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1、CHAPTER 7 Net Present Value and Other Investment Rules Multiple Choice Questions: I. DEFINITIONS NET PRESENT VALUE a 1. The difference between the present value of an investment and its cost is the: a. net present value. b. internal rate of return. c. payback period. d. profitability index. e. disco
2、unted payback period. Difficulty level: Easy NET PRESENT VALUE RULE c 2. Which one of the following statements concerning net present value (NPV) is correct? a. An investment should be accepted if, and only if, the NPV is exactly equal to zero. b. An investment should be accepted only if the NPV is
3、equal to the initial cash flow. c. An investment should be accepted if the NPV is positive and rejected if it is negative. d. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.
4、e. Any project that has positive cash flows for every time period after the initial investment should be accepted. Difficulty level: Easy PAYBACK c 3. The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: a. net p
5、resent value. b. internal rate of return. c. payback period. d. profitability index. e. discounted cash period. Difficulty level: Easy PAYBACK RULE a 4. Which one of the following statements is correct concerning the payback period? a. An investment is acceptable if its calculated payback period is
6、less than some pre-specified period of time. b. An investment should be accepted if the payback is positive and rejected if it is negative. 欢迎下载 2 c. An investment should be rejected if the payback is positive and accepted if it is negative. d. An investment is acceptable if its calculated payback p
7、eriod is greater than some pre-specified period of time. e. An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate. Difficulty level: Easy DISCOUNTED PAYBACK e 5. The length of time required for a projects discounted ca
8、sh flows to equal the initial cost of the project is called the: a. net present value. b. internal rate of return. c. payback period. d. discounted profitability index. e. discounted payback period. Difficulty level: Easy DISCOUNTED PAYBACK RULE d 6. The discounted payback rule states that you shoul
9、d accept projects: a. which have a discounted payback period that is greater than some pre-specified period of time. b. if the discounted payback is positive and rejected if it is negative. c. only if the discounted payback period equals some pre-specified period of time. d. if the discounted paybac
10、k period is less than some pre-specified period of time. e. only if the discounted payback period is equal to zero. Difficulty level: Easy AVERAGE ACCOUNTING RETURN c 7. An investments average net income divided by its average book value defines the average: a. net present value. b. internal rate of
11、 return. c. accounting return. d. profitability index. e. payback period. Difficulty level: Easy AVERAGE ACCOUNTING RETURN RULE b 8. An investment is acceptable if its average accounting return (AAR): a. is less than a target AAR. b. exceeds a target AAR. c. exceeds the firms return on equity (ROE).
12、 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 3 d. is less than the firms return on assets (ROA). e. is equal to zero and only when it is equal to zero. Difficulty level: Easy INTERNAL RATE OF RETURN b. 9. The discount rate that makes the
13、 net present value of an investment exactly equal to zero is called the: a. external rate of return. b. internal rate of return. c. average accounting return. d. profitability index. e. equalizer. Difficulty level: Easy INTERNAL RATE OF RETURN RULE d 10. An investment is acceptable if its IRR: a. is
14、 exactly equal to its net present value (NPV). b. is exactly equal to zero. c. is less than the required return. d. exceeds the required return. e. is exactly equal to 100 percent. Difficulty level: Easy MULTIPLE RATES OF RETURN e 11. The possibility that more than one discount rate will make the NP
15、V of an investment equal to zero is called the _ problem. a. net present value profiling b. operational ambiguity c. mutually exclusive investment decision d. issues of scale e. multiple rates of return Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS c 12. A situation in which accepting one inv
16、estment prevents the acceptance of another investment is called the: a. net present value profile. b. operational ambiguity decision. c. mutually exclusive investment decision. d. issues of scale problem. e. multiple choices of operations decision. Difficulty level: Easy 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢
17、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 4 PROFITABILITY INDEX d. 13. The present value of an investments 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 retur
18、n. d. profitability index. e. profile period. Difficulty level: Easy PROFITABILITY INDEX RULE a 14. An investment is acceptable if the profitability index (PI) of the investment is: a. greater than one. b. less than one. c. greater than the internal rate of return (IRR). d. less than the net present
19、 value (NPV). e. greater than a pre-specified rate of return. Difficulty level: Easy II. CONCEPTS NET PRESENT VALUE d 15. All else constant, the net present value of a project increases when: a. the discount rate increases. b. each cash inflow is delayed by one year. c. the initial cost of a project
20、 increases. d. the rate of return decreases. e. all cash inflows occur during the last year of a projects life instead of periodically throughout the life of the project. Difficulty level: Easy NET PRESENT VALUE a 16. The primary reason that company projects with positive net present values are cons
21、idered acceptable is that: a. they create value for the owners of the firm. b. the projects rate of return exceeds the rate of inflation. c. they return the initial cash outlay within three years or less. d. the required cash inflows exceed the actual cash inflows. e. the investments cost exceeds th
22、e present value of the cash inflows. Difficulty level: Easy 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 5 NET PRESENT VALUE d 17. If a project has a net present value equal to zero, then: I. the present value of the cash inflows exceeds
23、the initial cost of the project. II. the project produces a rate of return that just equals the rate required to accept the project. III. the project is expected to produce only the minimally required cash inflows. IV. any delay in receiving the projected cash inflows will cause the project to have
24、a negative net present value. a. II and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, and III only Difficulty level: Medium NET PRESENT VALUE b 18. Net present value: a. cannot be used when deciding between two mutually exclusive projects. b. is more useful to de
25、cision makers than the internal rate of return when comparing different sized projects. c. is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. d. is not an as widely used tool as payback and discounted payback e. is very si
26、milar in its methodology to the average accounting return. Difficulty level: Easy PAYBACK c 19. Payback is frequently used to analyze independent projects because: a. it considers the time value of money. b. all relevant cash flows are included in the analysis. c. it is easy and quick to calculate.
27、d. it is the most desirable of all the available analytical methods from a financial perspective. e. it produces better decisions than those made using either NPV or IRR. Difficulty level: Easy PAYBACK c 20. The advantages of the payback method of project analysis include the: I. application of a di
28、scount rate to each separate cash flow. II. bias towards liquidity. III. ease of use. IV. arbitrary cutoff point. a. I and II only b. I and III only c. II and III only 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 6 d. II and IV only e. II
29、, III, and IV only Difficulty level: Medium PAYBACK d 21. All else equal, the payback period for a project will decrease whenever the: a. initial cost increases. b. required return for a project increases. c. assigned discount rate decreases. d. cash inflows are moved forward in time. e. duration of
30、 a project is lengthened. Difficulty level: Medium DISCOUNTED PAYBACK d 22. The discounted payback period of a project will decrease whenever the: a. discount rate applied to the project is increased. b. initial cash outlay of the project is increased. c. time period of the project is increased. d.
