Question 1

A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A)conventional cash flows
B)cash flows that extend beyond the acceptable payback period
C)a year or more in the middle of a project where the cash flows are equal to zero
D)a cash inflow at time zero
E)cash inflows which are equal in amount

Accepted Answer

A project with financing type cash flows typically starts with a cash inflow at time zero, representing the initial financing received to start the project. This is in contrast to conventional or investment type projects, which usually begin with an outflow of cash for the investment.

Question 2

Which one of the following correctly applies to the average accounting rate of return?
A)It considers the time value of money.
B)It measures net income as a percentage of the sales generated by a project.
C)It is the best method of analyzing mutually exclusive projects from a financial point of view.
D)It is the primary methodology used in analyzing independent projects.
E)It can be compared to the return on assets ratio.

Accepted Answer

The average accounting rate of return (AARR) compares the average annual profit of an investment to the initial or average investment cost. This method is similar to the return on assets ratio, which also compares net income to the total assets to assess a company's efficiency in using its assets to generate earnings.

Question 3

A project has a discounted payback period that is equal to the required payback period.Given this,which of the following statements must be true?
I.The project must also be acceptable under the payback rule.
II.The project must have a profitability index that is equal to or greater than 1.0.
III.The project must have a zero net present value.
IV.The project's internal rate of return must equal the required return.
A)I only
B)I and II only
C)II and III only
D)I, III, and IV only
E)I, II, III, and IV

Accepted Answer

If a project has a discounted payback period that is equal to the required payback period, it means that the project's cash inflows are sufficient enough to cover the initial investment within the required time frame. Therefore, the project is acceptable under the payback rule (Statement I is true). However, it does not necessarily mean that the project has a zero net present value or that its internal rate of return is equal to the required return (Statements III and IV are not necessarily true). The project's profitability index is not mentioned, so it could be greater or less than 1.0 (Statement II is not necessarily true). Therefore, the best choice is B, as it includes the only statement that is necessarily true in this scenario (Statement I) and a statement that could be true (Statement II).

Question 4

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires.Which one of the following changes to the project would be most expected to increase the project's internal rate of return?
A)decreasing the required discount rate
B)increasing the initial investment in fixed assets
C)condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
D)eliminating the salvage value
E)decreasing the amount of the final cash inflow

Accepted Answer

By condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows, the project's internal rate of return will increase. This is because the cash flows will be earned sooner and can be reinvested, thus compounding the returns. Decreasing the required discount rate (A) or eliminating the salvage value (D) could also increase the internal rate of return, but it depends on the specific circumstances of the project. Increasing the initial investment in fixed assets (B) or decreasing the amount of the final cash inflow (E) would likely decrease the project's internal rate of return.

Question 5

You are comparing two mutually exclusive projects.The crossover point is 12.3 percent.You have determined that you should accept project A if the required return is 13.1 percent.This implies you should:
A) always accept project A.
B) be indifferent to the projects at any discount rate above 13.1 percent.
C) always accept project A if the required return exceeds the crossover rate.
D) accept project B only when the required return is equal to the crossover rate.
E) accept project B if the required return is less than 13.1 percent.

Accepted Answer

EThe crossover point is the discount rate at which the net present values (NPVs) of two projects are equal. If you should accept project A at a required return of 13.1 percent, which is above the crossover rate of 12.3 percent, it implies that project A has a higher NPV at discount rates above the crossover point. Therefore, you should always accept project A if the required return exceeds the crossover rate (C). Additionally, since project B would be preferable at discount rates below the crossover point, you should accept project B if the required return is less than 13.1 percent (E), as it implies the required return is also below the crossover rate where project B's NPV would be higher.

Question 6

Which one of the following statements is correct in relation to independent projects?
A)The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows.
B)A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.
C)A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return.
D)The net present value profile is upsloping for projects with both investing and financing type cash flows.
E)Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

Accepted Answer

A project with investing type cash flows is considered acceptable if its internal rate of return (IRR) is higher than the required return. This is because the IRR represents the project's expected rate of return, and exceeding the required return indicates that the project is expected to generate value beyond the minimum threshold set by the investor or company.

