Question 1

Net present value:
A)is the best method of analyzing mutually exclusive projects.
B)is less useful than the internal rate of return when comparing different sized projects.
C)is the easiest method of evaluation for non-financial managers to use.
D)is less useful than the profitability index when comparing mutually exclusive projects.
E)is very similar in its methodology to the average accounting return.

Accepted Answer

Net Present Value (NPV) is considered the best method for analyzing mutually exclusive projects because it provides a direct measure of how much value is added to the firm by undertaking the project. It takes into account the time value of money, providing a dollar amount that represents the project's contribution to wealth. Unlike other methods, NPV can accurately compare projects of different sizes and durations by showing the expected increase in the firm's value, making it a preferred choice for evaluating mutually exclusive investments.

Question 2

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
A)project tract
B)projected risk profile
C)NPV profile
D)NPV route
E)present value sequence

Accepted Answer

This graph is called an NPV profile, as it shows the net present value of the project at various discount rates.

Question 3

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
A)net present value
B)discounted payback
C)internal rate of return
D)profitability index
E)payback

Accepted Answer

Net present value (NPV) calculates the present value of future cash flows generated by a proposed project and subtracts the initial investment. The result represents the estimated change in the value of the firm. A positive NPV indicates that the project is expected to increase the value of the firm, while a negative NPV indicates the opposite. Therefore, NPV is considered the best method for determining the impact of a proposed project on the value of a firm.

Question 4

The length of time a firm must wait to recoup the money it has invested in a project is called the:
A)internal return period.
B)payback period.
C)profitability period.
D)discounted cash period.
E)valuation period.

Accepted Answer

The payback period is defined as the length of time it takes for a firm to recover the initial investment in a project. This metric is useful for evaluating the liquidity of a project and the speed at which cash flows can be generated. The internal return period, profitability period, and discounted cash period are all related to project profitability and the time value of money, but do not specifically address the payback period. The valuation period is not a commonly used financial term.

Question 5

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
A)have two net present value profiles.
B)have operational ambiguity.
C)create a mutually exclusive investment decision.
D)produce multiple economies of scale.
E)have multiple rates of return.

Accepted Answer

When a project has two distinct discount rates at which it will have a zero net present value, it is said to have multiple rates of return. This means that the project has multiple points in time when the cash inflows and outflows will exactly offset each other, resulting in a zero net present value. This can create difficulties in decision-making, as it is unclear which rate of return should be used to evaluate the project.

Question 6

The internal rate of return is defined as the:
A)maximum rate of return a firm expects to earn on a project.
B)rate of return a project will generate if the project in financed solely with internal funds.
C)discount rate that equates the net cash inflows of a project to zero.
D)discount rate which causes the net present value of a project to equal zero.
E)discount rate that causes the profitability index for a project to equal zero.

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. In other words, it is the rate of return that a project is expected to generate. Therefore, choice D is the correct answer. Choice A is incorrect because the IRR is not necessarily the maximum rate of return that a firm expects to earn on a project. Choice B is incorrect because the method of financing a project does not affect the IRR. Choice C is partially correct because the IRR does equate the net cash inflows of a project to zero, but it is not the only discount rate that does so. Choice E is also incorrect because the profitability index is calculated by dividing the present value of future cash flows by the initial investment, and it is not directly related to the IRR.

Question 7

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
A)independent.
B)interdependent.
C)mutually exclusive.
D)economically scaled.
E)operationally distinct.

Accepted Answer

The fact that accepting one project excludes the possibility of accepting the other project indicates that the projects are mutually exclusive. This means that only one of the two projects can be accepted, and accepting one will preclude the possibility of accepting the other.

Question 8

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?
A)profitability index less than 1.0
B)project's internal rate of return less than the required return
C)discounted payback period greater than requirement
D)average accounting return that is less than the internal rate of return
E)modified internal rate of return that exceeds the required return

Accepted Answer

For an independent project with investing type cash flows, the project acceptance indicator is whether the modified internal rate of return (MIRR) exceeds the required return. This is because the MIRR takes into account both the cost of capital and the reinvestment rate, providing a more accurate measure of the project's profitability. If the MIRR is greater than the required return, it means the project is expected to generate a return that exceeds the cost of capital and is therefore acceptable. Choices A, B, C, and D are not project acceptance indicators for this type of project.

Question 9

Which one of the following will decrease the net present value of a project?
A)increasing the value of each of the project's discounted cash inflows
B)moving each of the cash inflows back to a later time period
C)decreasing the required discount rate
D)increasing the project's initial cost at time zero
E)increasing the amount of the final cash inflow

Accepted Answer

Increasing the project's initial cost at time zero will increase the amount of money needed upfront and will decrease the net present value of the project. This is because the present value of future cash inflows will be reduced more than the increase in initial cost. Therefore, option D is the correct answer.

Question 10

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
A)reduction in the cash outflow at time zero
B)cash inflow in the final year of the project
C)cash inflow for the year following the final year of the project
D)cash inflow prorated over the life of the project
E)not included in the net present value

Accepted Answer

The $45,000 salvage value is treated as a cash inflow in the final year of the project, as it represents the after-tax value of the fixed assets that are sold at the end of the project. This cash inflow reduces the net investment in fixed assets, which in turn has a positive impact on the net present value of the project.

