Chapter 6 & 9

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

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

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Which one of the following is the best example of two mutually exclusive projects?

Waiting until a machine finishes molding Product A before being able to mold Product B

An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

You should not apply the IRR rule in this case.

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

accounting 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:

always accept Project A if the required return exceeds the crossover rate.

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

Discounted cash flow valuation

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed)

Project B is worth less today than Project A.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

The payback decision rule could override the net present value decision rule should cash availability be limited.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed)

Project X has both a higher present and a higher future value than Project Y.