Question 1

Your ﬁrm's CFO presents you with two capital budgeting analyses: one that involves buying a new delivery truck to replace the existing truck and one that involves the purchase of a three-ton metal
Stamping press to replace the existing press on the plant ﬂoor. This is an example of a decision
Involving _______________.
A) Mutually exclusive projects.
B) Crossover projects.
C) Payback projects.
D) Independent projects.
E) Working capital projects.

Accepted Answer

This is an example of independent projects because the decision to invest in one does not affect the decision to invest in the other. Each project can be evaluated on its own merits.

Question 2

The principle that an investment should be accepted if the difference between the investment's market value and its cost is positive and rejected if the difference is negative is referred to as the:
A) Average accounting return rule.
B) Internal rate of return rule.
C) Proﬁtability index rule.
D) Discounted payback rule.
E) Net present value rule.

Accepted Answer

The principle described in the question is best represented by the net present value (NPV) rule, which states that an investment should be accepted if its NPV is positive and rejected if its NPV is negative. The NPV calculates the present value of expected cash flows from an investment, minus the initial cost of the investment. If the resulting value is positive, the investment is considered profitable, as the present value of expected future cash flows exceeds the initial cost. The NPV is considered the most comprehensive and reliable method for investment analysis, and is widely used by businesses and investors to evaluate potential investments.

Question 3

As the required rate of return increases, the:
A) Net present value increases.
B) Payback period decreases.
C) Proﬁtability index decreases.
D) Discounted payback period decreases.
E) Average accounting return decreases.

Accepted Answer

As the required rate of return increases, the profitability index decreases. This is because the profitability index measures the present value of future cash flows in relation to the initial investment, and the discounting of future cash flows becomes more severe as the required rate of return increases. As a result, the profitability index decreases, indicating a lower return on investment. The other options are not affected by changes in the required rate of return in the same way as the profitability index.

Question 4

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 percent, and a required accounting
Return of 11 percent. Which one of these values indicates an accept decision?
A) Net present value of ($1,200).
B) Accounting rate of return of 10 percent.
C) Proﬁtability index of 1.02.
D) Internal rate of return of 13.6 percent.
E) Payback period of 3.2 years.

Accepted Answer

A profitability index of greater than 1 indicates that the project is expected to generate a positive net present value, which is the case here with a value of 1.02. This means the project is expected to create value and should be accepted. The other values indicate a negative net present value (A), a lower accounting rate of return (B), a lower internal rate of return (D), or a longer payback period (E), which are all less desirable for investment decision-making.

Question 5

Your ﬁrm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labour to operate, and another that is manual, requiring a
Signiﬁcant amount of labour. This is an example of a decision involving ______________.
A) Independent projects.
B) Working capital projects.
C) Positive NPV projects.
D) Crossover projects.
E) Mutually exclusive projects.

Accepted Answer

The decision presented is an example of mutually exclusive projects because the firm can only choose one of the two options presented. To determine the best choice, a comparison of the costs and benefits of each option should be conducted. Factors such as the initial investment, operating costs, expected return on investment, and any potential risks should be considered.

Question 6

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.  Matt has been asked for his best recommendation given this information. His recommendation
Should be to accept:
A) Project B because it has the shortest payback period.
B) Both projects as they both have positive net present values.
C) Project A and reject project B based on their net present values.
D) Project B and reject project A based on their average accounting returns.
E) Project B and reject project A based on both the payback period and the average accounting return.

Accepted Answer

The answer of Matt is analyzing two mutually exclusive projects...

Question 7

Corey is considering two projects both of which have an initial cost of $20,000 and total cash inﬂows of $25,000. The cash inﬂows of project A are $3,000, $5,000, $8,000, and $9,000 over the
Next four years, respectively. The cash inﬂows for project B are $9,000, $8,000, $5,000, and
$3,000 over the next four years, respectively. Which one of the following statements is correct if
Corey requires a 10 percent rate of return and has a required discounted payback period of 3
Years?
A) Both projects should be accepted.
B) Both projects should be rejected.
C) Project A should be accepted and project B should be rejected.
D) Project A should be rejected and project B should be accepted.
E) You should be indifferent to accepting either or both projects.

