Finance 318 Chapter 8, Chapter 8
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
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?
Internal rate of return and net present value
Which one of the following is an indicator that an investment is acceptable?
Internal rate of return that exceeds the required 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
Payback is best used to evaluate which type of projects?
Low-cost, short-term
Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?
Modified internal rate of return
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 the firm accepts a new project.
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.
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
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
initial
which one of the following is most closely related to the net present value profile
internal rate of return
based on the most recent survey information presented in your textbook CFO's tend to use which 2 methods of investment analysis the most frequently
internal rate of return and net present value
the profitability index reflects the value created per dollar
invested
The profitability index reflects the value created per dollar:
invested.
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
payback is best used to evaluate which type of projects
low-cost, short-term
the average accounting return
measures profitability rather than cash flow
The average accounting return:
measures profitability rather than cash flow.
which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows
modified internal rate of return
the possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as
multiple rates of return
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
multiple rates of return.
both project A and B are acceptable as independent projects....
mutually exclusive
Mary has just been asked to analyze an investment to determine if it is acceptable....
net present value
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
which one of the following methods of analysis is most appropriate to use when two investments are mutually exculsive
net present value
which one of the following methods of analysis has the greatest bias towards short term projects
payback
which one of the following methods of analysis ignore the time value of money
payback
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 inidators offers the best assurance that a project will produce value for its owners
positive npv
which one of the following can be defined as a benefit-cost ratio
profitability index
you were recently hired by a firm as a project analyst, the owner of the firm is unfamiliar with financial analysis
profitability index
which one of the following indicated that a project is definitely acceptable
profitability index greater than 1.0
which one of the following indicates that a project should be rejected
profitability index less than 1.0
the payback period is the length of time it takes an investment to generate sufficient cash flow to enable the project to
recoup its initial cost
which one of the following statements is correct
the payback method is biased towards short term projects
which one of the following statements is correct?
the payback period ignores the time value of money
the payback method of analysis ignores which one of the following
time value of money
the modified internal rate of return is specifically designed to address the problems associated with which one of the following
unconventional cash flows
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
zero
if an investment is producing a return that is equal to the required return the investments net present value will be
zero
which one of the following is the primary advantage of payback analysis
ease of use
discounted cash flow valuation is the process of discounting an investments
future cash flow
Discounted cash flow valuation is the process of discounting an investment's:
future cash flows.
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 defines the internal rate of return for a project?
Discount rate that results in a zero net present value for the project
What is the net present value of the following cash flows if the relevant discount rate is 8 percent?
$1,587.61
What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?
$1,869.69
What is the net present value of the following cash flows if the relevant discount rate is 9.0 percent?
$3,374.11
What is the net present value of a project with the following cash flows if the discount rate is 15 percent?
$39.80
Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 13 percent rate of return?
$4,312.65
What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?
$4,518.47; -$321.76
What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent?
$4,529.59
The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent. What is the project's net present value?
$512,408.23
Molly is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 10 percent. What is the net present value of this project if it the start-up cost is $2,100?
$59.50
Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of ____, but at the relevant discount rate of 17 percent the project's net present value is ____.
$6,000; -$5,739
You are making a $120,000 investment and feel that a 20 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $48,000 in the first year, $54,000 in the second year, and $56,000 in the third year. You expect to pay out $12,000 as an additional investment in the fourth year. What is the net present value of this investment given your expectations?
-$15,879.63
A proposed project requires an initial cash outlay of $849,000 for equipment and an additional cash outlay of $48,500 in year 1 to cover operating costs. During years 2 through 4, the project will generate cash inflows of $354,000 a year. What is the net present value of this project at a discount rate of 13 percent? Round your answer to the nearest whole dollar.
-$152,232
What is the net present value of a project with the following cash flows if the discount rate is 15 percent?
-$5,433.67
Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties?
-$651,233
A project has the following cash flows. What is the payback period?
3.21 years
Which one of the following analytical methods is based on net income?
Average accounting return
Which one of the following methods of analysis ignores cash flows?
Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
Average accounting return
Joe and Rich are both considering investing in a project with the following cash flows. Joe is content earning a 9 percent return, but Rich desires a return of 16 percent. Who, if either, should accept this project?
Both Joe and Rich
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
Net present value
Which one of the following is the primary advantage of payback analysis?
Ease of use
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
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?
Net present value
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
Which one of the following methods of analysis has the greatest bias toward short-term projects?
Payback
Which one of the following methods of analysis ignores the time value of money?
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
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 a project is definitely acceptable?
Profitability index greater than 1.0
Which one of the following indicates that a project should be rejected?
Profitability index less than 1.0
which one of the following defines the internal rate of return for a project
discount rate which results in a zero net present value for the project
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 under consideration.
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 Project 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.
Which one of the following statements is correct?
The payback method is biased toward short-term projects.
Which one of the following statements is correct?
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.
The payback method of analysis ignores which one of the following?
Time value of money
The modified internal rate of return is specifically designed to address the problems associated with which one of the following?
Unconventional cash flows
Which one of the following statements is correct?
When the internal rate of return is greater than the required return, the net present value is positive.
the average net income of a project divided by the projects average book value is referred to as the projects
average accounting return
which one of the analytical methods is based on net income
average accounting return
which one of the following methods of analysis ignores cash flows
average accounting return
which one of the following methods of anaylsis is most similar to computing the return on assets
average accounting return
The average net income of a project divided by the project's average book value is referred to as the project's:
average accounting return.
The reinvestment approach to the modified internal rate of return:
compounds all of the cash flows, except for the initial cash flow, to the end of the project.
the reinvestment approach to the modified internal rate of return
compounds all the cash flows except for the initial cash flow to the end of the project
The net present value of an investment represents the difference between the incestment's
cost and its market value
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 net present value:
decreases as the required rate of return increases.
the net present value profile illustrates how the net present value of an investment is affected by which one of the following
discount rate