. b.internal rate of return. c.payback period. d.profitability index. e.discounted paybac
2、k period. Difficulty level: Easy NET PRESENT VALUE RULE c2.Which one of the following statements concerning net present value (NPV) is correct? a.An investment should be accepted if, and only if, the NPV is exactly equal to zero. b.An investment should be accepted only if the NPV is equal to the ini
3、tial cash flow. c.An investment should be accepted if the NPV is positive and rejected if it is negative. d.An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. e.Any project that
4、 has positive cash flows for every time period after the initial investment should be accepted. Difficulty level: Easy PAYBACK c3.The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: present value. b.internal rat
5、e of return. c.payback period. d.profitability index. e.discounted cash period. Difficulty level: Easy PAYBACK RULE a4.Which one of the following statements is correct concerning the payback period? a.An investment is acceptable if its calculated payback period is less than some pre- specified perio
6、d of time. b.An investment should be accepted if the payback is positive and rejected if it is negative. #+ c.An investment should be rejected if the payback is positive and accepted if it is negative. d.An investment is acceptable if its calculated payback period is greater than some pre- specified
7、 period of time. e.An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate. Difficulty level: Easy DISCOUNTED PAYBACK e5.The length of time required for a projects discounted cash flows to equal the initial cost of the p
8、roject is called the: present value. b.internal rate of return. c.payback period. d.discounted profitability index. e.discounted payback period. Difficulty level: Easy DISCOUNTED PAYBACK RULE d6.The discounted payback rule states that you should accept projects: a.which have a discounted payback per
9、iod that is greater than some pre-specified period of time. b.if the discounted payback is positive and rejected if it is negative. c.only if the discounted payback period equals some pre-specified period of time. d.if the discounted payback period is less than some pre-specified period of time. e.o
10、nly if the discounted payback period is equal to zero. Difficulty level: Easy AVERAGE ACCOUNTING RETURN c7.An investments average net income divided by its average book value defines the average: present value. b.internal rate of return. c.accounting return. d.profitability index. e.payback period.
11、Difficulty level: Easy AVERAGE ACCOUNTING RETURN RULE b8.An investment is acceptable if its average accounting return (AAR): a.is less than a target AAR. b.exceeds a target AAR. c.exceeds the firms return on equity (ROE). #+ d.is less than the firms return on assets (ROA). e.is equal to zero and onl
12、y when it is equal to zero. Difficulty level: Easy INTERNAL RATE OF RETURN b.9.The discount rate that makes the net present value of an investment exactly equal to zero is called the: a.external rate of return. b.internal rate of return. c.average accounting return. d.profitability index. e.equalize
13、r. Difficulty level: Easy INTERNAL RATE OF RETURN RULE d10.An investment is acceptable if its IRR: a.is exactly equal to its net present value (NPV). b.is exactly equal to zero. c.is less than the required return. d.exceeds the required return. e.is exactly equal to 100 percent. Difficulty level: Ea
14、sy MULTIPLE RATES OF RETURN e11.The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _ problem. present value profiling b.operational ambiguity c.mutually exclusive investment decision d.issues of scale e.multiple rates of return Difficulty
15、level: Medium MUTUALLY EXCLUSIVE PROJECTS c12.A situation in which accepting one investment prevents the acceptance of another investment is called the: present value profile. b.operational ambiguity decision. c.mutually exclusive investment decision. d.issues of scale problem. e.multiple choices of
16、 operations decision. Difficulty level: Easy #+ PROFITABILITY INDEX d.13.The present value of an investments future cash flows divided by the initial cost of the investment is called the: present value. b.internal rate of return. c.average accounting return. d.profitability index. e.profile period.