Accepted Answer

Neither project meets the required discounted payback period of 3 years at a 10% rate of return.

Question 8

The New Blues Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Minglewood Retail Center. Project B consists of building a sit-down
Restaurant on lot #169 of the Minglewood 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.
C) Payback.
D) Net present value.
E) Accounting rate of return.

Accepted Answer

The most appropriate analysis method to use in this situation is the net present value (NPV) method. This is because the NPV takes into account the time value of money and considers all future cash flows associated with each project. A positive NPV indicates that a project is expected to generate more cash inflows than outflows, which means that it will likely add value to the company. Therefore, management should compare the NPV for each project and choose the one with the higher value.

Question 9

Ilona is considering two projects both of which have an initial cost of $17,000 and total cash inﬂows of $21,000. The cash inﬂows of project A are $6,000, $5,000, $5,000, and $5,000 over the next
Four years, respectively. The cash inﬂows for project B are $9,000, $7,000, $3,000 and $2,000 over
The next four years, respectively. Which one of the following statements is correct if Ilona requires a
12 percent rate of return and has a required discounted payback period of 3.5 years?
A) Both projects should be accepted.
B) Neither project ever pays back.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) Both projects should be rejected even though Project B does pay back.

Accepted Answer

The answer of Ilona is considering two projects both of...

Question 10

The average accounting return:
A) Reﬂects the projected net effect of the cash ﬂows from a project on the overall ﬁrm.
B) Is comparable to the return on assets and thus provides a similar measure of performance.
C) Reﬂects the anticipated net impact of a project on the shareholders of the ﬁrm.
D) Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted.
E) Ignores all income produced by a project after an arbitrarily assigned cutoff point.

Accepted Answer

The average accounting return (AAR) is similar to the return on assets (ROA) as it measures the average profitability of an investment relative to its cost, providing a performance measure.

Question 11

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand; (2) Biased towards liquidity; (3) Requires an arbitrary cutoff point; (4) Ignores the time
Value of money.
A) NPV
B) IRR
C) Proﬁtability index
D) Payback period
E) Discounted payback

Accepted Answer

The characteristics described fit the payback period evaluation technique. It is easy to understand, biased towards liquidity, requires an arbitrary cutoff point, and ignores the time value of money.

Question 12

By deﬁnition, the net present value is equal to zero when the discount rate is equal to the:
A) Average account rate of return.
B) Rate used in the discounted payback formula.
C) Proﬁtability index rate.
D) Internal rate of return.
E) Crossover rate.

Accepted Answer

The net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. At the discount rate that makes NPV equal to zero, we have the internal rate of return (IRR). Therefore, the correct choice is D, the internal rate of return.

Question 13

Using the proﬁtability index, which of the following projects would you choose if you have limited funds? 
A) Project 1
B) Project 2
C) Project 3
D) Project 4
E) Project 5

Accepted Answer

The answer of Using the proﬁtability index, which of the...

Question 14

When the funds available for investment are limited and you wish to receive the greatest beneﬁt per dollar spent, you should use the _____ method of analysis to determine which one of two
Projects should be accepted.
A) Net present value.
B) Internal rate of return.
C) Payback.
D) Proﬁtability index.
E) Average accounting rate of return.

Accepted Answer

The profitability index method helps in determining the best project when funds are limited by comparing the benefit per dollar invested.

Question 15

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.
Suppose the pawn shop has more customers than funds. Which capital budgeting technique would
Allow it to rank potential customers in order to maximize current wealth?
A) AAR
B) Payback period
C) Proﬁtability index
D) NPV
E) Discounted payback

Accepted Answer

The profitability index (PI) is a capital budgeting technique that helps rank projects or investments based on their profitability relative to their cost. It is useful for prioritizing projects when resources are limited, as it indicates which projects will provide the most value per unit of investment.

