Question 1

Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash ﬂows for the ﬁrst year. In the second year the cash inﬂow is $35,000. This inﬂow
Will increase to $55,000 and then $75,000 for the following two years before ceasing permanently.
Ginny requires a 10 percent rate of return and has a required discounted payback period of three
Years. Ginny should _____ this project because the discounted payback period is _____
A) Accept; 2.03 years.
B) Accept; 2.97 years.
C) Accept; 3.97 years.
D) Reject; 3.03 years.
E) Reject; 3.97 years.

Accepted Answer

The discounted payback period is 3.97 years, which exceeds Ginny's required payback period of three years, so she should reject the project.

Question 2

Elderkin & Martin is considering an investment which will cost $259,000. The investment produces no cash ﬂows for the ﬁrst year. In the second year, the cash inﬂow is $58,000. This inﬂow will
Increase to $150,000 and then $200,000 for the following two years before ceasing permanently.
The ﬁrm requires a 14 percent rate of return and has a required discounted payback period of three
Years. The ﬁrm should _____ the project because the discounted payback period is _____ years.
Accept or reject this project? Why?
A) accept; 2.26
B) accept; 2.49
C) accept; 3.96
D) reject; 3.26
E) reject; 3.96

Accepted Answer

The discounted payback period is 3.96 years, which exceeds the firm's required discounted payback period of three years, so the firm should reject the project.

Question 3

Under the payback method of analysis:
A) The initial cash outlay is ignored.
B) The cash ﬂow in year 3 is ignored if the required payback period is 4 years.
C) A project's initial cost is discounted.
D) The cash ﬂow in year 2 is valued just as highly as the cash ﬂow in year 1 as long as the required payback period is 3 years or more.
E) A project will be acceptable whenever the payback period exceeds the pre-speciﬁed number of years.

Accepted Answer

The payback method values cash flows equally within the payback period, without discounting, as long as they occur within the required timeframe.

Question 4

A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over
The life of the project. The ﬁrm wants to earn a minimal average accounting return of 8.5 percent.
The ﬁrm should _____ the project based on the AAR of _____
A) Accept; 6.46 percent.
B) Accept; 9.69 percent.
C) Accept; 12.92 percent.
D) Reject; 6.46 percent.
E) Reject; 12.92 percent.

Accepted Answer

The answer of A project has average net income of...

Question 5

You would like to invest in the following project.  Victoria, your boss, insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted. She also insists on applying a 10 percent discount rate to all cash
ﬂows. Based on these criteria, you should:
A) Accept the project because it returns almost $1.22 for every $1 invested.
B) Accept the project because it has a positive PI.
C) Accept the project because the NPV is $2,851.
D) Reject the project because the PI is 1.05.
E) Reject the project because the IRR exceeds 10 percent.

Accepted Answer

The answer of You would like to invest in the...

Question 6

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for four years while investment B pays $30,000 a year for ﬁve years. If your
Required return is 13%, which should you choose?
A) A, because the pays back sooner.
B) A, because the IRR exceeds 13%.
C) A, because the project has a higher IRR.
D) B, because the IRR exceeds 13%.
E) B, because it has a higher NPV.

Accepted Answer

The best choice is investment B because it has a higher NPV. To calculate the NPV for each investment, we need to discount the cash flows using the required return of 13%.

For investment A: 
Year 1: 35,000/(1+0.13)^1 = 30,973 
Year 2: 35,000/(1+0.13)^2 = 27,406 
Year 3: 35,000/(1+0.13)^3 = 24,181 
Year 4: 35,000/(1+0.13)^4 = 21,250 
NPV = -80,000 + 30,973 + 27,406 + 24,181 + 21,250 = 23,810

For investment B: 
Year 1: 30,000/(1+0.13)^1 = 26,549 
Year 2: 30,000/(1+0.13)^2 = 23,484 
Year 3: 30,000/(1+0.13)^3 = 20,781 
Year 4: 30,000/(1+0.13)^4 = 18,412 
Year 5: 30,000/(1+0.13)^5 = 16,347 
NPV = -80,000 + 26,549 + 23,484 + 20,781 + 18,412 + 16,347 = 31,573

Investment B has a higher NPV of $31,573 compared to investment A's NPV of $23,810, so investment B is the better choice.

