FIN 310 Midterm Exam 1 - Set 9 (NPV & Investment Criteria)

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

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

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

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

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

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

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

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

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

E

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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