QUIZ 3 FINANCE 3824

Which one of the following is a capital budgeting decision? the constant dividend growth model. discounted cash flow valuation. average accounting valuation. the expected earnings model. the Capital Asset Pricing Model.

discounted cash flow valuation.

The discount rate that makes the net present value of an investment exactly equal to zero is called the: external rate of return. internal rate of return. average accounting return. profitability index. equalizer.

internal rate of return.

A project creates value for a firm's owners: when the net present value of the project is positive. any time the cash inflows exceed the cash outflows. whenever the internal rate of return is less than the required return. whenever the profitability index is less than one. whenever the payback period exceeds the life of the project.

when the net present value of the project is positive.

The internal rate of return (IRR): I. rule states that a project is acceptable when the IRR exceeds the required rate of return. II. ignores the initial investment in a project. III. is the rate that causes the net present value of a project to equal zero. IV. can effectively be used to analyze all investment scenarios. I and III only II and IV only I and II only II, III, and IV only I, II, III, and IV

I and III only

Which of the following are elements of the internal rate of return method of analysis? I. the timing of the cash flows II. the cutoff point after which any future cash flows are ignored III. the rate designated as the minimum acceptable rate of return for a project IV. the amount of each cash flow? I and II only III and IV only I, II, and III only I, III, and IV only II, III, and IV only

I, III, and IV only

REFER BACK TO THE QUIZ RESULTS ON BB FOR QUANTITATIVE PROBLEMS

REFER BACK TO THE QUIZ RESULTS ON BB FOR QUANTITATIVE PROBLEMS

Which one of the following statements is correct?

When the NPV is positive, both the PI and the IRR will indicate acceptance. Answers: A positive NPV signals a reject decision. Projects should be accepted when the PI is less than one. A payback period that is greater than the required period signals an accept decision. When the IRR exceeds the required return, a project should be rejected.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: accepted because the internal rate of return is positive. accepted because the profitability index is greater than 1. accepted because the profitability index is negative. rejected because the internal rate of return is negative. rejected because the net present value is negative.

accepted because the profitability index is greater than 1.

Net present value: when applied properly, can accurately predict the cash flows that will occur if a project is implemented. is highly independent of the rate of return assigned to a particular project. is the preferred method of analyzing a project even though the cash flows are only estimates. is unaffected by the timing of each and every cash flow related to a project. is unaffected by the timing of the purchase of the fixed assets required for a project.

is the preferred method of analyzing a project even though the cash flows are only estimates.

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem. net present value profiling operational ambiguity mutually exclusive investment decision economies of scale multiple rates of return

multiple rates of return

The difference between an investment's market value and its cost is the: net present value. internal rate of return. payback period. profitability index. discounted payback period.

net present value.