31、amount of each project cash flow is increased. e. costs of the fixed assets utilized in the project increase. Difficulty level: Medium DISCOUNTED PAYBACK a 23. The discounted payback rule may cause: a. some positive net present value projects to be rejected. b. the most liquid projects to be rejecte
32、d 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. Difficulty level: Easy INTERNAL R
33、ATE OF RETURN b 24. The internal rate of return (IRR): I. rule states that a project with an IRR that is less than the required rate should be accepted. II. is the rate generated solely by the cash flows of an investment. III. is the rate that causes the net present value of a project to exactly equ
34、al zero. IV. can effectively be used to analyze all investment scenarios. a. I and IV only b. II and III only c. I, II, and III only d. II, III, and IV only 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 7 e. I, II, III, and IV Difficulty l
35、evel: Medium INTERNAL RATE OF RETURN a 25. The internal rate of return for a project will increase if: a. the initial cost of the project can be reduced. b. the total amount of the cash inflows is reduced. c. each cash inflow is moved such that it occurs one year later than originally projected. d.
36、the required rate of return is reduced. e. the salvage value of the project is omitted from the analysis. Difficulty level: Medium INTERNAL RATE OF RETURN c 26. The internal rate of return is: a. more reliable as a decision making tool than net present value whenever you are considering mutually exc
37、lusive projects. b. equivalent to the discount rate that makes the net present value equal to one. c. difficult to compute without the use of either a financial calculator or a computer. d. dependent upon the interest rates offered in the marketplace. e. a better methodology than net present value w
38、hen dealing with unconventional cash flows. Difficulty level: Medium INTERNAL RATE OF RETURN a 27. The internal rate of return tends to be: a. easier for managers to comprehend than the net present value. b. extremely accurate even when cash flow estimates are faulty. c. ignored by most financial an
39、alysts. d. used primarily to differentiate between mutually exclusive projects. e. utilized in project analysis only when multiple net present values apply. Difficulty level: Easy INCREMENTAL INTERNAL RATE OF RETURN e 28. You are trying to determine whether to accept project A or project B. These pr
40、ojects are mutually exclusive. As part of your analysis, you should compute the incremented IRR by determining: a. the internal rate of return for the cash flows of each project. b. the net present value of each project using the internal rate of return as the discount rate. c. the discount rate tha
41、t equates the discounted payback periods for each project. d. the discount rate that makes the net present value of each project equal to 1. e. the internal rate of return for the differences in the cash flows of the two projects. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎
42、下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 8 Difficulty level: Medium INCREMENTAL INTERNAL RATE OF RETURN b 29. Graphing the incremental IRR 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
43、 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. Difficulty level: Medium PROFITABILITY INDEX d 30. The profitability index is close
44、ly related to: a. payback. b. discounted payback. c. the average accounting return. d. net present value. e. mutually exclusive projects. Difficulty level: Easy PROFITABILITY INDEX b 31. Analysis using the profitability index: a. frequently conflicts with the accept and reject decisions generated by
45、 the application of the net present value rule. b. is useful as a decision tool when investment funds are limited. c. is useful when trying to determine which one of two mutually exclusive projects should be accepted. d. utilizes the same basic variables as those used in the average accounting retur
46、n. e. produces results which typically are difficult to comprehend or apply. Difficulty level: Medium PROFITABILITY INDEX e 32. If you want to review a project from a benefit-cost perspective, you should use the _ method of analysis. a. net present value b. payback c. internal rate of return d. aver
47、age accounting return e. profitability index Difficulty level: Easy PROFITABILITY INDEX 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 9 b 33. When the present value of the cash inflows exceeds the initial cost of a project, then the projec
48、t should be: a. accepted because the internal rate of return is positive. b. accepted because the profitability index is greater than 1. c. accepted because the profitability index is negative. d. rejected because the internal rate of return is negative. e. rejected because the net present value is
49、negative. Difficulty level: Easy MUTUALLY EXCLUSIVE PROJECTS c 34. Which one of the following is the best example of two mutually exclusive projects? a. planning to build a warehouse and a retail outlet side by side b. buying sufficient equipment to manufacture both desks and chairs simultaneously c
50、. using an empty warehouse for storage or renting it entirely out to another firm d. using the company sales force to promote sales of both shoes and socks e. buying both inventory and fixed assets using funds from the same bond issue Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS d 35. The Li
51、berty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center. Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether or build the book outlet or the res
52、taurant, 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 Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS c 36. When two projects both require
53、 the total use of the same limited economic resource, the projects are generally considered to be: a. independent. b. marginally profitable. c. mutually exclusive. d. acceptable. e. internally profitable. Difficulty level: Easy MUTUALLY EXCLUSIVE PROJECTS c 37. Matt is analyzing two mutually exclusi
54、ve projects of similar size and has prepared the 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 10 following data. Both projects have 5 year lives. Project A Project B Net present value $15,090 $14,693 Payback period 2.76 years 2.51 years A
55、verage accounting return 9.3 percent 9.6 percent Required return 8.3 percent 8.0 percent Required AAR 9.0 percent 9.0 percent 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. bo
56、th 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 r
57、eturn. Difficulty level: Medium INVESTMENT ANALYSIS a 38. Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods? a. The other methods help validate whether or not the results from the net present value analysis ar
58、e reliable. b. You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators. c. You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows. d. T
59、he average accounting return must always indicate acceptance since this is the best method from a financial perspective. e. The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project. Difficulty lev
60、el: Medium INVESTMENT ANALYSIS e 39. In actual practice, managers frequently use the: I. AAR because the information is so readily available. II. IRR because the results are easy to communicate and understand. III. payback because of its simplicity. IV. net present value because it is considered by
61、many to be the best method of analysis. a. I and III only b. II and III only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 11 Difficulty level: Medium INVESTMENT ANALYSIS
62、 a 40. No matter how many forms of investment analysis you do: a. the actual results from a project may vary significantly from the expected results. b. the internal rate of return will always produce the most reliable results. c. a project will never be accepted unless the payback period is met. d.
63、 the initial costs will generally vary considerably from the estimated costs. e. only the first three years of a project ever affect its final outcome. Difficulty level: Easy INVESTMENT ANALYSIS b 41. Which of the following methods of project analysis are biased towards short-term projects? I. inter
64、nal rate of return II. accounting rate of return III. payback IV. discounted payback a. I and II only b. III and IV only c. II and III only d. I and IV only e. II and IV only Difficulty level: Medium INVESTMENT ANALYSIS a 42. If a project is assigned a required rate of return equal to zero, then: a.