Question 7

The profitability index is most closely related to which one of the following?
A)payback
B)discounted payback
C)average accounting return
D)net present value
E)modified internal rate of return

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of cash inflows by the initial investment. This index indicates how much value a project will bring in for every unit of investment. The net present value (NPV) method also involves calculating the present value of cash inflows and subtracting the initial investment. Therefore, the profitability index is most closely related to the net present value method.

Question 8

The internal rate of return:
A)may produce multiple rates of return when cash flows are conventional.
B)is best used when comparing mutually exclusive projects.
C)is rarely used in the business world today.
D)is principally used to evaluate small dollar projects.
E)is easy to understand.

Accepted Answer

The answer of The internal rate of return:
A)may produce multiple...

Question 9

Which of the following statements generally apply to the cash flows of a financing type project?
I.nonconventional cash flows
II.cash outflows exceed cash inflows prior to any time value adjustments
III.cash for services rendered is received prior to the cash that is spent providing the services
IV.the total of all cash flows must equal zero on an unadjusted basis
A)I only
B)I and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The cash flows of a financing type project are nonconventional, meaning that they do not follow the typical pattern of cash inflows exceeding cash outflows over the life of the project. Instead, cash outflows may exceed cash inflows prior to any time value adjustments. Additionally, cash for services rendered is often received prior to the cash that is spent providing the services. Finally, the total of all cash flows must equal zero on an unadjusted basis.

Question 10

Which one of the following is an advantage of the average accounting return method of analysis?
A)easy availability of information needed for the computation
B)inclusion of time value of money considerations
C)the use of a cutoff rate as a benchmark
D)the use of pre-tax income in the computation
E)use of real, versus nominal, average income

Accepted Answer

The advantage of the average accounting return method of analysis is easy availability of information needed for the computation. This method is simple and straightforward, making it easy to compute even for those who may not be financial experts.

Question 11

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I.exclusion of time value of money considerations
II.need of a cutoff rate
III.easily obtainable information for computation
IV.based on accounting values
A)I only
B)I and IV only
C)II and III only
D)I, II, and IV only
E)I, II, III, and IV

Accepted Answer

The average accounting return method does not consider the time value of money, requires a cutoff rate which can be arbitrary, and is based on accounting values rather than cash flows, making I, II, and IV weaknesses.

Question 12

Which one of the following statements related to the internal rate of return (IRR)is correct?
A)The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.
B)A project with an IRR equal to the required return would reduce the value of a firm if accepted.
C)The IRR is equal to the required return when the net present value is equal to zero.
D)Financing type projects should be accepted if the IRR exceeds the required return.
E)The average accounting return is a better method of analysis than the IRR from a financial point of view.

Accepted Answer

The IRR is the discount rate that sets the net present value to zero. Therefore, option C is the correct statement. Option A is incorrect because the IRR and net present value methods can sometimes yield different decisions, especially when considering mutually exclusive projects. Option B is incorrect because a project with an IRR equal to the required return would not change the value of a firm if accepted or rejected - it would simply break even. Option D is incorrect because financing type projects should be accepted if the IRR is greater than the cost of capital, which may not be equal to the required return. Option E is incorrect because the average accounting return is a non-discounted method that does not account for the time value of money and is therefore generally considered inferior to the IRR.

Question 13

Which one of the following statements related to payback and discounted payback is correct?
A)Payback is a better method of analysis than is discounted payback.
B)Discounted payback is used more frequently in business than is payback.
C)Discounted payback does not require a cutoff point like the payback method does.
D)Discounted payback is biased towards long-term projects while payback is biased towards short-term projects.
E)Payback is used more frequently even though discounted payback is a better method.

Accepted Answer

Discounted payback takes into account the time value of money, making it a more accurate method than the traditional payback method, which does not. However, due to its simplicity, the payback method is still used more frequently in practice.

Question 14

Applying the discounted payback decision rule to all projects may cause:
A)some positive net present value projects to be rejected.
B)the most liquid projects to be rejected in favor of the less liquid projects.
C)projects to be incorrectly accepted due to ignoring the time value of money.
D)a firm to become more long-term focused.
E)some projects to be accepted which would otherwise be rejected under the payback rule.

Accepted Answer

Discounted payback takes into account the time value of money by discounting future cash flows. Therefore, projects with long-term cash flows may be rejected under the discounted payback rule even if they have a positive net present value. This is because the discounted payback rule considers not only the timing of cash flows, but also their magnitude. Thus, relying solely on the discounted payback rule may cause some positive net present value projects to be rejected.

