Question 1

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.

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.

Question 2

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

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 3

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?

Accepted Answer

The condensing of cash inflows into fewer years without lowering the total amount would increase the project's internal rate of return. This is because the internal rate of return is a measure of the project's profitability and by condensing cash inflows into fewer years, it increases the likelihood of the project being profitable. Decreasing the required discount rate or eliminating the salvage value would also increase the internal rate of return, but they are not as likely to have as significant an impact as condensing cash inflows. Increasing the initial investment in fixed assets and decreasing the amount of the final cash inflow would both decrease the internal rate of return.

Question 4

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

Accepted Answer

The answer of Applying the discounted payback decision rule to...

Question 5

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

Accepted Answer

The IRR is the discount rate that makes the net present value of a project equal to zero. Therefore, when the NPV is zero, the IRR is equal to the required return. Option A is incorrect because the NPV and IRR can provide different outcomes in mutually exclusive projects. Option B is incorrect because a project with an IRR equal to the required return would not affect the value of a firm if accepted or rejected. Option D is incorrect because the decision to accept financing projects should be based on the cost of capital rather than the IRR. Option E is incorrect because the IRR is a better method of analysis than the average accounting return from a financial point of view.

Question 6

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

Accepted Answer

For independent projects, the internal rate of return (IRR) can be used to determine the acceptability of a project with investing type cash flows, as long as the IRR exceeds the required return. However, for projects with financing type cash flows, the IRR cannot be used to determine acceptability because it may result in multiple rates of return. The net present value (NPV) is the preferred method for analyzing these types of projects. The NPV profile can be upsloping or downsloping depending on the size and timing of cash inflows and outflows, so choice D is not always true. Choice E is incorrect because a negative IRR indicates that the project's cash outflows exceed the inflows and is not a desirable outcome.

Question 7

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

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 8

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?

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 9

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.

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 10

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

Accepted Answer

The advantage of the average accounting return method is the easy availability of information needed for the computation. This method is based on accounting information that is readily available and does not require complex financial analysis. However, it does not incorporate the time value of money, use a benchmark cutoff rate, or consider whether the income is pre-tax or real.

Question 11

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

Accepted Answer

A project with financing type cash flows typically involves a cash inflow at time zero, which represents the initial investment in the project. The project then generates cash outflows in the form of interest payments and principal repayments, as well as cash inflows from the project's operations. This type of project is often used to fund capital expenditures or to finance a company's growth.

Question 12

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

Accepted Answer

The answer of Which of the following are considered weaknesses...

Question 13

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

Accepted Answer

The profitability index is a ratio of the present value of future cash flows to the initial investment. It is used to determine the value created per unit of investment. The net present value (NPV) is the difference between the present value of future cash flows and the initial investment. Therefore, the profitability index is closely related to the net present value.

Question 14

The internal rate of return is:

Accepted Answer

The answer of The internal rate of return is:
...

Question 15

The internal rate of return:

Accepted Answer

The answer of The internal rate of return:
...

Question 16

Graphing the crossover point helps explain:

Accepted Answer

The crossover point is the point where two projects have the same net present value. Plotting the NPV of two projects on a graph helps in identifying the point where one project becomes more profitable than the other. This aids in decision-making for mutually exclusive projects, as the project with a higher NPV beyond the crossover point is selected.

Question 17

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?

Accepted Answer

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

Question 18

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

Accepted Answer

The answer of Which of the following statements generally apply...

Question 19

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Accepted Answer

The profitability index decision rule assumes that the firm has sufficient funds to undertake all projects that have a profitability index greater than 1. This implies that if both projects are considered acceptable according to this rule, it is assumed the firm has the necessary funds to invest in both.

Question 20

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?

Accepted Answer

The required payback period for Samuelson Electronics is three years, and Project A has an expected payback period of 2.8 years, which is less than the required payback period. Therefore, Project A should be accepted based on the payback decision rule. Project B has an expected payback period of 3.1 years, which is greater than the required payback period of three years. Therefore, Project B should not be accepted based on the payback decision rule.

Quiz 9: Net Present Value and Other Investment Criteria