65、 the timing of the projects cash flows has no bearing on the value of the project. b. the project will always be accepted. c. the project will always be rejected. d. whether the project is accepted or rejected will depend on the timing of the cash flows. e. the project can never add value for the sh
66、areholders. Difficulty level: Medium DECISION RULES e 43. You are considering a project with the following data: Internal rate of return 8.7 percent Profitability ratio .98 Net present value -$393 Payback period 2.44 years Required return 9.5 percent Which one of the following is correct given this
67、information? 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 12 a. The discount rate used in computing the net present value must have been less than 8.7 percent. b. The discounted payback period will have to be less than 2.44 years. c. The
68、discount rate used to compute the profitability ratio was equal to the internal rate of return. d. This project should be accepted based on the profitability ratio. e. This project should be rejected based on the internal rate of return. Difficulty level: Medium NET PRESENT VALUE c 44. Accepting pos
69、itive NPV projects benefits the stockholders because: a. it is the most easily understood valuation process. b. the present value of the expected cash flows are equal to the cost. c. the present value of the expected cash flows are greater than the cost. d. it is the most easily calculated. e. None
70、of the above. Difficulty level: Easy NET PRESENT VALUE a 45. Which of the following does not characterize NPV? a. NPV does not incorporate risk into the analysis. b. NPV incorporates all relevant information. c. NPV uses all of the projects cash flows. d. NPV discounts all future cash flows. e. Usin
71、g NPV will lead to decisions that maximize shareholder wealth. Difficulty level: Easy PAYBACK e 46. The payback period rule: a. discounts cash flows. b. ignores initial cost. c. always uses all possible cash flows in its calculation. d. Both A and C. e. None of the above. Difficulty level: Easy PAYB
72、ACK c 47. The payback period rule accepts all investment projects in which the payback period for the cash flows is: a. equal to the cutoff point. b. greater than the cutoff point. c. less than the cutoff point. d. positive. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载
73、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 13 e. None of the above. Difficulty level: Easy PAYBACK d 48. The payback period rule is a convenient and useful tool because: a. it provides a quick estimate of how rapidly the initial investment will be recouped. b. results of a short payback rule decision will be q
74、uickly seen. c. it does not take into account time value of money. d. All of the above. e. None of the above. Difficulty level: Easy DISCOUNTED PAYBACK a 49. The discounted payback period rule: a. considers the time value of money. b. discounts the cutoff point. c. ignores uncertain cash flows. d. i
75、s preferred to the NPV rule. e. None of the above. Difficulty level: Easy PAYBACK c 50. The payback period rule: a. determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. b. determines a cutoff point so that depreciation is just equal to
76、positive cash flows in the payback year. c. requires an arbitrary choice of a cutoff point. d. varies the cutoff point with the interest rate. e. Both A and D. Difficulty level: Easy AVERAGE ACCOUNTING RETURN c 51. The average accounting return is determined by: a. dividing the yearly cash flows by
77、the investment. b. dividing the average cash flows by the investment. c. dividing the average net income by the average investment. d. dividing the average net income by the initial investment. e. dividing the net income by the cash flow. Difficulty level: Easy 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下
78、载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 14 AVERAGE ACCOUNTING RETURN b 52. The investment decision rule that relates average net income to average investment is the: a. discounted cash flow method. b. average accounting return method. c. average payback method. d. averag
79、e profitability index. e. None of the above. Difficulty level: Easy MODIFIED INTERNAL RATE OF RETURN d 53. Modified internal rate of return: a. handles the multiple IRR problem by combining cash flows until only one change in sign change remains. b. requires the use of a discount rate. c. does not r
80、equire the use of a discount rate. d. Both A and B. e. Both A and C. Difficulty level: Medium AVERAGE ACCOUNTING RETURN d 54. The shortcoming(s) of the average accounting return (AAR) method is (are): a. the use of net income instead of cash flows. b. the pattern of income flows has no impact on the
81、 AAR. c. there is no clear-cut decision rule. d. All of the above. e. None of the above. Difficulty level: Medium INTERNAL RATE OF RETURN e 55. The two fatal flaws of the internal rate of return rule are: a. arbitrary determination of a discount rate and failure to consider initial expenditures. b.
82、arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects. c. arbitrary determination of a discount rate and the multiple rate of return problem. d. failure to consider initial expenditures and failure to correctly analyze mutually exclusive i
83、nvestment projects. e. failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem. Difficulty level: Medium MUTUALLY EXCLUSIVE PROJECTS d 56. A mutually exclusive project is a project whose: 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢
84、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 15 a. acceptance or rejection has no effect on other projects. b. NPV is always negative. c. IRR is always negative. d. acceptance or rejection affects other projects. e. cash flow pattern exhibits more than one sign change. Difficulty level: Easy INTER
85、NAL RATE OF RETURN d 57. A project will have more than one IRR if: a. the IRR is positive. b. the IRR is negative. c. the NPV is zero. d. the cash flow pattern exhibits more than one sign change. e. the cash flow pattern exhibits exactly one sign change. Difficulty level: Easy INTERNAL RATE OF RETUR
86、N RULES b 58. Using internal rate of return, a conventional project should be accepted if the internal rate of return is: a. equal to the discount rate. b. greater than the discount rate. c. less than the discount rate. d. negative. e. positive. Difficulty level: Easy INTERNAL RATE OF RETURN a 59. T
87、he internal rate of return may be defined as: a. the discount rate that makes the NPV cash flows equal to zero. b. the difference between the market rate of interest and the NPV. c. the market rate of interest less the risk-free rate. d. the project acceptance rate set by management. e. None of the
88、above. Difficulty level: Medium MULTIPLE INTERNAL RATE OF RETURNS d 60. The problem of multiple IRRs can occur when: a. there is only one sign change in the cash flows. b. the first cash flow is always positive. c. the cash flows decline over the life of the project. d. there is more than one sign c
89、hange in the cash flows. e. None of the above. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 16 Difficulty level: Easy TIMING AND SCALE ISSUES WITH INTERNAL RATE OF RETURN b 61. The elements that cause problems with the use of the IRR in p
90、rojects that are mutually exclusive are: a. the discount rate and scale problems. b. timing and scale problems. c. the discount rate and timing problems. d. scale and reversing flow problems. e. timing and reversing flow problems. Difficulty level: Medium NET PRESENT VALUE DECISION c 62. If there is
91、 a conflict between mutually exclusive projects due to the IRR, one should: a. drop the two projects immediately. b. spend more money on gathering information. c. depend on the NPV as it will always provide the most value. d. depend on the AAR because it does not suffer from these same problems. e.