Question 16

The length of time required for an investment's discounted cash ﬂows to equal its initial cost is the:
A) Net present value.
B) Internal rate of return.
C) Payback period.
D) Proﬁtability index.
E) Discounted payback period.

Accepted Answer

The discounted payback period is the time it takes for the present value of cash inflows to cover the initial investment cost.

Question 17

You are considering the following two mutually exclusive projects with the following cash ﬂows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life
Of the project. Neither project has any salvage value.   You should _____ Project A and _____ Project B based on the payback period of each project.
A) accept; accept
B) accept; reject
C) reject; accept
D) reject; reject
E) The payback method should not be used to determine which of these projects should be accepted.

Accepted Answer

The answer of You are considering the following two mutually...

Question 18

The internal rate of return is deﬁned as the:
A) Average annual rate of return on a project.
B) Average annual rate of return divided by the average book value of a project's ﬁxed assets.
C) Rate of return which yields a net present value equal to the initial investment in a project.
D) Rate of return which causes the net present value of a project to equal zero.
E) Rate of return which a cost-cutting, non-revenue generating project returns in an average year.

Accepted Answer

The internal rate of return is the rate of return that causes the net present value of a project to equal zero. This means that the initial investment and the present value of future cash flows are equal, making it a break-even point for the project. This is the best choice out of the given options.

Question 19

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 projects.
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.

Accepted Answer

The discounted payback rule may cause some positive net present value projects to be rejected because it only considers the amount of time it takes to recoup the initial investment, rather than the overall profitability of the project. By focusing solely on recouping the initial investment, some projects that may have a longer payback period but a higher overall profitability may be rejected.

Question 20

A four-year project has an initial outlay of $100,000. The future cash inﬂows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%,
Will the project be accepted?
A) Accept the project as the NPV is $44,150.
B) Reject the project as the NPV is $44,150.
C) Reject the project as the NPV is $(44,150).
D) Accept the project as the NPV is $18,250.
E) Reject the project as the NPV is $18,250.

Accepted Answer

To calculate the net present value (NPV), we need to discount each future cash flow by the discount rate of 10%:
NPV = -$100,000 + $50,000/(1.1)^1 + $50,000/(1.1)^2 + $40,000/(1.1)^3 + $40,000/(1.1)^4
NPV = -$100,000 + $41,322 + $37,566 + $28,231 + $25,030
NPV = $31,149
Since the NPV is positive ($31,149), the project should be accepted. Choice A is the correct answer.

Quiz 9: Net Present Value and Other Investment Criteria

The principle that an investment should be accepted if the difference between the investment's market value and its cost is positive and rejected if the difference is negative is referred to as the:

As the required rate of return increases, the:

The following values have been computed for various independent projects which have a required payback period of 3 years, a required discount rate of 14.5 percent, and a required accounting Return of 11 percent. Which one of these values indicates an accept decision?

Your ﬁrm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labour to operate, and another that is manual, requiring a Signiﬁcant amount of labour. This is an example of a decision involving ______________.

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation Should be to accept:

The average accounting return:

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand; (2) Biased towards liquidity; (3) Requires an arbitrary cutoff point; (4) Ignores the time Value of money.

By deﬁnition, the net present value is equal to zero when the discount rate is equal to the:

Using the proﬁtability index, which of the following projects would you choose if you have limited funds?

When the funds available for investment are limited and you wish to receive the greatest beneﬁt per dollar spent, you should use the _____ method of analysis to determine which one of two Projects should be accepted.

The length of time required for an investment's discounted cash ﬂows to equal its initial cost is the:

The internal rate of return is deﬁned as the:

The discounted payback rule may cause:

A four-year project has an initial outlay of $100,000. The future cash inﬂows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%, Will the project be accepted?