finance exam 4 ch 8 test bank

11. 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. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.

A. decreases as the required rate of return increases

27. 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

A. internal rate of return

40. The profitability index reflects the value created per dollar: A. invested. B. of sales. C. of net income. D. of taxable income. E. of shareholders' equity.

A. invested

18. Generally speaking, 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

A. low-cost, short-term

25. The average accounting return: A. measures profitability rather than cash flow. B. discounts all values to today's dollars. C. is expressed as a percentage of an investment's current market value. D. will equal the required return when the net present value equals zero. E. is used more often by CFOs than the internal rate of return.

A. measures profitability rather than cash flow

8. 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. mutually exclusive

46. Which one of the following indicates that an independent 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

A. profitability index greater than 1.0

38. Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? A. The firm should increase in value each time it 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.

A. the firm should increase in value each time accepts a new project

6. 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

B. discount rate

5. The internal rate of return is the: A. discount rate that causes a project?s aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.

B. discount rate that results in a zero net present value for the project

19. 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

B. ease of use

45. 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 toward 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 applicable only if a project has conventional cash flows.

B. the payback method is biased toward short-term projects

36. 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.

B. the profitability index will equal 1.0

31. The modified internal rate of return is specifically designed to address the problems associated with: A. mutually exclusive projects. B. unconventional cash flows. C. long-term projects. D. negative net present values. E. crossover points.

B. unconventional cash flows

23. Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Payback C. Average accounting return D. Modified internal rate of return E. Internal rate of return

C. average accounting return

24. 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. average accounting return

26. 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. average accounting return

1. 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.

C. cost and its market value

41. 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

C. internal rate of return and net present value

30. Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. A. Modified internal rate of return that is 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

C. internal rate of return that exceeds the required return

7. The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as: A. duplication. B. the net present value profile. C. multiple rates of return. D. the AAR problem. E. the dual dilemma.

C. multiple rates of return

34. 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. net present value

10. 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

C. positive net present value

9. 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

C. profitability index

37. 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. the net present value is equal to zerio

17. 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. the payback period ignores the time value of money

29. Which one of the following statements is correct? Assume cash flows are conventional. 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.

C. when the internal rate of return is greater than the required return, the net present value is positive

14. If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.

C. zero

4. The average net income of a project divided by the project's average book value is referred to as the project's: A. required return. B. market rate of return. C. internal rate of return. D. average accounting return. E. discounted rate of return.

D. average accounting return

13. 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.

D. if the internal rate of return equals the required return, the net present value will equal zero

42. 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

D. net present value

21. 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

D. payback

43. You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only 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

D. profitability index

15..Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. 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

D. profitability index less than 1.0

28. 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 of a different size. E. The cash flows are conventional.

D. the investment is mutually exclusive with another investment of a different size

35. You are using a net present value profile to compare Projects 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. the net present value of Project A equals that of Project B, but generally does not equal zero

20. 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

D. time value of money

32. The reinvestment approach to the modified internal rate of return: A. individually discounts each separate cash flow back to the present. B. reinvests all the cash flows, including the initial cash flow, to the end of the project. C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D. discounts all negative cash flows back to the present and combines them with the initial cost. E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.

E. compounds all of the cash flows, except for the initial cash flow, to the end of the project

2. Net present value involves discounting an investment's: A. assets. B. future profits. C. liabilities. D. costs. E. future cash flows.

E. future cash flows

39. 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.

E. have an internal rate of return that equals the required return

44. In which one of the following situations would the payback method be the preferred method of analysis? A. A long-term capital-intensive project 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

E. investment funds available only for a limited period of time

33. Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive 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

E. modified internal rate of return

12. 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

E. net present value

22. Which one of the following methods of analysis has the greatest bias toward short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback

E. payback

16. 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

E. positive NPV

3. 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.

E. recoup its initial cost