92、None of the above. Difficulty level: Medium PROFITABILITY INDEX e 63. The profitability index is the ratio of: a. average net income to average investment. b. internal rate of return to current market interest rate. c. net present value of cash flows to internal rate of return. d. net present value
93、of cash flows to average accounting return. e. present value of cash flows to initial investment cost. Difficulty level: Easy INVESTMENT DECISION RULES a 64. Which of the following statement is true? a. One must know the discount rate to compute the NPV of a project but one can compute the IRR witho
94、ut referring to the discount rate. b. One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate. c. Payback accounts for time value of money. d. There will always be one IRR regardless of cash flows. e. Average accounting retur
95、n is the ratio of total assets to total net income. Difficulty level: Medium CAPITAL BUDGETING PRACTICE 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 17 b 65. Graham and Harvey (2001) found that _ and _ were the two most popular capital bu
96、dgeting methods. a. Internal Rate of Return; Payback Period b. Internal Rate of Return; Net Present Value c. Net Present Value; Payback Period d. Modified Internal Rate of Return; Internal Rate of Return e. Modified Internal Rate of Return; Net Present Value Difficulty level: Medium III. PROBLEMS NE
97、T PRESENT VALUE b 66. What is the net present value of a project with the following cash flows and a required return of 12 percent? Year Cash Flow 0 -$28,900 1 $12,450 2 $19,630 3 $ 2,750 a. -$287.22 b. -$177.62 c. $177.62 d. $204.36 e. $287.22 Difficulty level: Easy NET PRESENT VALUE a 67. What is
98、the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 percent. Year Cash Inflows 1 $4,375 2 $ 0 3 $8,750 4 $4,100 a. $218.68 b. $370.16 c. $768.20 d. $1,249.65 e. $1,371.02 Difficulty level: Easy NET PRESENT VALUE b
99、 68. A project will produce cash inflows of $1,750 a year for four years. The project 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 18 initially costs $10,600 to get started. In year five, the project will be closed and as a result should
100、produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 percent? a. -$5,474.76 b. -$1,011.40 c. -$935.56 d. $1,011.40 e. $5,474.76 Difficulty level: Easy NET PRESENT VALUE a 69. You are considering the following two mutually exclusive pr
101、ojects that will not be repeated. The required rate of return is 11.25 percent for project A and 10.75 percent for project B. Which project should you accept and why? Year Project A Project B 0 -$48,000 -$126,900 1 $18,400 $ 69,700 2 $31,300 $ 80,900 3 $11,700 $ 0 a. project A; because its NPV is ab
102、out $335 more than the NPV of project B b. project A; because it has the higher required rate of return c. project B; because it has the largest total cash inflow d. project B; because it returns all its cash flows within two years e. project B; because it is the largest sized project Difficulty lev
103、el: Medium NET PRESENT VALUE a 70. You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 percent rather than 11 percent? If so, what should you do? Year Project A Project B 0 -$240,000 -
104、$198,000 1 $ 0 $110,800 2 $ 0 $ 82,500 3 $325,000 $ 45,000 a. yes; Select A at 8 percent and B at 11 percent. b. yes; Select B at 8 percent and A at 11 percent. c. yes; Select A at 8 percent and select neither at 11 percent. d. no; Regardless of the required rate, project A always has the higher NPV
105、. e. no; Regardless of the required rate, project B always has the higher NPV. Difficulty level: Medium INTERNAL RATE OF RETURN 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 19 b 71. What is the internal rate of return on an investment wit
106、h the following cash flows? Year Cash Flow 0 -$123,400 1 $ 36,200 2 $ 54,800 3 $ 48,100 a. 5.93 percent b. 5.96 percent c. 6.04 percent d. 6.09 percent e. 6.13 percent Difficulty level: Easy INTERNAL RATE OF RETURN a 72. An investment has the following cash flows. Should the project be accepted if i
107、t has been assigned a required return of 9.5 percent? Why or why not? Year Cash Flow 0 -$24,000 1 $ 8,000 2 $12,000 3 $ 9,000 a. yes; because the IRR exceeds the required return by about 0.39 percent b. yes; because the IRR is less than the required return by about 3.9 percent c. yes; because the IR
108、R is positive d. no; because the IRR exceeds the required return by about 3.9 percent e. no; because the IRR is 9.89 percent Difficulty level: Medium INTERNAL RATE OF RETURN AND NET PRESENT VALUE e 73. You are considering two independent projects with the following cash flows. The required return fo
109、r both projects is 10 percent. Given this information, which one of the following statements is correct? Year Project A Project B 0 -$950,000 -$125,000 1 $330,000 $ 55,000 2 $400,000 $ 50,000 3 $450,000 $ 50,000 a. You should accept project B since it has the higher IRR and reject project A because
110、you can not accept both projects. b. You should accept project A because it has the lower NPV and reject project B. c. You should accept project A because it has the higher NPV and you can not accept both projects. d. You should accept project B because it has the higher IRR and reject project A. 迎下
111、载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 20 e. You should accept both projects if the funds are available to do so since both NPVs are 0. Difficulty level: Medium INTERNAL RATE OF RETURN e 74. You are considering an investment with the
112、following cash flows. If the required rate of return for this investment is 13.5 percent, should you accept it based solely on the internal rate of return rule? Why or why not? Year Cash Flow 0 -$12,000 1 $ 5,500 2 $ 8,000 3 -$ 1,500 a. yes; because the IRR exceeds the required return b. yes; becaus
113、e the IRR is a positive rate of return c. no; because the IRR is less than the required return d. no; because the IRR is a negative rate of return e. You can not apply the IRR rule in this case because there are multiple IRRs. Difficulty level: Medium PROFITABILITY INDEX d 75. What is the profitabil
114、ity index for an investment with the following cash flows given a 9 percent required return? Year Cash Flow 0 -$21,500 1 $ 7,400 2 $ 9,800 3 $ 8,900 a. .96 b. .98 c. 1.00 d. 1.02 e. 1.04 Difficulty level: Easy PROFITABILITY INDEX e 76. Based on the profitability index (PI) rule, should a project wit
115、h the following cash flows be accepted if the discount rate is 8 percent? Why or why not? Year Cash Flow 0 -$18,600 1 $10,000 2 $ 7,300 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 21 3 $ 3,700 a. yes; because the PI is 1.008 b. yes; beca
