FIN 310 Ch. 8 HW

Which one of the following defines the internal rate of return for a project? - Discount rate that creates a zero cash flow from assets - Discount rate which results in a zero net present value for the project - Discount rate which results in a net present value equal to the project's initial cost - Rate of return required by the project's investors - The project's current market rate of return

Discount rate which results in a zero net present value for the project

Which one of the following is the primary advantage of payback analysis? - Incorporation of the time value - Ease of use - Research and development bias - Arbitrary cutoff point - Long-term bias

Ease of use

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? - Payback - Profitability index - Accounting rate of return - Internal rate of return - Net present value

Net present value

Which one of the following indicates that a project is expected to create value for its owners? - Profitability index less than 1.0 - Payback period greater than the requirement - Positive net present value - Positive average accounting rate of return - Internal rate of return that is less than the requirement

Positive net present value

Which one of the following indicates that a project is definitely acceptable? - Profitability index greater than 1.0 - Negative net present value - Modified internal rate return that is lower than the requirement - Zero internal rate of return - Positive average accounting return

Profitability index greater than 1.0

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? - The internal rate of return exceeds the required rate of return. - The investment never pays back. - The net present value is equal to zero. - The average accounting return is 1.0. - The net present value is greater than 1.0.

The net present value is equal to zero.

Which one of the following statements is correct? - The internal rate of return is the most reliable method of analysis for any type of investment decision. - The payback method is biased towards short-term projects. - The modified internal rate of return is most useful when projects are mutually exclusive. - The average accounting return is the most difficult method of analysis to compute. - The net present value method is only applicable if a project has conventional cash flows.

The payback method is biased towards short-term projects.

The profitability index reflects the value created per dollar:

invested

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $19.4 million, which will be depreciated straight-line to zero over its four-year life. Required: If the plant has projected net income of $1,855,000, $2,126,212, $2,074,000, and $1,346,000 over these four years, what is the project's average accounting return (AAR)?

19.08%

Which one of the following methods of analysis ignores cash flows? - Profitability index - Net present value - Average accounting return - Modified internal rate of return - Internal rate of return

Average accounting return

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? - Internal rate of return - Profitability index - Average accounting return - Net present value - Payback

Average accounting return