Final Exam

Net present value:

is the best method of analyzing mutually exclusive projects.

Which of the following are advantages of the payback method of project analysis?

liquidity bias; ease of use

A project has a discounted payback period that is equal to the required payback period. Given this information, the project:

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

If a project has a net present value equal to zero, then:

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

A project has a net present value of zero. Given this information:

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

An advantage of the average accounting return method of analysis is its:

use of easily obtainable information

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

accounting return

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource.

The profitability index is most closely related to which one of the following?

Net present value

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

The internal rate of return is defined as the:

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

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discounted payback period

The length of time a firm must wait to recoup the money it has invested in a project is called the:

Payback period

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis usually outweigh the costs of the analysis.