116、use the PI is .992 c. yes; because the PI is .999 d. no; because the PI is 1.008 e. no; because the PI is .992 Difficulty level: Medium PROFITABIILITY INDEX c 77. You are considering two independent projects both of which have been assigned a discount rate of 8 percent. Based on the profitability in
117、dex, what is your recommendation concerning these projects? Project A Project B Year Cash Flow Year Cash Flow 0 -$38,500 0 -$42,000 1 $20,000 1 $10,000 2 $24,000 2 $40,000 a. You should accept both projects since both of their PIs are positive. b. You should accept project A since it has the higher
118、PI. c. You should accept both projects since both of their PIs are greater than 1. d. You should only accept project B since it has the largest PI and the PI exceeds 1. e. Neither project is acceptable. Difficulty level: Medium PROFITABILITY INDEX d 78. You would like to invest in the following proj
119、ect. Year Cash Flow 0 -$55,000 1 $30,000 2 $37,000 Victoria, your boss, insists that only projects that can return at least $1.10 in todays dollars for every $1 invested can be accepted. She also insists on applying a 10 percent discount rate to all cash flows. Based on these criteria, you should: a
120、. accept the project because it returns almost $1.22 for every $1 invested. b. accept the project because it has a positive PI. c. accept the project because the NPV is $2,851. d. reject the project because the PI is 1.05. e. reject the project because the IRR exceeds 10 percent. Difficulty level: C
121、hallenge PAYBACK PERIOD 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 22 c 79. It will cost $2,600 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected
122、to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart? a. .86 years b. 1.46 years c. 1.86 years d. 2.46 years e. 2.86 years Difficulty level: Easy PAYBACK PERIOD e 80. You are considering a project with an initial cost of $4,30
123、0. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year over the next four years, respectively. a. 2.04 years b. 2.36 years c. 2.89 years d. 3.04 years e. 3.36 years Difficulty level: Easy PAYBACK PERIOD d 81. A project has an initial cost of $1,900
124、. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period? a. 2.71 years b. 2.98 years c. 3.11 years d. 3.71 years e. never Difficulty level: Easy PAYBACK PERIOD e 82. Jack is considering adding toys to his general store. He estimates that the
125、 cost of inventory will be $4,200. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years, respectively. Should Jack add toys to his store if he assigns a three-year payback
126、 period to this project? a. yes; because the payback period is 2.94 years b. yes; because the payback period is 2.02 years c. yes; because the payback period is 3.80 years d. no; because the payback period is 2.02 years e. no; because the payback period is 3.80 years Difficulty level: Medium 迎下载欢迎下载
127、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 23 DISCOUNTED PAYBACK PERIOD e 83. A project has an initial cost of $8,500 and produces cash inflows of $2,600, $4,900, and $1,500 over the next three years, respectively. What is the discounted payba
128、ck period if the required rate of return is 7 percent? a. 2.13 years b. 2.33 years c. 2.67 years d. 2.91 years e. never Difficulty level: Medium DISCOUNTED PAYBACK PERIOD c 84. Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 percent requ
129、ired rate of return and an initial cost of $2,800. What is the discounted payback period? a. 3.11 years b. 3.18 years c. 3.82 years d. 4.18 years e. never Difficulty level: Medium DISCOUNTED PAYBACK PERIOD e 85. Ginny Trueblood is considering an investment which will cost her $120,000. The investmen
130、t produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10 percent rate of return and has a required discounted payback period of three y
131、ears. Ginny should _ this project because the discounted payback period is _ a. accept; 2.03 years. b. accept; 2.97 years. c. accept; 3.97 years. d. reject; 3.03 years. e. reject; 3.97 years. Difficulty level: Medium AVERAGE ACCOUNTING RETURN e 86. Larrys Lanterns is considering a project which will
132、 produce sales of $240,000 a year for the next five years. The profit margin is estimated at 6 percent. The project will cost $290,000 and be depreciated straight-line to a book value of zero over the life of the project. Larrys has a required accounti ng return of 8 percent. This project should be
133、_ because the AAR is _ a. rejected; 4.14 percent. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 24 b. rejected; 6 percent. c. rejected; 8.28 percent. d. accepted; 8.28 percent. e. accepted; 9.93 percent. Difficulty level: Medium AVERAGE AC
134、COUNTING RETURN d 87. A project has an initial cost of $38,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,000, $1,200, $1,500, and $1,700 a year for the next four years, respe
135、ctively. What is the average accounting return? a. 3.55 percent b. 4.13 percent c. 4.28 percent d. 7.11 percent e. 14.21 percent Difficulty level: Medium AVERAGE ACCOUNTING RETURN d 88. A project produces annual net income of $9,500, $12,500, and $15,500 over the three years of its life, respectivel
136、y. The initial cost of the project is $260,400. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 7 percent? a. 4.80 percent b. 7.32 percent c. 8.97 percent d. 9.60 percent e. 10.27 percent Dif
137、ficulty level: Medium AVERAGE ACCOUNTING RETURN d 89. A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to
138、earn a minimal average accounting return of 8.5 percent. The firm should _ the project based on the AAR of _ a. accept; 6.46 percent. b. accept; 9.69 percent. c. accept; 12.92 percent. d. reject; 6.46 percent. e. reject; 12.92 percent. Difficulty level: Medium 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载
139、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 25 AVERAGE ACCOUNTING RETURN a 90. Martin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation
140、 to a zero book value over the life of the asset. Year Cash Flow Net Income 0 -$642,000 n/a 1 $170,000 $ 9,500 2 $240,000 $79,500 3 $205,000 $44,500 4 $195,000 $34,500 a. 13.08 percent b. 15.77 percent c. 21.83 percent d. 26.17 percent e. 31.54 percent Difficulty level: Medium INCREMENTAL INTERNAL R