Question 7

Sal is considering a project that costs $15,000. The project produces cash inﬂows of $3,000, $5,000, $7,000, and $3,000 respectively for the next four years. Sal wants to recoup his money
Within 3 years after applying a 6% discount rate. Sal should:
A) Accept the project because it produces $15,534 on a discounted payback basis.
B) Accept this project because the discounted payback period is 2.78 years.
C) Accept this project because the payback period is exactly 3 years.
D) Reject this project because the payback period is 2.78 years.
E) Reject this project because the discounted payback period is 3.78 years.

Accepted Answer

The discounted cash flows for the first three years do not recoup the initial investment of $15,000 within 3 years at a 6% discount rate. The discounted payback period is longer than 3 years, specifically 3.78 years.

Question 8

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash ﬂows beyond the cutoff date; (2)
Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV
Projects.
A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback

Accepted Answer

The answer of For which capital investment evaluation technique is...

Question 9

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.
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.

Accepted Answer

The project should be accepted because the profitability index is greater than 1, indicating that there is a positive net present value. This means that the present value of the cash inflows is greater than the initial cost of the project, making it profitable. The internal rate of return and net present value are also important factors to consider but they are not the best choices in this scenario.

Question 10

An investment's average net income divided by its average book value deﬁnes the average:
A) Net present value.
B) Internal rate of return.
C) Accounting return.
D) Proﬁtability index.
E) Payback period.

Accepted Answer

The calculation described in the question refers to the accounting return, which measures the profitability of an investment based on its accounting net income and book value. Choice A, B, D, and E are not relevant to this calculation.

Question 11

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect
Decisions when applied to mutually exclusive investments.
A) NPV.
B) IRR.
C) AAR.
D) Payback period.
E) Discounted payback.

Accepted Answer

The IRR (Internal Rate of Return) is easy to understand and communicate, but it can result in multiple IRRs for non-conventional cash flows and may lead to incorrect decisions when comparing mutually exclusive projects.

Question 12

Which capital investment evaluation technique is described by the following characteristics? (1) Closely related to NPV; (2) Easy to understand and communicate; (3) May lead to incorrect
Decisions when comparing mutually exclusive investments; (4) May be useful when the available
Investment funds are limited.
A) NPV
B) IRR
C) AAR
D) Payback period
E) PI

Accepted Answer

The answer of Which capital investment evaluation technique is described...

Question 13

You are considering two mutually exclusive projects with the following cash ﬂows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent? 
A) Accept project A as it always has the higher NPV.
B) Accept project B as it always has the higher NPV.
C) Accept A at 7 percent and B at 10 percent.
D) Accept B at 7 percent and A at 10 percent.
E) Accept A at 7 percent and neither at 10 percent.

Accepted Answer

The answer of You are considering two mutually exclusive projects...

Question 14

Shawn's Health Care is considering a project which will produce sales of $1.7 million a year for the next ten years. The proﬁt margin is estimated at 8 percent. The project will cost $2.9 million and will
Be depreciated straight-line to a zero book value over the life of the project. Shawn's has a required
Accounting return of 9 percent. This project should be _____ because the AAR is _____.
A) Accepted; 8.44 percent
B) Accepted; 9.38 percent
C) Accepted; 9.82 percent
D) Rejected; 8.44 percent
E) Rejected; 9.38 percent

Accepted Answer

The answer of Shawn's Health Care is considering a project...

Question 15

A negative net present value indicates that:
A) A project's cash inﬂows must be less than the project's initial cost.
B) A project is acceptable.
C) A project's initial cash outﬂow is greater than the present value of the project's cash inﬂows.
D) The discount rate is greater than the current market rate of return.
E) The discount rate applied to the project is less than the project's internal rate of return.

Accepted Answer

A negative net present value means that the initial cash outflow of a project is greater than the present value of the project's cash inflows. This indicates that the project is not economically viable since its cash inflows are insufficient to cover its cost.

