Finance ch8
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 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 one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?
The firm should increase in value each time it accepts a new project.
Which one of the following statements is correct? 2
The payback period ignores the time value of money.
Which one of the following will occur when the internal rate of return equals the required return?
The profitability index will equal 1.0.
Which one of the following is the primary advantage of payback analysis?
Ease of use
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.
Which one of the following is most closely related to the net present value profile?
Internal rate of 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
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.
The net present value of an investment represents the difference between the investment's:
cost and its market value.
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.
Net present value involves discounting an investment's:
future cash flows.
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 reflects the value created per dollar:
invested
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.
Generally speaking, payback is best used to evaluate which type of projects?
Low-cost, short-term
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
Net present value
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
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
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
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
Which one of the following methods of analysis has the greatest bias toward short-term projects?
Payback
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
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
The investment is mutually exclusive with another investment of a different size.
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.
You are using a net present value profile to compare Projects 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.