141、ATE OF RETURN e 91. You are analyzing the following two mutually exclusive projects and have developed the following information. What is the incremental IRR? Project A Project B Year Cash Flow Cash Flow 0 -$84,500 -$76,900 1 $29,000 $25,000 2 $40,000 $35,000 3 $27,000 $26,000 a. 11.11 percent b. 13
142、.01 percent c. 14.91 percent d. 16.75 percent e. 17.90 percent Difficulty level: Medium INCREMENTAL INTERNAL RATE OF RETURN b 92. The Winston Co. is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _ and if the required rate is higher than the crossov
143、er rate then project _ should be accepted. Project A Project B Year Cash Flow Cash Flow 0 -$75,000 -$60,000 1 $30,000 $25,000 2 $35,000 $30,000 3 $35,000 $25,000 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 26 a. 13.94 percent; A b. 13.94
144、 percent; B c. 15.44 percent; A d. 15.44 percent; B e. 15.86 percent; A Difficulty level: Medium Use the following information to answer questions 93 through 96. You are analyzing a project and have prepared the following data: Year Cash flow 0 -$169,000 1 $ 46,200 2 $ 87,300 3 $ 41,000 4 $ 39,000 R
145、equired payback period 2.5 years Required AAR 7.25 percent Required return 8.50 percent PROFITABILITY INDEX b 93. Based on the profitability index of _ for this project, you should _ the project. a. .97; accept b. 1.05; accept c. 1.18; accept d. .97; reject e. 1.05; reject Difficulty level: Easy INT
146、ERNAL RATE OF RETURN b 94. Based on the internal rate of return of _for this project, you should _ the project. a. 8.95 percent; accept b. 10.75 percent; accept c. 8.44 percent; reject d. 9.67 percent; reject e. 10.33 percent; reject Difficulty level: Easy NET PRESENT VALUE c 95. Based on the net pr
147、esent value of _for this project, you should _ the project. a. -$2,021.28; reject 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 27 b. -$406.19; reject c. $7,978.72; accept d. $9,836.74; accept e. $12,684.23; accept Difficulty level: Easy P
148、AYBACK PERIOD c 96. Based on the payback period of _for this project, you should _ the project. a. 1.87 years; accept b. 2.87 years; accept c. 2.87 years; reject d. 3.13 years; reject e. 3.87 years; reject Difficulty level: Easy Use the following information to answer questions 97 through 101. You a
149、re considering the following two mutually exclusive projects. 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. Project A Project B Year Cash Flow Year Cash Flow 0 -$75,000 0 -$70,000 1 $19,000
150、 1 $10,000 2 $48,000 2 $16,000 3 $12,000 3 $72,000 Required rate of return 10 % 13 % Required payback period 2.0 years 2.0 years Required accounting return 8 % 11 % NET PRESENT VALUE c 97. Based on the net present value method of analysis and given the information in the problem, you should: a. acce
151、pt both project A and project B. b. accept project A and reject project B. c. accept project B and reject project A. d. reject both project A and project B. e. accept whichever one you want as they represent equal opportunities. Difficulty level: Medium INTERNAL RATE OF RETURN e 98. Based upon the i
152、nternal rate of return (IRR) and the information provided in the problem, you should: 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 28 a. accept both project A and project B. b. reject both project A and project B. c. accept project A and
153、reject project B. d. accept project B and reject project A. e. ignore the IRR rule and use another method of analysis. Difficulty level: Medium PAYBACK PERIOD b 99. Based upon the payback period and the information provided in the problem, you should: a. accept both project A and project B. b. rejec
154、t both project A and project B. c. accept project A and reject project B. d. accept project B and reject project A. e. require that management extend the payback period for project A since it has a higher initial cost. Difficulty level: Medium PROFITABILITY INDEX e 100. Based upon the profitability
155、index (PI) and the information provided in the problem, you should: a. accept both project A and project B. b. accept project A and reject project B. c. accept project B and reject project A. d. reject both project A and project B. e. disregard the PI method in this case. Difficulty level: Medium AV
156、ERAGE ACCOUNTING RETURN e 101. Based upon the average accounting return (AAR) and the information provided in the problem, you: a. should accept both project A and project B. b. should accept project A because the AAR exceeds the required rate. c. should accept project A because the AAR is less than
157、 the required rate. d. should accept whichever project you prefer as they are equivalent from an AAR perspective. e. can not compute the AAR of either project. Difficulty level: Medium NET PRESENT VALUE d 102. A $25 investment produces $27.50 at the end of the year with no risk. Which of the followi
158、ng is true? a. NPV is positive if the interest rate is less than 10%. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 29 b. NPV is negative if the interest rate is less than 10%. c. NPV is zero if the interest rate is equal to 10%. d. Both A
159、 and C. e. None of the above. Difficulty level: Challenge PAYBACK b 103. Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expec
160、ted to be $22,000 or an average of $4,400 per year. Compute the payback period in years. a. 3.18 years b. 3.82 years c. 4.00 years d. 4.55 years e. None of the above. Difficulty level: Medium DISCOUNTED PAYBACK c 104. An investment with an initial cost of $15,000 produces cash flows of $5,000 annual
161、ly for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _ years. a. 3 b. 3.2 c. 3.75 d. 4 e. 5 Difficulty level: Medium DISCOUNTED PAYBACK b 105. An investment project has the cash flow stream of $-250, $75, $125, $100, and
162、 $50. The cost of capital is 12%. What is the discount payback period? a. 3.15 years b. 3.38 years c. 3.45 years d. 3.60 years e. 4.05 years Difficulty level: Medium NET PRESENT VALUE AND INTERNAL RATE OF RETURN a 106. An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The di
163、scount rate is 15.2382%. The NPV is _ and the IRR is _ for the project. a. $0; 15.2382%. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 30 b. $3.33; 27.2242%. c. $5,000; 0%. d. Can not answer without one or the other value as input. e. None
164、 of the above. Difficulty level: Easy IV. ESSAYS INTERNAL RATE OF RETURN 107. List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule. The advantages of the rule are its close relationship with NPV and the ease with which it is understood and communicated.
