Question 1

Which one of the following will occur when the internal rate of return equals the required return?
A)The average accounting return will equal 1.0.
B)The profitability index will equal 1.0.
C)The profitability index will equal 0.
D)The net present value will equal the initial cash outflow.
E)The profitability index will equal the average accounting return.

Accepted Answer

When the internal rate of return (IRR) equals the required return, the project's net present value will be equal to zero. The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. When PI equals 1.0, it means that the present value of the future cash inflows is equal to the initial investment. Therefore, the project is expected to break even, and this occurs at the IRR.

Question 2

Which one of the following is an indicator that an investment is acceptable?
A)Modified internal rate of return equal to zero
B)Profitability index of zero
C)Internal rate of return that exceeds the required return
D)Payback period that exceeds the required period
E)Negative average accounting return

Accepted Answer

An internal rate of return that exceeds the required return indicates that the investment is acceptable as it generates a return greater than the cost of capital. A profitability index of greater than one also indicates the investment is acceptable, but none of the answer choices provide a profitability index greater than one. The other options (A, D, E) are indicators that the investment is not acceptable.

Question 3

Which one of the following methods of analysis ignores the time value of money?
A)Net present value
B)Internal rate of return
C)Discounted cash flow analysis
D)Payback
E)Profitability index

Accepted Answer

Payback method only considers the time required to recover the initial investment and does not take into account the time value of money. On the other hand, NPV, IRR, DCF, and profitability index all consider the time value of money by discounting future cash flows.

Question 4

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?
A)Mutually exclusive projects
B)Unconventional cash flows
C)Long-term projects
D)Negative net present values
E)Crossover points

Accepted Answer

The modified internal rate of return (MIRR) is specifically designed to address the problems associated with unconventional cash flows, such as multiple changes in the direction of cash flows, and it assumes reinvestment at a rate different from the project's internal rate of return. MIRR is calculated using the same formula as IRR, but instead of assuming that cash flows are reinvested at the project's internal rate of return, it assumes that cash flows are reinvested at a rate equal to the firm's cost of capital. MIRR is especially useful for comparing projects with different cash flow patterns and for identifying the optimal project among mutually exclusive projects. Therefore, option B is the best choice.

Question 5

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment under consideration.
E)The cash flows are conventional.

Accepted Answer

The internal rate of return (IRR) can be unreliable in making investment decisions when comparing mutually exclusive investments. This is because IRR assumes that the cash flows from the investment can be reinvested at the same rate, which may not be the case when choosing between multiple investments with different cash flow patterns. In these situations, other methods such as net present value (NPV) or profitability index (PI) should be used to evaluate the investments. Choices A, B, C, and E are not necessarily factors that make IRR unreliable as an indicator of whether or not an investment should be accepted.

Question 6

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?
A)The firm should increase in value each time the firm accepts a new project.
B)The firm is most likely steadily losing value.
C)The price of the firm's stock should remain constant.
D)The net present value of each new project is zero.
E)The internal rate of return on each new project is zero.

Accepted Answer

Accepting projects with a profitability index greater than 1.5 ensures that the project returns more cash than the initial investment. This should increase the value of the firm, making option A the correct answer. Option B is incorrect as accepting profitable projects would not cause the firm to lose value. Option C is incorrect as the profitability index does not directly impact the price of the firm's stock. Option D and E are also incorrect as both the net present value and internal rate of return of profitable projects should be positive.

Question 7

The average accounting return:
A)measures profitability rather than cash flow.
B)discounts all values to today's dollars.
C)is expressed as a percentage of an investment's current market value.
D)will equal the required return when the net present value equals zero.
E)is used more often by CFOs than the internal rate of return.

Accepted Answer

The average accounting return measures profitability based on accounting metrics such as net income or earnings, rather than cash flow. The other choices are incorrect: B is referring to the present value concept, C is describing the market value ratio, D is referring to the IRR concept, and E is not true as IRR is used more frequently than AAR by CFOs.

Question 8

You are using a net present value profile to compare Project A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?
A)The internal rate of return for Project A equals that of Project B, but generally does not equal zero.
B)The internal rate of return of each project is equal to zero.
C)The net present value of each project is equal to zero.
D)The net present value of Project A equals that of Project B, but generally does not equal zero.
E)The net present value of each project is equal to the respective project's initial cost.

Accepted Answer

The crossover point is where the net present values of both projects are equal, indicating the discount rate at which both projects are equally preferable.

Question 9

Which one of the following methods of analysis has the greatest bias toward short-term projects?
A)Net present value
B)Internal rate of return
C)Average accounting return
D)Profitability index
E)Payback

Accepted Answer

Payback period only considers the time it takes to recoup the initial investment, so it is biased towards short-term projects. The other methods such as net present value and internal rate of return take into account the time value of money and future cash flows, making them more suitable for long-term projects.

Question 10

The reinvestment approach to the modified internal rate of return:
A)individually discounts each separate cash flow back to the present.
B)reinvests all the cash flows, including the initial cash flow, to the end of the project.
C)discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.
D)discounts all negative cash flows back to the present and combines them with the initial cost.
E)compounds all of the cash flows, except for the initial cash flow, to the end of the project.

Accepted Answer

The answer of The reinvestment approach to the modified internal...

Question 11

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
A)Internal rate of return
B)Profitability index
C)Average accounting return
D)Net present value
E)Payback

Accepted Answer

The return on assets (ROA) measures the company's earnings in relation to its assets. The average accounting return is a similar ratio that measures the average net income generated by an asset during its life in relation to its average book value. Therefore, option C is the best choice. The other options are different methods of analyzing investment projects or financial performance.

