Chapter 8

Which one of the following defines the internal rate of return for a project? - Discount rate that creates a zero cash flow from assets - Discount rate which results in a zero net present value for the project - Discount rate which results in a net present value equal to the project's initial cost - Rate of return required by the project's investors - The project's current market rate of return

Discount rate which results in a zero net present value for the project

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? - Payback - Profitability index - Accounting rate of return - Internal rate of return - Net present value

Net present value

Which one of the following indicates that a project is expected to create value for its owners? - Profitability index less than 1.0 - Payback period greater than the requirement - Positive net present value - Positive average accounting rate of return - Internal rate of return that is less than the requirement

Positive net present value

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? - The internal rate of return exceeds the required rate of return - The investment never pays back - The net present value is equal to zero. - The average accounting return is 1.0. -The net present value is greater than 1.0.

The net present value is equal to zero.

Which one of the following statements is correct? - The internal rate of return is the most reliable method of analysis for any type of investment decision. - The payback method is biased towards short-term projects. - The modified internal rate of return is most useful when projects are mutually exclusive. - The average accounting return is the most difficult method of analysis to compute. - The net present value method is only applicable if a project has conventional cash flows.

The payback method is biased towards short-term projects.

The profitability index reflects the value created per dollar: - invested - of sales. - of net income. - of taxable income. - of shareholders' equity.

invested.

Which one of the following methods of analysis ignores cash flows? - Profitability index - Net present value - Average accounting return - Modified internal rate of return - Internal rate of return

Average accounting return

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? - Internal rate of return - Profitability index - Average accounting return - Net present value - Payback

Average accounting return