Question 11

If a project has a net present value equal to zero, then:
A)the total of the cash inflows must equal the initial cost of the project.
B)the project earns a return exactly equal to the discount rate.
C)a decrease in the project's initial cost will cause the project to have a negative NPV.
D)any delay in receiving the projected cash inflows will cause the project to have a positive NPV.
E)the project's PI must be also be equal to zero.

Accepted Answer

The answer of If a project has a net present...

Question 12

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:
A)net present value period.
B)internal return period.
C)payback period.
D)discounted profitability period.
E)discounted payback period.

Accepted Answer

The discounted payback period is the length of time it takes to recoup an investment in present value terms, accounting for the time value of money. This contrasts with the simple payback period, which does not take the time value of money into account.

Question 13

Which one of the following increases the net present value of a project?
A)an increase in the required rate of return
B)an increase in the initial capital requirement
C)a deferment of some cash inflows until a later year
D)an increase in the aftertax salvage value of the fixed assets
E)a reduction in the final cash inflow

Accepted Answer

Increasing the aftertax salvage value of the fixed assets will increase the final cash inflows, resulting in a higher net present value for the project. The other options (A, B, C, and E) would decrease the net present value.

Question 14

A project has a net present value of zero. Which one of the following best describes this project?
A)The project has a zero percent rate of return.
B)The project requires no initial cash investment.
C)The project has no cash flows.
D)The summation of all of the project's cash flows is zero.
E)The project's cash inflows equal its cash outflows in current dollar terms.

Accepted Answer

A net present value (NPV) of zero indicates that the present value of a project's cash inflows equals the present value of its cash outflows, taking into account the time value of money. This means the project is expected to break even, considering the cost of capital.

Question 15

Why is payback often used as the sole method of analyzing a proposed small project?
A)Payback considers the time value of money.
B)All relevant cash flows are included in the payback analysis.
C)It is the only method where the benefits of the analysis outweigh the costs of that analysis.
D)Payback is the most desirable of the various financial methods of analysis.
E)Payback is focused on the long-term impact of a project.

Accepted Answer

Small projects often have limited resources and time available for financial analysis. Payback period analysis is a quick and simple method of assessing the feasibility of such projects because it only requires a determination of how quickly a project can recoup its initial investment. Since the benefits of doing a more detailed financial analysis may not justify the costs associated with that analysis, payback is often the only method used for smaller projects.

Question 16

Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
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 only

Accepted Answer

The payback method is favored for its simplicity and focus on liquidity, as it measures how quickly an investment can be recouped. However, it does not account for the value of money over time or returns beyond the payback period, which limits its usefulness for evaluating the full profitability of projects, especially those with long-term benefits like research and development.

Question 17

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A)net present value.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)profile period.

Accepted Answer

The definition given in the question describes the profitability index. A is incorrect because net present value is the difference between the present value of an investment's cash inflows and outflows. B is incorrect because internal rate of return is the discount rate at which the net present value of an investment’s cash flows is zero. C is incorrect because average accounting return is the average net income an asset generates divided by its average book value. E is not a valid term in finance.

Question 18

A project's average net income divided by its average book value is referred to as the project's average:
A)net present value.
B)internal rate of return.
C)accounting return.
D)profitability index.
E)payback period.

Accepted Answer

The calculation mentioned in the question is the formula for accounting return, which is a ratio of a project's net income to its book value. Option A is incorrect because net present value is a measure of project profitability based on discounted cash flows, not a ratio. Option B is incorrect because the internal rate of return is the discount rate that makes the net present value of a project's cash flows equal to zero. Option D is incorrect because the profitability index is a measure of a project's profitability relative to its initial investment. Option E is incorrect because the payback period is the amount of time it takes for a project to recoup its initial investment.

Question 19

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?
A)constant dividend growth model
B)discounted cash flow valuation
C)average accounting return
D)expected earnings model
E)internal rate of return

Accepted Answer

Discounted cash flow valuation involves calculating the present value of a project's anticipated cash flows, taking into account the time value of money. This method considers the timing and amount of all future cash flows associated with the project and discounts them back to their present value using an appropriate discount rate. This enables a more accurate estimation of the project's true value and helps in making better investment decisions.

Question 20

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
A)net present value
B)internal return
C)payback value
D)profitability index
E)discounted payback

Accepted Answer

The difference between the market value of a project and its cost is referred to as the net present value (NPV). This measures the project's profitability by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Quiz 9: Net Present Value and Other Investment Criteria

Net present value:

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

The length of time a firm must wait to recoup the money it has invested in a project is called the:

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

The internal rate of return is defined as the:

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

Which one of the following will decrease the net present value of a project?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

If a project has a net present value equal to zero, then:

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

Which one of the following increases the net present value of a project?

A project has a net present value of zero. Which one of the following best describes this project?

Why is payback often used as the sole method of analyzing a proposed small project?

Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

A project's average net income divided by its average book value is referred to as the project's average:

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?