17、Difficulty level: Easy PROFITABILITY INDEX RULE a14.An investment is acceptable if the profitability index (PI) of the investment is: a.greater than one. b.less than one. c.greater than the internal rate of return (IRR). d.less than the net present value (NPV). e.greater than a pre-specified rate of
18、 return. Difficulty level: Easy II.CONCEPTS NET PRESENT VALUE d15.All else constant, the net present value of a project increases when: a.the discount rate increases. b.each cash inflow is delayed by one year. c.the initial cost of a project increases. d.the rate of return decreases. e.all cash infl
19、ows occur during the last year of a projects life instead of periodically throughout the life of the project. Difficulty level: Easy NET PRESENT VALUE a16.The primary reason that company projects with positive net present values are considered acceptable is that: a.they create value for the owners o
20、f the firm. b.the projects rate of return exceeds the rate of inflation. c.they return the initial cash outlay within three years or less. d.the required cash inflows exceed the actual cash inflows. e.the investments cost exceeds the present value of the cash inflows. Difficulty level: Easy #+ NET P
21、RESENT VALUE d17.If a project has a net present value equal to zero, then: I.the present value of the cash inflows exceeds the initial cost of the project. II.the project produces a rate of return that just equals the rate required to accept the project. III.the project is expected to produce only t
22、he minimally required cash inflows. IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value. a.II and III only b.II and IV only c.I, II, and IV only d.II, III, and IV only e.I, II, and III only Difficulty level: Medium NET PRESENT VALUE b18.N
23、et present value: a.cannot be used when deciding between two mutually exclusive projects. b.is more useful to decision makers than the internal rate of return when comparing different sized projects. c.is easy to explain to non-financial managers and thus is the primary method of analysis used by th
24、e lowest levels of management. d.is not an as widely used tool as payback and discounted payback e.is very similar in its methodology to the average accounting return. Difficulty level: Easy PAYBACK c19.Payback is frequently used to analyze independent projects because: a.it considers the time value
25、 of money. b.all relevant cash flows are included in the analysis. c.it is easy and quick to calculate. d.it is the most desirable of all the available analytical methods from a financial perspective. e.it produces better decisions than those made using either NPV or IRR. Difficulty level: Easy PAYB
26、ACK c20.The advantages of the payback method of project analysis include the: I.application of a discount rate to each separate cash flow. II.bias towards liquidity. III.ease of use. IV. arbitrary cutoff point. a.I and II only b.I and III only c.II and III only #+ d.II and IV only e.II, III, and IV
27、only Difficulty level: Medium PAYBACK d21.All else equal, the payback period for a project will decrease whenever the: a.initial cost increases. b.required return for a project increases. c.assigned discount rate decreases. d.cash inflows are moved forward in time. e.duration of a project is lengthe
28、ned. Difficulty level: Medium DISCOUNTED PAYBACK d22.The discounted payback period of a project will decrease whenever the: a.discount rate applied to the project is increased. b.initial cash outlay of the project is increased. c.time period of the project is increased. d.amount of each project cash
29、 flow is increased. e.costs of the fixed assets utilized in the project increase. Difficulty level: Medium DISCOUNTED PAYBACK a23.The discounted payback rule may cause: a.some positive net present value projects to be rejected. b.the most liquid projects to be rejected in favor of less liquid projec
30、ts. c.projects to be incorrectly accepted due to ignoring the time value of money. d.projects with negative net present values to be accepted. e.some projects to be accepted which would otherwise be rejected under the payback rule. Difficulty level: Easy INTERNAL RATE OF RETURN b24.The internal rate
31、 of return (IRR): I.rule states that a project with an IRR that is less than the required rate should be accepted. II.is the rate generated solely by the cash flows of an investment. III.is the rate that causes the net present value of a project to exactly equal zero. IV. can effectively be used to
32、analyze all investment scenarios. a.I and IV only b.II and III only c.I, II, and III only d.II, III, and IV only #+ e.I, II, III, and IV Difficulty level: Medium INTERNAL RATE OF RETURN a25.The internal rate of return for a project will increase if: a.the initial cost of the project can be reduced.
