FIN_3610_CH_9_40

Which one of the following is an advantage of the average accounting return method of analysis? A. Easy availability of information needed for the computation, B. Inclusion of time value of money considerations, C. The use of a cutoff rate as a benchmark, D. The use of pre-tax income in the computation, E. Use of real, versus nominal, average income,

A. Easy availability of information needed for the computation,

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? A. Project A only. B. Project B only. C. Both A and B. D. Neither A nor B. E. Either, but not both projects.

A. Project A only.

Applying the discounted payback decision rule to all projects may cause: A. Some positive net present value projects to be rejected. B. The most liquid projects to be rejected in favor of the less liquid projects. C. Projects to be incorrectly accepted due to ignoring the time value of money. D. A firm to become more long-term focused. E. Some projects to be accepted which would otherwise be rejected under the payback rule.

A. Some positive net present value projects to be rejected.

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.

B. How decisions concerning mutually exclusive projects are derived.

Assume a project is independent with financing cash flows. Which one of these statements is correct? A. The IRR cannot be used to determine the acceptability of the project. B. The project is acceptable if the required return exceeds the IRR. C. The project is acceptable only if the NPV is zero or negative. D. The project's net present value profile is upsloping. E. The project is acceptable if the internal rate of return is negative.

B. The project is acceptable if the required return exceeds the IRR.

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? A. The project will not be acceptable under the payback rule. B. The project must have a profitability index that is equal to or greater than 1.0. C. The project must have a zero net present value. D. The project's internal rate of return must equal the required return. E. The project will still be acceptable if the discount rate is increased.

B. The project must have a profitability index that is equal to or greater than 1.0.

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: A. Always accept Project A. B. Be indifferent to the projects at any discount rate above 13.1 percent. C. Always accept Project A if the required return exceeds the crossover rate. D. Accept Project B only when the required return is equal to the crossover rate. E. Accept Project B if the required return is less than 13.1 percent.

C. Always accept Project A if the required return exceeds the crossover rate.

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? A. Decreasing the required discount rate. B. Increasing the initial investment in fixed assets. C. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows. D. Eliminating the salvage value. E. Decreasing the amount of the final cash inflow.

C. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows.

The internal rate of return is: A. The discount rate that makes the net present value of a project equal to the initial cash outlay. B. Equivalent to the discount rate that makes the net present value equal to one. C. Tedious to compute without the use of either a financial calculator or a computer. D. Highly dependent upon the current interest rates offered in the marketplace. E. A better methodology than net present value when dealing with unconventional cash flows.

C. Tedious to compute without the use of either a financial calculator or a computer.

Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B. A project with an IRR equal to the required return would reduce the value of a firm if accepted. C. The IRR is equal to the required return when the net present value is equal to zero. D. Financing type projects should be accepted if the IRR exceeds the required return. E. The average accounting return is a better method of analysis than the IRR from a financial point of view.

C. The IRR is equal to the required return when the net present value is equal to zero.

A project with financing type cash flows is typified by a project that has which one of the following characteristics? A. Conventional cash flows. B. Cash flows that extend beyond the acceptable payback period. C. A year or more in the middle of a project where the cash flows are equal to zero. D. A cash inflow at time zero. E. Cash inflows which are equal in amount.

D. A cash inflow at time zero.

Which one of these is a strength of the average accounting return method of project analysis? A. Ignores the issue of taxes. B. Uses a cutoff rate. C. Considers the time value of money. D. Based on easily obtainable information. E. Based on accounting values.

D. Based on easily obtainable information.

The profitability index is most closely related to which one of the following? A. Payback. B. Discounted payback. C. Average accounting return. D. Net present value. E. Modified internal rate of return.

D. Net present value.

Which one of the following characteristics is most associated with financing type projects? A. Long payback period. B. Multiple internal rates of return. C. Cash inflows that equal cash outflows when ignoring the time value of money. D. Prepaid services. E. Conventional cash flows.

D. Prepaid services.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B. The cash flow in year three is ignored. C. The project's cash flow in year three is discounted by a factor of (1 + R)3. D. The cash flow in year two is valued just as highly as the cash flow in year one. E. The project is acceptable whenever the payback period exceeds three years.

D. The cash flow in year two is valued just as highly as the cash flow in year one.

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. Crossover rate.

The internal rate of return: A. May produce multiple rates of return when cash flows are conventional. B. Is best used when comparing mutually exclusive projects. C. Is rarely used in the business world today. D. Is principally used to evaluate small dollar projects. E. Is easy to understand.

E. Is easy to understand.

Which one of the following correctly applies to the average accounting rate of return? A. It considers the time value of money. B. It measures net income as a percentage of the sales generated by a project. C. It is the best method of analyzing mutually exclusive projects from a financial point of view. D. It is the primary methodology used in analyzing independent projects. E. It can be compared to the return on assets ratio.

E. It can be compared to the return on assets ratio.

Which one of these statements related to discounted payback is correct? A. Payback is a better method of analysis than is discounted payback. B. Discounted payback is used more frequently in business than is payback. C. Discounted payback does not require a cutoff point. D. Discounted payback is biased towards long-term projects. E. The discounted payback period decreases as the discount rate decreases.

E. The discounted payback period decreases as the discount rate decreases.

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that: A. Neither project will be accepted if the discount rate is less than 11.7 percent. B. Both projects have a negative NPV at discounts rates greater than 11.7 percent. C. Both projects provide an internal rate of return of 11.7 percent. D. Both projects have a zero NPV at a discount rate of 11.7 percent. E. The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.

E. The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.