finance 300 exam 3 conceptual

Which of the following statements of the investment decision rules is most false?

Both the payback method and the discounted payback method bias against liquid projects.

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year

Which one of the following correctly identifies the sunk costs of the project?

$134,000 for research

Which one of the following correctly identifies the opportunity costs of the project?

$229,000 value of the building

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return

I and III only

Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals.

I, II, III, and IV

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

I, II, and IV only

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values

I, II, and IV only

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,

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?

Mutually exclusive projects are best defined as competing projects which:

both require the total use of the same limited resource.

Changes in the net working capital requirements:

can affect the cash flows of a project every year of the project's life.

Based on the profitability index (PI), what is your recommendation concerning the two projects?

d. You should accept project A because its PI *exceeds 1* but reject project B.

13 Which of the following best serves as the basis for project analysis?

d. incremental cash flows

The internal rate of return (IRR) is defined as the

discount rate which causes the *net present value* of a project to equal zero.

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

easy availability of information needed for the computation

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

equivalent annual cost

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

increasing the project's initial cost at time zero (inverse realtionship)

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

incremental

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

Net present value:

is the best method of analyzing mutually exclusive projects.

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's 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?

net present value

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

opportunity cost

Which one of the following best describes the concept of erosion?

the cash flows of a new project that come at the expense of a firm's existing cash flows

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

the project earns a return exactly equal to the discount rate.

the IRR rule cannot be used to determine acceptance or rejection.

when the cash flow direction changes twice, there are two IRRs.

Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point

II and III only

Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product

II, III, and IV only

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.

Which one of the following correctly applies to the average accounting rate of return (AAR)?

It can be compared to the return on assets ratio (ROA).

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?

Project A only (only look at the payback period)

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

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

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

average accounting return. AAR

A project's average net income divided by its average book value

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

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

Which of the following statements of Net Present Value (NPV) and Internal Rate of Return (IRR) is most false?

The IRR rule is easier to apply than the NPV rule, because you do not need to know the required return to apply the IRR rule.

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

selling fewer hot dogs because hamburgers were added to the menu