33、b.the total amount of the cash inflows is reduced. c.each cash inflow is moved such that it occurs one year later than originally projected. d.the required rate of return is reduced. e.the salvage value of the project is omitted from the analysis. Difficulty level: Medium INTERNAL RATE OF RETURN c26
34、.The internal rate of return is: a.more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. b.equivalent to the discount rate that makes the net present value equal to one. c.difficult to compute without the use of either a financial ca
35、lculator or a computer. d.dependent upon the interest rates offered in the marketplace. e.a better methodology than net present value when dealing with unconventional cash flows. Difficulty level: Medium INTERNAL RATE OF RETURN a27.The internal rate of return tends to be: a.easier for managers to co
36、mprehend than the net present value. b.extremely accurate even when cash flow estimates are faulty. c.ignored by most financial analysts. d.used primarily to differentiate between mutually exclusive projects. e.utilized in project analysis only when multiple net present values apply. Difficulty leve
37、l: Easy INCREMENTAL INTERNAL RATE OF RETURN e28.You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremented IRR by determining: a.the internal rate of return for the cash flows of each proje
38、ct. b.the net present value of each project using the internal rate of return as the discount rate. c.the discount rate that equates the discounted payback periods for each project. d.the discount rate that makes the net present value of each project equal to 1. e.the internal rate of return for the
39、 differences in the cash flows of the two projects. #+ Difficulty level: Medium INCREMENTAL INTERNAL RATE OF RETURN b29.Graphing the incremental IRR helps explain: a.why one project is always superior to another project. b.how decisions concerning mutually exclusive projects are derived. c.how the d
40、uration of a project affects the decision as to which project to accept. d.how the net present value and the initial cash outflow of a project are related. e.how the profitability index and the net present value are related. Difficulty level: Medium PROFITABILITY INDEX d30.The profitability index is
41、 closely related to: a.payback. b.discounted payback. c.the average accounting return. present value. e.mutually exclusive projects. Difficulty level: Easy PROFITABILITY INDEX b31.Analysis using the profitability index: a.frequently conflicts with the accept and reject decisions generated by the app
42、lication of the net present value rule. b.is useful as a decision tool when investment funds are limited. c.is useful when trying to determine which one of two mutually exclusive projects should be accepted. d.utilizes the same basic variables as those used in the average accounting return. e.produc
43、es results which typically are difficult to comprehend or apply. Difficulty level: Medium PROFITABILITY INDEX e32.If you want to review a project from a benefit-cost perspective, you should use the _ method of analysis. present value b.payback c.internal rate of return d.average accounting return e.
44、profitability index Difficulty level: Easy PROFITABILITY INDEX #+ b33.When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: a.accepted because the internal rate of return is positive. b.accepted because the profitability index is greater than 1
45、. c.accepted because the profitability index is negative. d.rejected because the internal rate of return is negative. e.rejected because the net present value is negative. Difficulty level: Easy MUTUALLY EXCLUSIVE PROJECTS c34.Which one of the following is the best example of two mutually exclusive
46、projects? a.planning to build a warehouse and a retail outlet side by side b.buying sufficient equipment to manufacture both desks and chairs simultaneously c.using an empty warehouse for storage or renting it entirely out to another firm d.using the company sales force to promote sales of both shoe
47、s and socks e.buying both inventory and fixed assets using funds from the same bond issue Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS d35.The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center. Project B
48、 consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether or build the book outlet or the restaurant, management should rely most heavily on the analysis results from the _ method of analysis. a.profitability index b.internal rate of return
49、 c.payback present value e.accounting rate of return Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS c36.When two projects both require the total use of the same limited economic resource, the projects are generally considered to be: a.independent. b.marginally profitable. c.mutually exclusive. d.acceptable. e.internally profitable. Difficulty level: Easy MUTUALLY EXCLUSIVE PROJECTS c37.Matt is analyzing two mutually exclusive projects of similar size and has prepared the #+ following data. Both projects have 5 year lives. Project AProject