intro to finance chapter 9
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
Discount rate which causes the net present value of a project to equal zero.
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?
Discounted cash flow valuation.
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
Cash inflow in the final year of the project.
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
Have multiple rates of return.
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
The cash flow in year two is valued just as highly as the cash flow in year one.
Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?
The payback decision rule could override the accept decision indicated by the net present value.
If a project has a net present value equal to zero, then:
The project earns a return exactly equal to the discount rate.
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.
Which one of the following is the best example of two mutually exclusive projects?
Waiting until a machine finishes molding Product A before being able to mold Product B.
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
required rate of return
Applying the discounted payback decision rule to all projects may cause:
some positive net present value projects to be rejected
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
Mutually exclusive projects are best defined as competing projects that:
both require the total use of the same limited resource
Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?
condensing the firm's cash flow into fewer years without lowering the total amount of those inflows
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:
crossover rate
Which one of these statements related to discounted payback is correct?
discounted payback period decreases as the discount rate decreases
Which of the following are advantages of the payback method of project analysis?
liquidity bias, ease of use.
In actual practice, managers most frequently use which two types of investment criteria?
IRR and NPV
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. These projects are considered to be:
mutually exclusive
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero.
Net present value:
Is the best method of analyzing mutually exclusive projects.
The profitability index is most closely related to which one of the following?
net present value
Why is payback often used as the sole method of analyzing a proposed small project?
It is the only method where the benefits of the analysis outweigh the costs of that analysis.
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?
NPV profile.
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
Net present value.
Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
Net present value.
Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?
payback
Which two methods of project analysis are the most biased towards short-term projects?
payback and discounted payback
The length of time a firm must wait to recoup the money it has invested in a project is called the:
Payback period.
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
The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
Profitability index.
You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:
Always accept Project A if the required return exceeds the crossover rate.
Which one of the following increases the net present value of a project?
An increase in the aftertax salvage value of the fixed assets.
