Chapter 9

I.The project must also be acceptable under the payback rule II.The project must have a profitability index that is equal to or greater than 1.0.

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?

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

A project has a net present value of zero. Which of the following best describes this project?

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

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?

Net present value

A project has an initial cost of $27,400 and a market value of $32,600. What os the difference between these two values called?

A cash inflow at time zero

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Accounting return

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

You cannot determine which project should be accepted given the information.

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which of the following statements is correct?

How decisions concerning mutually exclusive projects are derived.

Graphing the crossover point helps explain:

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

The internal rate of return is defined as the:

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

The internal rate of return is:

Is easy to understand

The internal rate of return:

Payback period

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

Discounted payback period

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:

Profitability Index

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Net Present Value

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

Have multiple rates of return

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

The payback decision rule could override the accept decision indicated by the net present value.

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period dis 3.0 years. Which one of the following statements correctly applies to this project?

Accepted because the profitability index is greater than 1

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

II.Liquidity bias III.Ease of use

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

I.Exclusion of time value of money considerations II.Need of a cutoff rate IV.Based on accounting values

Which of the following are considered weaknesses in the average accounting return method of project analysis?

I.Positive net present value III.Internal rate of return greater than the required rate

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?

It can be compared to the return on assets ratio.

Which of the following correctly applies to the average accounting rate of return?

Easy availability of information needed for the computation

Which of the following is an advantage of the average counting return method of analysis?

I.Nonconventional cash flows II.Cash outflows exceed cash inflows prior to any time value adjustments III.Cash for services rendered is received prior to the cash that is spent providing the services

Which of the following statements generally apply to the cash flows of a financing type project?

I.The IRR method of analysis can be adapted to handle non-conventional cash flows. II.The IRR that causes the net present value to the differences between two project's cash flows to equal zero is called the crossover rate. III.The IRR tends to be used more than net present value simply because its results are easier to understand IV.Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

Which of the following statements related to the internal rate of return (IRR) are correct?

An increase in the aftertax salvage value of the fixed assets

Which one of the following increases the net present value of a project?

Modified internal rate of return that exceeds the required return

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

Waiting until a machine finishes molding project A before being able to mold project B

Which one of the following is the best example of two mutually exclusive projects?

Net Present Value

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

Profitability Index

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

Discounted cash flow valuation

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return

Which one of the following statements is correct in relation to independent projects?

Payback is used more frequently even though discounted payback is a better method.

Which one of the following statements related to payback and discounted payback is correct?

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

Which one of the following statements related to the internal rate of return (IRR) is correct?

The payback decision rule could override the net present value decision rule should cash availability be limited.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

Increasing the project's initial cost at time zero

Which one of the following will decrease the net present value of a project?

Payback and discounted payback

Which two methods of project analysis are the most biased towards short-term projects?

Internal rate of return and net present value

Which two methods of project analysis were the most widely used by CEO's as of 1999?

It is the only method where the benefits of the analysis outweigh the costs of the analysis.

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

Required rate of return

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

Mutually exclusive

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

The project earns a return exactly equal to the discount rate

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

I.Average accounting return method because the information is so readily available. II.Internal rate of return because the results are easy to communicate and understand IV.Net present value because it is considered by many to be the best method of analysis.

In actual practice, managers frequently use the:

Payback

Kristi wants to start training her most junior assistant, Amy, in the art of analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

Both require the total use of the same limited resource

Mutually exclusive projects are best defined as competing projects which:

Is the best method of analyzing mutually exclusive projects.

Net Present Value:

Some positive net present value projects to be rejected

Applying the discounted payback decision rule to all projects may cause:

Assumes the firm has sufficient funds to undertake both projects

Roger's Meat Market is considered two independent projects. The profitability index rule indicates that both projects should be accepted. This result most likely does which one of the following?

Cash inflow in the final year of the project

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled where computing the net present value of the project?

Project A only

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?

Net Present Value

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on an unused portion of the restaurants property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

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

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?

Always accept project A if the required return exceeds the crossover rate.

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:

I.The discount rate used in computing the net present value was less than 11.63 percent II.The discounted payback period must be more than 2.98 years IV.This project should be accepted as the internal rate of return exceeds the required return

You are considering a project with conventional cash flows and the following characteristics: IRR: 11.63% Profitability Ratio: 1.04 NPV: $987 Payback Period: 2.98 Years Which of the following statements is correct given this information?

You cannot apply the IRR rule in this case

You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5%, should you accept the investment based solely on the internal rate of return rule? Why or why not? Year Cash Flow 0 -$152,000 1 98,200 2 102,300 3 -4,900

NPV profile

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?