Question 15

A project has a required payback period of three years.Which one of the following statements is correct concerning the payback analysis of this project? A)The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B)The cash flow in year three is ignored. C)The project's cash flow in year three is discounted by a factor of (1 + R)³. D)The cash flow in year two is valued just as highly as the cash flow in year one. E)The project is acceptable whenever the payback period exceeds three years.

Accepted Answer

The payback period analysis does not discount future cash flows, meaning all cash flows within the payback period are valued equally regardless of when they occur. Therefore, cash flow in year two is valued just as highly as in year one.

Question 16

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent.Project A has an internal rate of return (IRR)of 15.3 percent and Project B has an IRR of 16.5 percent.Given this information,which one of the following statements is correct?
A)Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR.
B)Project B should be accepted as it has the higher IRR.
C)Both projects should be accepted as both of the project's IRRs exceed the crossover rate.
D)Neither project should be accepted since both of the project's IRRs exceed the crossover rate.
E)You cannot determine which project should be accepted given the information provided.

Accepted Answer

The answer of Douglass Interiors is considering two mutually exclusive...

Question 17

Graphing the crossover point helps explain:
A)why one project is always superior to another project.
B)how decisions concerning mutually exclusive projects are derived.
C)how the duration 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.

Accepted Answer

The crossover point helps in determining the point at which the net present value of two competing projects becomes equal. Thus, it helps in making decisions concerning mutually exclusive projects.

Question 18

Samuelson Electronics has a required payback period of three years for all of its projects.Currently,the firm is analyzing two independent projects.Project A has an expected payback period of 2.8 years and a net present value of $6,800.Project B has an expected payback period of 3.1 years with a net present value of $28,400.Which projects should be accepted based on the payback decision rule?
A)Project A only
B)Project B only
C)Both A and B
D)Neither A nor B
E)Answer cannot be determined based on the information given.

Accepted Answer

Since Samuelson Electronics has a required payback period of three years for all of its projects, the company should only accept Project A, which has an expected payback period of 2.8 years, and reject Project B, which has an expected payback period of 3.1 years. The net present value of the projects is not relevant when considering the payback decision rule.

Question 19

The internal rate of return is:
A)the discount rate that makes the net present value of a project equal to the initial cash outlay.
B)equivalent to the discount rate that makes the net present value equal to one.
C)tedious to compute without the use of either a financial calculator or a computer.
D)highly dependent upon the current interest rates offered in the marketplace.
E)a better methodology than net present value when dealing with unconventional cash flows.

Accepted Answer

The answer of The internal rate of return is:
A)the discount...

Question 20

Which of the following statements related to the internal rate of return (IRR)are correct?
I.The IRR method of analysis can be adapted to handle non-conventional cash flows.
II.The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III.The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV.Both the timing and the amount of a project's cash flows affect the value of the project's IRR.
A)I and II only
B)III and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

All statements about the internal rate of return (IRR) are correct. IRR can indeed be adapted for non-conventional cash flows, the crossover rate is defined as stated, IRR's ease of understanding often makes it more popular than NPV, and both the timing and amount of cash flows influence the IRR value.

Quiz 9: Net Present Value and Other Investment Criteria

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Which one of the following correctly applies to the average accounting rate of return?

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires.Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

You are comparing two mutually exclusive projects.The crossover point is 12.3 percent.You have determined that you should accept project A if the required return is 13.1 percent.This implies you should:

Which one of the following statements is correct in relation to independent projects?

The profitability index is most closely related to which one of the following?

The internal rate of return:

Which one of the following is an advantage of the average accounting return method of analysis?

Which of the following are considered weaknesses in the average accounting return method of project analysis? I.exclusion of time value of money considerations II.need of a cutoff rate III.easily obtainable information for computation IV.based on accounting values

Which one of the following statements related to the internal rate of return (IRR) is correct?

Which one of the following statements related to payback and discounted payback is correct?

Applying the discounted payback decision rule to all projects may cause:

A project has a required payback period of three years.Which one of the following statements is correct concerning the payback analysis of this project?

Graphing the crossover point helps explain:

The internal rate of return is: