FIN 3060 Chapter 8
E
If a project with conventional cash flows has a profitability index of 1.0, the project will: A. never pay back. B. have a negative net present value. C. have a negative internal rate of return. D. produce more cash inflows than outflows in today's dollars. E. have an internal rate of return that equals the required return.
zero
If an investment is producing a return that is equal to the required return, the investment's net present value will be _____________.
E
In which one of the following situations would the payback method be the preferred method of analysis? A. A project that can easily be expanded B. Two mutually exclusive projects C. A proposed expansion of a firm's current operations D. Different-sized projects E. Investment funds available only for a limited period of time
D
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A. Internal rate of return B. Payback C. Average accounting rate of return D. Net present value E. Profitability index
future cash flows
Discounted cash flow valuation is the process of discounting an investment's ______________.
C
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? A. The internal rate of return exceeds the required rate of return. B. The investment never pays back. C. The net present value is equal to zero. D. The average accounting return is 1.0. E. The net present value is greater than 1.0.
C
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A. Payback and net present value B. Payback and internal rate of return C. Internal rate of return and net present value D. Net present value and profitability index E. Profitability index and internal rate of return
A
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? A. Mutually exclusive B. Conventional C. Multiple choice D. Dual return E. Crosswise
A
Payback is best used to evaluate which type of projects? A. Low-cost, short-term B. High-cost, short-term C. Low-cost, long-term D. High-cost, long-term E. Any size of long-term project
average accounting return
The __________________ measures profitability rather than cash flow.
reinvestment approach
The __________________ to the modified internal rate of return compounds all of the cash flows, except for the initial cash flow, to the end of the project.
average accounting return
The average net income of a project divided by the project's average book value is referred to as the project's ______________.
D
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A. One of the time periods within the investment period has a cash flow equal to zero B. The initial cash flow is negative C. The investment has cash inflows that occur after the required payback period D. The investment is mutually exclusive with another investment under consideration E. The cash flows are conventional
B
The modified internal rate of return is specifically designed to address the problems associated with which one of the following? A. Mutually exclusive projects B. Unconventional cash flows C. Long-term projects D. Negative net present values E. Crossover points
C
The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities.
B
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? A. Project's initial cost B. Discount rate C. Timing of the project's cash inflows D. Inflation rate E. Real rate of return
A
The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. is directly related to the discount rate. E. is unaffected by the timing of an investment's cash flows.
D
The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow
E
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.
multiple rates of return
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as ________________.
invested
The profitability index reflects the value created per dollar ____________.
C
Which one of the following analytical methods is based on net income? A. Profitability index B. Internal rate of return C. Average accounting return D. Modified internal rate of return E. Payback
C
Which one of the following can be defined as a benefit-cost ratio? A. Net present value B. Internal rate of return C. Profitability index D. Accounting rate of return E. Modified internal rate of return
B
Which one of the following defines the internal rate of return for a project? A. Discount rate that creates a zero cash flow from assets B. Discount rate which results in a zero net present value for the project C. Discount rate which results in a net present value equal to the project's initial cost D. Rate of return required by the project's investors E. The project's current market rate of return
A
Which one of the following indicates that a project is definitely acceptable? A. Profitability index greater than 1.0 B. Negative net present value C. Modified internal rate return that is lower than the requirement D. Zero internal rate of return E. Positive average accounting return
C
Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement
D
Which one of the following indicates that a project should be rejected? A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return
E
Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive AAR D. Positive IRR E. Positive NPV
C
Which one of the following is an indicator that an investment is acceptable? A. Modified internal rate of return equal to zero B. Profitability index of zero C. Internal rate of return that exceeds the required return D. Payback period that exceeds the required period E. Negative average accounting return
E
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? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value
A
Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback
E
Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows? A. Average accounting return B. Profitability index C. Internal rate of return D. Indexed rate of return E. Modified internal rate of return
B
Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias
A
Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5? A. The firm should increase in value each time the firm accepts a new project. B. The firm is most likely steadily losing value. C. The price of the firm's stock should remain constant. D. The net present value of each new project is zero. E. The internal rate of return on each new project is zero.
E
Which one of the following methods of analysis has the greatest bias towards short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback
C
Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Net present value C. Average accounting return D. Modified internal rate of return E. Internal rate of return
D
Which one of the following methods of analysis ignores the time value of money? A. Net present value B. Internal rate of return C. Discounted cash flow analysis D. Payback E. Profitability index
C
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of return B. Profitability index C. Net present value D. Modified internal rate of return E. Average accounting return
C
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Internal rate of return B. Profitability index C. Average accounting return D. Net present value E. Payback
C
Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.
C
Which one of the following statements is correct? A. If the IRR exceeds the required return, the profitability index will be less than 1.0. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. E. If two projects are mutually exclusive, you should select the project with the shortest payback period.
B
Which one of the following statements is correct? A. The internal rate of return is the most reliable method of analysis for any type of investment decision. B. The payback method is biased towards short-term projects. C. The modified internal rate of return is most useful when projects are mutually exclusive. D. The average accounting return is the most difficult method of analysis to compute. E. The net present value method is only applicable if a project has conventional cash flows.
D
Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.
B
Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0. B. The profitability index will equal 1.0. C. The profitability index will equal 0. D. The net present value will equal the initial cash outflow. E. The profitability index will equal the average accounting return.
D
You are using a net present value profile to compare investments A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? A. The internal rate of return for project A equals that of project B, but generally does not equal zero. B. The internal rate of return of each project is equal to zero. C. The net present value of each project is equal to zero. D. The net present value of project A equals that of project B, but generally does not equal zero. E. The net present value of each project is equal to the respective project's initial cost.
D
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? A. Internal rate of return B. Modified internal rate of return C. Net present value D. Profitability index E. Payback
