Finance Quiz 1

10) What is the net present value of a project with the following cash flows if the discount rate is 9 percent? Year Cash Flow 0 −$ 55,000 1 21,500 2 24,750 3 29,450 A) $7,126.22 B) $8,297.15 C) $20,700.00 D) −$7,126.22 E) −$6,456.23

B - $8,297.15

4) 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 - discount rate that results in a zero net present value for the project

3) 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 - average accounting return

9) What is the net present value of a project with the following cash flows if the discount rate is 12 percent? Year Cash flow 0 −$ 27,500 1 14,800 2 19,400 3 5,200 A) $4,881.10 B) $11,900.00 C) $4,358.13 D) $11,035.24 E) $8,129.06

A - $4,881.10

6) The net present value: A) decreases as the required rate of return increases. B) is equal to the initial investment when the internal rate of return is equal to the required return. C) method of analysis cannot be applied to mutually exclusive projects. D) ignores cash flows that are distant in the future. E) is unaffected by the timing of an investment's cash flows.

A - decreases as the required rate of return increases

8) Which one of the following statements is correct? Assume cash flows are conventional. A) If the IRR exceeds the required return, the profitability index will be less than 1.0. B) The profitability index will be greater than 1.0 when the net present value is negative. C) When the internal rate of return is greater than the required return, the net present value is positive. D) Projects with conventional cash flows have multiple internal rates of return. E) If two projects are mutually exclusive, you should select the project with the shortest payback period.

C - when the internal rate of return is greater than the required return, the net present value is positive

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

E - future cash flows

7) 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 - net present value

2) 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 - recoup its initial cost

5) 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 - positive net present value