Question 16

A ﬁrm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash ﬂows occurring in the distant future, and avoid projects that require a large
Amount of research and development expenses. This ﬁrm may be justiﬁed in using the
____________ to evaluate its projects.
A) IRR rule.
B) NPV rule.
C) AAR rule.
D) Payback rule.
E) PI rule.

Accepted Answer

The payback rule is a measure that determines how long it will take for a project to recoup its initial investment. This rule is attractive to firms seeking projects with high liquidity since it focuses on the timeframe necessary to recover the investment. Furthermore, avoiding projects with high forecasting errors and substantial research and development expenses aligns with the payback rule's emphasis on shorter-term investments. Hence, the payback rule would be the best method for this firm to evaluate its projects.

Question 17

Which one of the following statements is correct?
A) A negative net present value indicates that a project is acceptable.
B) A proﬁtability index that is less than 1.0 indicates that a project is acceptable.
C) A project with a net present value of zero is earning exactly the required rate of return.
D) When the internal rate of return is less than the required rate, the project should be accepted.
E) If the accounting rate of return exceeds the required discount rate, the project should be accepted.

Accepted Answer

A negative net present value (NPV) indicates that a project is not acceptable as it means the project's expected cash flows are not sufficient to cover the required rate of return. A profitability index (PI) less than 1.0 also indicates an unacceptable project as it means the present value of future cash flows is less than the initial investment. When the NPV is zero, it means the project is earning exactly the required rate of return, so it is acceptable. When the internal rate of return (IRR) is less than the required rate, the project should be rejected as it means the project's rate of return is lower than the cost of capital. Lastly, the acceptance of a project based on the accounting rate of return (ARR) and required discount rate depends on the company's policies, but generally, if the ARR exceeds the required discount rate, the project can be accepted. However, ARR does not consider the time value of money and ignores cash flows beyond the payback period, so other methods such as NPV and IRR should also be considered. Therefore, option C is the correct statement as it accurately describes a project earning the required rate of return.

Question 18

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?
A) Net present value.
B) Internal rate of return.
C) Accounting rate of return.
D) Payback.
E) Proﬁtability index.

Accepted Answer

The payback method is most applicable for small dollar, short-term projects evaluated by low level managers on a daily basis. It measures the time it takes for the initial investment to be recouped through cash inflows. This is a quick and simple method of analysis that doesn't require complex calculations or consideration of the time value of money.

Question 19

The payback period is deﬁned as the length of time it requires for an investment to generate suﬃcient cash ﬂows to recoup:
A) The required rate of return on the investment.
B) The initial cost of the investment.
C) All of the initial cost plus the ongoing maintenance costs of the ﬁxed assets required by the investment.
D) Both the initial cost of the investment and the amount needed to provide the required rate of return.
E) The future value of the initial cost of the investment.

Accepted Answer

The payback period is the time required for the investment to generate enough cash flows to cover the initial cost of the investment. Option B is the only choice that correctly lists the initial cost of the investment as what needs to be recouped. Option A refers to the required rate of return, which is not necessarily the same as the initial cost, while options C, D, and E include additional costs beyond the initial cost.

Question 20

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.
A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback

Accepted Answer

The answer of Which capital investment evaluation technique offers the...

Quiz 9: Net Present Value and Other Investment Criteria

Under the payback method of analysis:

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for four years while investment B pays $30,000 a year for ﬁve years. If your Required return is 13%, which should you choose?

Sal is considering a project that costs $15,000. The project produces cash inﬂows of $3,000, $5,000, $7,000, and $3,000 respectively for the next four years. Sal wants to recoup his money Within 3 years after applying a 6% discount rate. Sal should:

For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash ﬂows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV Projects.

When the present value of the cash inﬂows exceeds the initial cost of a project, then the project should be:

An investment's average net income divided by its average book value deﬁnes the average:

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect Decisions when applied to mutually exclusive investments.

You are considering two mutually exclusive projects with the following cash ﬂows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent?

A negative net present value indicates that:

Which one of the following statements is correct?

Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

The payback period is deﬁned as the length of time it requires for an investment to generate suﬃcient cash ﬂows to recoup:

Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.