165、 The two disadvantages are that there may be multiple solutions and the rule may lead to a ranking conflict in evaluating mutually exclusive investments. The student should add a brief explanation demonstrating their understanding of each. NPV VS. PI 108. Explain the differences and similarities bet
166、ween net present value (NPV) and the profitability index (PI). The NPV and PI are basically the same calculation, and both rules lead to the same accept/reject decision. The main difference between the two is that the PI may be useful in determining which projects to accept if funds are limited; how
167、ever, the PI may lead to incorrect decisions in considering mutually exclusive investments. NPV AND PROJECT VALUE 109. Given the goals of firm value and shareholder wealth maximization, we have stressed the importance of net present value (NPV). And yet, many financial decision-makers at some of the
168、 most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR). Why do you think this is the case? This is an open-ended question which allows the creative student to speculate on the value of non-discounted cash flow eva
169、luation measures. We use it as a springboard to stress that even rational financial managers sometimes find it expedient to use a group of measures. For example, firms may rely on the IRR because it is easier to explain to board members than NPV. Also, for large projects, AAR provides shareholders w
170、ith some insights as to the projects impact on net income and earnings per share. INTERNAL RATE OF RETURN 110. The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the
171、 third year. The interest rate is 12%. Calculate the projects payback. Also, calculate projects IRR. Should the project be taken? Check your answer by computing the projects NPV. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 31 Payback - 2
172、.63 years. IRR = 10.41%. Do not take project as IRR 12% Reject the project NPV = ($136.60) MULTIPLE METHODS OF VALUATION 111. The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, an
173、d $3,000 in the third year. The interest rate is 12%. Calculate the projects Discounted Payback and Profitability Index assuming end of year cash flows. Should the project be taken? If the Average Accounting Return was positive, how would this affect your decision? Time 0 Cash flows = $-4,300, Prese
174、nt Value of Cash flows = $-4,300 Time 1 and 2 Cash flows = $1,200 each period, Present Value of Cash flows = $2,028.06 for both periods, Sum of Present Value of Cash flows = $-2,271.94 at the end of time 2 Time 3 Cash flows = $3,000, Present Value of Cash flows = $2,135.34, Sum of Present Value of C
175、ash flows = $-136.60 Discounted Payback cannot be calculated as NPV 0; NPV = $-136.60 PI = CFATt /Initial Investment = $4,163.40/$4,300 = .968 = .97 Both measures indicate rejection. A positive accounting rate of return should not change the decision. DPP and PI indicate that the cost of capital is
176、not being covered. MULTIPLE METHODS OF VALUATION 112. The Walker Landscaping Company can purchase a piece of equipment for $3,600. The asset has a two-year life, will produce a cash flow of $600 in the first year and $4,200 in the second year. The interest rate is 15%. Calculate the projects payback
177、 assuming steady cash flows. Also calculate the projects IRR. Should the project be taken? Check your answer by computing the projects NPV. Payback = 1.714 years Calculated IRR = 16.67%. Accept the project. NPV = $97.54. INTERNAL RATE OF RETURN AND NET PRESENT VALUE 113. The IRR rule is said to be a
178、 special case of the NPV rule. Explain why this is so and why it has some limitations NPV does not? At some K, NPV = $0; by definition, when NPV=0, K=IRR. Problems occur due to conflicts with mutually exclusive projects, timing and size problems, multiple sign changes present problem for IRR NPV alw
179、ays the best choice 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 32 SOLUTIONS TO TEST BANK PROBLEMS Chapter 7 66. 321)12.1 (750, 2$)12.1 (630,19$)12.1 (450,12$900,28$NPV; NPV = -$177.62 (negative) CF0 -$28,900 C01 $12,450 F01 1 C02 $19,63
180、0 F02 1 C03 $2,750 F03 1 I = 12% NPV CPT -$177.62 67. 4321)115.1 (100, 4$)115.1 (750, 8$)115.1 (0$)115.1 (375, 4$670,12$NPV NPV = $218.68 CF0 -$12,670 C01 $4,375 F01 1 C02 $0 F02 1 C03 $8,750 F03 1 C04 $4,100 F04 1 I = 11.5% NPV CPT $218.68 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载
181、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 33 68. 54321)1375.1 (500, 8$)1375.1 (750, 1$)1375.1 (750, 1$)1375.1 (750, 1$)1375.1 (750, 1$600,10$NPVNPV = -$1,011.40 CF0 -$10,600 C01 $1,750 F01 4 C02 $8,500 F02 1 I = 13.75% NPV CPT -$1,011.40 (negative) 69. 321A)1125.1 (700,11$)1125.1 (300,31$)1125
182、.1 (400,18$000,48$NPV; NPVA = $2,326.46 CF0 -$48,000 C01 $18,400 F01 1 C02 $31,300 F02 1 C03 $11,700 F03 1 I = 11.25% NPV CPT $2,326.46 21B)1075.1 (900,80$)1075.1 (700,69$900,126$NPV; NPVB = $1,991.56 CF0 -$126,900 C01 $69,700 F01 1 C02 $80,900 F03 1 I = 10.75% NPV CPT $1,991.56 Difference in NPVs =
183、 $2,326.46 - $1,991.56 = $334.90 The answer states that the NPV of Project A exceeds the NPV of project B by about $335. 70. 3%8 ,A)08.1 (000,325$000,240$NPV; NPVA,8% = $17,995.48 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 34 3%11,A)11.
184、1 (000,325$000,240$NPV; NPVA,11% = -$2,362.80 (negative) CF0 -$240,000 C01 $0 F01 2 C02 $325,000 F02 1 I = 8% I=11% NPV CPT NPV CPT $17,995.48 -$2,362.80 (negative) 321%8 ,B)08.1 (000,45$)08.1 (500,82$)08.1 (800,110$000,198$NPV; NPVB,8% = $11,045.50 321%11,B)11.1 (000,45$)11.1 (500,82$)11.1 (800,110
185、$000,198$NPV; NPVB,11% = $1,682.28 CF0 -$198,000 C01 $110,800 F01 1 C02 $82,500 F02 1 C03 $45,000 F03 1 I = 8% I = 11% NPV CPT NPV CPT $11,045.50 $1,682.28 At 8 percent, Project A has the higher NPV. At 11 percent, Project B has the higher NPV. 71. CF0 -$123,400 C01 $ 36,200 F01 1 C02 $ 54,800 F02 1
186、 C03 $ 48,100 F03 1 IRR CPT 5.96% 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 35 72. CF0 -$24,000 C01 $ 8,000 F01 1 C02 $12,000 F02 1 C03 $ 9,000 F03 1 IRR CPT 9.89 percent The project should be accepted because the IRR of 9.89 percent e
187、xceeds the required return of 9.5 percent. 73. Project A: Project B: CF0 -$950,000 CF0 -$125,000 C01 $330,000 C01 $ 55,000 F01 1 F01 1 C02 $400,000 C02 $ 50,000 F02 1 F02 2 C03 $450,000 F03 1 IRR CPT IRR CPT 11.06 percent 11.79 percent I = 10 I = 10 NPV CPT NPV CPT $18,670.17 $3,888.05 Since these a
188、re independent projects and both the IRR and NPV rules say accept, you should accept both projects if there are sufficient funds to do so. 74. Since C03 is a negative value, there are multiple IRRs. Thus, the IRR rule does not apply. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下