Question 12

Which one of the following analytical methods is based on net income?
A)Profitability index
B)Internal rate of return
C)Average accounting return
D)Modified internal rate of return
E)Payback

Accepted Answer

Average accounting return is based on net income, as it calculates the average net income of an investment over a certain period of time. The other methods listed do not solely rely on net income as a factor in their calculations.

Question 13

Which one of the following methods of analysis ignores cash flows?
A)Profitability index
B)Net present value
C)Average accounting return
D)Modified internal rate of return
E)Internal rate of return

Accepted Answer

The average accounting return is a method of analysis that only considers accounting measures, such as net income and book value of assets, but ignores cash flows. The other methods listed, such as profitability index, net present value, and internal rate of return, all take into account the timing and amount of cash flows in their calculations. Modified internal rate of return also considers cash flows but adjusts for potential reinvestment assumptions.

Question 14

An investment has conventional cash flows and a profitability index of 1.0.Given this,which one of the following must be true?
A)The internal rate of return exceeds the required rate of return.
B)The investment never pays back.
C)The net present value is equal to zero.
D)The average accounting return is 1.0.
E)The net present value is greater than 1.0.

Accepted Answer

A profitability index of 1.0 indicates that the present value of the investment's future cash flows is equal to the initial cost of the investment.This means that the investment is just breaking even, with no profit or loss. Therefore, the net present value is equal to zero.

Question 15

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?
A)Average accounting return
B)Profitability index
C)Internal rate of return
D)Indexed rate of return
E)Modified internal rate of return

Accepted Answer

The Modified Internal Rate of Return (MIRR) is specifically designed to compute the rate of return on a project that has unconventional cash flows. The MIRR is a modified version of the Internal Rate of Return (IRR) which assumes that all intermediate cash flows are reinvested at the cost of capital rather than at the project's own rate of return. This makes the MIRR more appropriate for projects with unconventional cash flows, such as those with multiple sign changes or non-conventional timing of cash flows. Therefore, the best choice is E, the Modified Internal Rate of Return.

Question 16

The profitability index reflects the value created per dollar:
A)invested.
B)of sales.
C)of net income.
D)of taxable income.
E)of shareholders' equity.

Accepted Answer

The profitability index measures the value created per dollar invested, making option A the best choice. Options B, C, D, and E all measure different aspects of a company's financial performance, but are not directly related to the profitability index.

Question 17

If a project with conventional cash flows has a profitability index of 1.0,the project will:
A)never pay back.
B)have a negative net present value.
C)have a negative internal rate of return.
D)produce more cash inflows than outflows in today's dollars.
E)have an internal rate of return that equals the required return.

Accepted Answer

The answer of If a project with conventional cash flows...

Question 18

Which one of the following is most closely related to the net present value profile?
A)Internal rate of return
B)Average accounting return
C)Profitability index
D)Payback
E)Discounted payback

Accepted Answer

The net present value profile and internal rate of return are closely related as they both measure the profitability and efficiency of an investment by taking into account the time value of money. The net present value profile shows how the net present value of an investment changes at different discount rates, while the internal rate of return is the discount rate at which the net present value of an investment is zero. Therefore, A (Internal rate of return) is the best choice. The other options are either different measures of profitability (B, C) or measures of liquidity (D, E).

Question 19

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
A)Internal rate of return
B)Profitability index
C)Net present value
D)Modified internal rate of return
E)Average accounting return

Accepted Answer

The net present value (NPV) method is the most appropriate choice when considering mutually exclusive investments. This is because the NPV method determines the present value of future cash flows, which allows for a direct comparison of the investments. The investment with the higher NPV is the better choice. The other methods listed can also be useful in evaluating investments, but they may not be as effective when comparing mutually exclusive options.

Question 20

Which one of the following statements is correct?
A)If the IRR exceeds the required return, the profitability index will be less than 1.0.
B)The profitability index will be greater than 1.0 when the net present value is negative.
C)When the internal rate of return is greater than the required return, the net present value is positive.
D)Projects with conventional cash flows have multiple internal rates of return.
E)If two projects are mutually exclusive, you should select the project with the shortest payback period.

Accepted Answer

When the internal rate of return (IRR) is greater than the required return, the net present value (NPV) is positive. This is because the IRR is the discount rate at which the NPV of the project equals zero. If the IRR is greater than the required return, it means that the project is generating more cash flows than needed to meet the required return, resulting in a positive NPV. Therefore, option C is the correct statement. The other statements are incorrect.

Quiz 8: Net Present Value and Other Investment Criteria

Which one of the following will occur when the internal rate of return equals the required return?

Which one of the following is an indicator that an investment is acceptable?

Which one of the following methods of analysis ignores the time value of money?

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

The average accounting return:

You are using a net present value profile to compare Project A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?

Which one of the following methods of analysis has the greatest bias toward short-term projects?

The reinvestment approach to the modified internal rate of return:

Which one of the following methods of analysis is most similar to computing the return on assets (ROA) ?

Which one of the following analytical methods is based on net income?

Which one of the following methods of analysis ignores cash flows?

An investment has conventional cash flows and a profitability index of 1.0.Given this,which one of the following must be true?

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?

The profitability index reflects the value created per dollar:

If a project with conventional cash flows has a profitability index of 1.0,the project will:

Which one of the following is most closely related to the net present value profile?

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Which one of the following statements is correct?