chapter 9 practice questions

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

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

B. how decisions concerning mutually exclusive projects are derived.

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.

E. crossover rate

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: A. required return. B. zero-sum rate. C. present value rate. D. break-even rate. E. crossover rate.

E. which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

The equivalent annual cost method is useful in determining: A. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. the operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. C. the minimum price that should be bid to earn a specified rate of return. D. which one of two investments to accept when the investments have differing required rates of return, differing costs, and will not be replaced once they wear out. E. which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

D. discount rate which causes the net present value of a project to equal zero.

The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project is financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

C. NPV

The profitability index is most closely related to which one of the following? A. payback B. discounted payback C. npv

E. Modified internal rate of return that exceeds the required return

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? A. Profitability index that is less than 1.0 B. Project's internal rate of return that is less than the required return C. Discounted payback period that is greater than the required return D. Average accounting return that is less than the internal rate of return E. Modified internal rate of return that exceeds the required return

B. the project earns a return exactly equal to the discount rate

If a project has a net present value equal to zero, then: A. the total of the cash inflows must equal the initial cost of the project. B. the project earns a return exactly equal to the discount rate. C. a decrease in the project's initial cost will cause the project to have a negative NPV. D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E. the project's PI must also be equal to zero.

NPV and IRR

In actual practice, managers most frequently use which two types of investment criteria?

E .Reject; the project never pays back on a discounted basis.

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years? A. Accept; The discounted payback period is 2.18 years. B. Accept; The discounted payback period is 2.32 years. C. Accept; The discounted payback period is 2.98 years. D. Reject; The discounted payback period is 3.87 years. E. Reject; The project never pays back on a discounted basis.

mutually exclusive projects

net present value is best method when analyzing _________ ______ projects.

C. Liquidity bias, ease of use

Which of the following are advantages of the payback method of project analysis? A. Considers time value of money, liquidity bias B. Liquidity bias, arbitrary cutoff point C. Liquidity bias, ease of use D. Ignores time value of money, ease of use E. Ease of use, arbitrary cutoff point

E. have multiple rates of return

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: A. have two net present value profiles. B. have operational ambiguity. C. create a mutually exclusive investment decision. D. produce multiple economies of scale. E. have multiple rates of return.

C. Payback and discounted payback

Which two methods of project analysis are the most biased towards short-term projects? A. Net present value and internal rate of return B. Internal rate of return and profitability index C. Payback and discounted payback D. Net present value and discounted payback E. Discounted payback and profitability index

E. lowest equivalent annual cost

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost.

c. NPV profile

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph? A. Project tracts B. Projected risk profile C. NPV profile

Accept project B and reject project A based on the NPVs

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

D. increasing the project's initial cost at time zero

Which one of the following will decrease the net present value of a project? A. Increasing the value of each of the project's discounted cash inflows B. Moving each cash inflow forward one time period, such as from Year 3 to Year 2 C. Decreasing the required discount rate D. Increasing the project's initial cost at time zero

prepaid services

characteristics is most associated with financing type projects

C. The discount rate used in computing the net present value was less than 11.63 percent.

ou are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information? A. The discounted payback period must be greater than 2.98 years. B. The break-even discount rate must be less than 11.63 percent. C. The discount rate used in computing the net present value was less than 11.63 percent. D. The AAR is equal to the IRR/PI. E. The project should be rejected based on its PI value.