189、载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 36 75. 321lowsinf)09. 1 (900, 8$)09. 1 (800, 9$)09. 1 (400, 7$PV; PVinflows = $21,909.89 CF0 $ 0 C01 $7,400 F01 1 C02 $9,800 F02 1 C03 $8,900 F03 1 I = 9 NPV CPT $21,909.89 500,21$89.909,21$PI = 1.02 76. 321lowsinf)08. 1 (700, 3$)08. 1 (300, 7$)08. 1 (000,10$
190、PV; PVinflows = $18,455.01 CF0 $ 0 C01 $10,000 F01 1 C02 $7,300 F02 1 C03 $3,700 F03 1 I = 8 NPV CPT $18,455.01 600,18$01.455,18$PI = .992 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 37 77. 21lowsinf,A)08. 1 (000,24$)08. 1 (000,20$PV; PV
191、A,inflows = $39,094.65 21lowsinf,B)08. 1 (000,40$)08. 1 (000,10$PV; PVB,inflows = $43,552.81 Project A: Project B: CF0 $ 0 CF0 $ 0 C01 $20,000 C01 $10,000 F01 1 F01 1 C02 $24,000 C02 $40,000 F02 1 F02 1 I = 8 I = 8 NPV CPT NPV CPT $39,094.65 $43,552.81 500,38$65.094,39$PIA = 1.02 000,42$81.552,43$PI
192、B = 1.04 Because the projects are independent and their PIs exceed 1.0, both projects should be accepted. 78. 21lowsinf)10. 1 (000,37$)10. 1 (000,30$NPV; NPVinflows = $57,851.24 CF0 $ 0 C01 $30,000 F01 1 C02 $37,000 F02 1 I = 10 NPV CPT $57,851.24 000,55$24.851,57$PI = 1.05 You should reject the pro
193、ject since the PI of 1.05 is less than Victorias requirement of 1.10. It is worth mentioning that the NPV of this project is $2,851.24 and the IRR is 13.71 percent, both of which would normally indicate project acceptance. However, neither the NPV nor the IRR meet the requirement of returning $1.10
194、for every $1 spent. 79. Payback period 400, 1$400, 1$600, 2$1= 1.86 years 80. Payback period 500$600, 2$970$550$300, 4$3 = 3.36 years 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 38 81. Payback period 700$900$500$0$900, 1$3 = 3.71 years 8
195、2. Payback period 750, 1$600, 1$500, 1$200, 1$)500, 1$200, 4($3 = 3.80 years Jack should reject the toy project because the payback period exceeds 3 years. 83. The project never pays back on a discounted basis. 321)07.1 (500, 1$)07.1 (900, 4$)07.1 (600, 2$CFD; DCF = $7,934.20, which is less than the
196、 initial cost of $8,500 84. Year Cash flow Discounted cash flow 1 $900 $825.69 2 $900 $757.51 3 $900 $694.97 4 $900 $637.58 58.637$97.694$51.757$69.825$800, 2$3payback Discounted = 3.82 years 85. Year Cash flow Discounted cash flow 1 $ 0 $ 0.00 2 $35,000 $28,925.62 3 $55,000 $41,322.31 4 $75,000 $51
197、,226.01 01.226,51$31.322,41$62.925,28$0$000,120$3payback Discounted = 3.97 years Ginny should reject the project since the payback period of 3.97 years exceeds the required 3 years. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 39 86. ) 00
198、00,290($5 .000,240$06.AAR; AAR = 9.93 percent; The project should be accepted. 87. ) 0000,38($5 .4)700, 1$500, 1$200, 1$000, 1($AAR = 7.11 percent 88. ) 0400,260($5 .3)500,15$500,12$500, 9($AAR = 9.60 percent 89. ) 0000,65($5 .100, 2$AAR = 6.46 percent The firm should reject the project based on the
199、 AAR. 90. ) 0000,642($5 .4)500,34$500,44$500,79$500, 9($AAR = 13.08 percent 91. Year Project A Cash Flow Project B Cash Flow Difference 0 -$84,500 -$76,900 -$7,600 1 $29,000 $25,000 $4,000 2 $40,000 $35,000 $5,000 3 $27,000 $26,000 $1,000 CF0 -$7,600 C01 $4,000 F01 1 C02 $5,000 F02 1 C03 $1,000 F03
200、1 IRR CPT 17.899 percent = 17.9% 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 40 92. Year Project A Cash Flow Project B Cash Flow Difference 0 -$75,000 -$60,000 -$15,000 1 $30,000 $25,000 $ 5,000 2 $35,000 $30,000 $ 5,000 3 $35,000 $25,00
201、0 $10,000 Cash flows for (A-B): Cash flows for A: Cash flows for B: CF0 -$15,000 CF0 -$75,000 CF0 -$60,000 C01 $ 5,000 C01 $30,000 C01 $25,000 F01 1 F01 1 F01 1 C02 $ 5,000 C02 $35,000 C02 $30,000 F02 1 F02 1 F02 1 C03 $10,000 C03 $35,000 C03 $25,000 F03 1 F03 1 F03 1 IRR CPT I = 15 I = 15 13.94 per
202、cent NPV CPT NPV CPT $565.05 $861.35 The crossover rate is 13.94 percent. At a rate higher than the crossover rate, such as 15 percent, Project B will have the higher NPV and should be accepted. 93. 4321lowsinf)085.1 (000,39$)085.1 (000,41$)085.1 (300,87$)085.1 (200,46$PV; PVinflows = $176,978.72 CF
203、0 $ 0 C01 $46,200 F01 1 C02 $87,300 F02 1 C03 $41,000 F03 1 C04 $39,000 F04 1 I = 8.5 NPV CPT $176,978.72 000,169$72.978,176$PI = 1.05; You should accept because the PI is greater than 1. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 41 94
204、. CF0 -$169,000 C01 $46,200 F01 1 C02 $87,300 F02 1 C03 $41,000 F03 1 C04 $39,000 F04 1 IRR CPT 10.75 percent You should accept because the IRR of 10.75 percent exceeds the required return of 8.50 percent. 95. CF0 -$169,000 C01 $46,200 F01 1 C02 $87,300 F02 1 C03 $41,000 F03 1 C04 $39,000 F04 1 NPV
205、CPT $7,978.72 You should accept because the NPV is positive. 96. Payback period 000,41$300,87$200,46$000,169$2 = 2.87 years Based on payback, the project should be rejected because the payback period of 2.87 years exceeds the required period of 2.5 years. 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢
206、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎 欢迎下载 42 97. 321A)10. 1 (000,12$)10.1 (000,48$)10.1 (000,19$000,75$NPV; NPVA = -$9,042.07 321B)13. 1 (000,72$)13.1 (000,16$)13.1 (000,10$000,70$NPV; NPVA = $1,279.52 Cash flows for A: Cash flows for B: CF0 -$75,000 CF0 -$70,000 C01 $19,000 C01
207、 $10,000 F01 1 F01 1 C02 $48,000 C02 $16,000 F02 1 F02 1 C03 $12,000 C03 $72,000 F03 1 F03 1 I = 10 I = 13 NPV CPT NPV CPT -$9,042.07 $1,279.52 Project B should be accepted and project A should be rejected. 98. Because these are mutually exclusive projects, the IRR rule should not be applied. 99. Pa
208、yback period for A 000,12$000,48$000,19$000,75$2 = 2.67 years Payback period for B 000,72$000,16$000,10$000,70$2 = 2.61 years Neither project pays back within 2 years, thus, they should both be rejected. 100. Because these are mutually exclusive projects, the PI rule should not be applied. 101. The
209、AAR can not be computed because the net income was not provided. 102. NPV = ($27.50/1.1) - $25.00 = $0 103. Payback Period = ($5,000 + $5,000 + $5,500 = $15,500 for 3 years; remainder $20,000 $15,500 = 4,500. $4,500/$5,500 = .81818 = .82) = Payback Period = 3.82 years 104. Discounted Payback: A.1,n
210、= $15,000/$5,000 = 3. PMT = 1 PV=-3 FV=0 I/YR=10 N=?=3.75 105. $75/1.12 = $66.96, $125/1.122 = $99.65, $100/1.123 = $71.18, $50/1.124 = $31.78 3 yr. CF: $250 - $66.96 - $99.65 - $71.18 = $12.21 + Fraction = $12.21/$31.78 = .38 Discounted Payback: 3 + .38 = 3.38 years 106. $-200/1.10 = $-181.82; $-181.82 + 1500 = $1,318.18; Cash flow 0 = $-1,000; Cash flow 1 = $1,318.18 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎
