MBA 501 - Finance Ch. 8

What is the payback period for a project with the following cash flows? YearCash Flow0− $75,000 15,000 23,000 35,000 25,000

= 3+(2,000/25,000) = 3.08 years

The spreadsheet function for calculating net present value is ______.

=NPV(rate,CF1, ..., CFn) + CF0

The Combination MIRR method is used by the Excel MIRR function and uses which of the following?

A reinvestment rate for compounding Compounding cash inflows to the end of the project Discounting all cash outflows to time 0 A financing rate for discounting

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

Average Accounting Return

which one of the following is the primary advantage of payback analysis?

Ease of Use

True or false: The payback period takes into consideration the time value of money.

False

Which one of the following is most closely related to the net present value profile?

Internal rate of return

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

Internal rate of return and net present value

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

Internal rate of return exceeds the required return.

In which one of the following situations would the payback method be the preferred method of analysis?

Investment funds available only for a limited period of time.

The average accounting return:

Measures Profitability rather than the cash flow

_______ is a measure of how much value is created or added by undertaking an investment.

Net PRESENT Value

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Net Present Value

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV

Which one of the following indicates that a project is expected to create value for its owners?

Positive Net Present Value

Which one of the following can be defined as a benefit-cost ratio?

Profitability Index

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?

Profitability Index

Which of the following are methods of calculating the MIRR of a project?

The Reinvestment Approach The Combination Approach The Discounting Approach

When calculating NPV, the present value of the nth cash flow is found by dividing the nth cash flow by 1 plus ______ rate raised to the nth power.

The discount

Which one of the following is true if the managers of a firm accept only projects that have profitability index greater than 1.5?

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

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which of the following?

The investment is mutually exclusive with another investment of a different size.

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

The net present value of Project A equals that of Project B, but generally does not equal zero.

What are the advantages of the payback period method for management?

The payback period method is easy to use. The payback period method is ideal for minor projects. It allows lower level managers to make small decisions effectively.

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0

The payback method of analysis ignores which one of the following?

Time value of money

True or false: A disadvantage of the AAR is that it does not take into account the time value of money.

True

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

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

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

Zero

The basic NPV investment rule is:

accept a project if the NPV is greater than zero. reject a project if its NPV is less than zero. if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference

A project should be __________ if its NPV is greater than zero.

accepted

The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.

accepts

The reinvestment approach to the modified internal rate of return:

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

The net present value of an investment represents the difference between the investment's:

cost and its market value

True or false: The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its future cost.

false

If a project with conventional cash flows has a profitability index of 1.0, the project will:

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

The profitability index (PI) is calculated by dividing the present value of an investment's future cash flows by its _____ _____.

initial cost

The ______ method evaluates a project by determining the time needed to recoup the initial investment.

internal rate of return

In capital budgeting, ______ determines the dollar value of a project to the company.

net PRESENT value

One of the flaws of the payback period method is that cash flows after the cutoff date are ___.

not considered in the analysis

Which one of the following methods of analysis has the greatest bias toward short-term projects?

payback

Which one of the following methods of analysis ignores the time value of money?

payback

The __________ is best suited for decisions on relatively small, minor projects while ______ is more appropriate for large complex projects.

payback period; NPV

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

recoup its initial cost

The modified internal rate of return is specifically designed to address the problems associated with:

unconventional cash flows

The profitability index reflects the value created per dollar:

invested

Generally speaking, payback is best used to evaluate which type of projects?

low costs, short term

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?

Modified internal rate 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:

Multiple rates of return

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?

Mutually Exclusive

The average net income of a project divided by the project's average book value is referred to as the project's:

Average Accounting Return

Which one of the following analytical methods is based on net income?

Average Accounting Return

Which one of the following methods of analysis ignores cash flows?

Average Accounting Return

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

The net present value is equal to zero.

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount Rate

A project has the following cash flows. What is the internal rate of return? YearCash Flow0− $12,500 2,750 3,100 3,333 5,260

Financial Calculator: IRR(-12500, {2750, 3100, 3333, 5260}

Net present value involves discounting an investment's:

Future Cash Flows

Which one of the following statements is correct?

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

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?

Net Present Value

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?

Net present Value

What is the net present value of a project with the following cash flows if the discount rate is 12 percent?

Net present value = -27,500 + 14,800 / (1 + 0.12)^1 + 19,400 / (1 + 0.12)^2 + 5,200 / (1 + 0.12)^3 Net present value = -27,500 + 13,214.2857 + 15,465.5612 + 3,701.2573 Net present value = $4,881.10

Which one of the following indicates that an independent project is definitely acceptable?

Profitability index greater than 1.0

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.

Profitability index less than 1.0

Which of the following is a disadvantage of the payback period rule?

Requires an arbitrary cutoff point

The net present value:

decreases as the required rate of return increases

The internal rate of return is the:

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