FIN 322 Old Exam 3

Which one of the following statements is correct: 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.

When the internal rate of return is greater than the required return, the net present value is positive.

The book value of an asset is primarily used to compute the:

amount of tax due on the sale of an asset

The net present value:

decreases as the required rate of return increases.

The internal rate of return tends to be:

easier for managers to comprehend than the net present value.

An investment is acceptable if its IRR:

exceeds the required return.

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

incremental

The operating cash flow for a project should exclude which of the following?

interest expense

Erosion can be explained as the:

loss of current sales due to a new project being implemented

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.

No matter how many forms of investment analysis you do:

the actual results from a project may vary significantly from the expected results

The problem of multiple IRRs can occur when:

there is more than one sign change in the cash flows

Which one of the following statements is correct concerning the payback period? A. An investment is acceptable if its calculated payback period is less than some pre-specified period of time. B. An investment should be accepted if the payback is positive and rejected if it is negative. C. An investment should be rejected if the payback is positive and accepted if it is negative. D. An investment is acceptable if its calculated payback period is greater than some pre-specified period of time. E. An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

A. An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

Which one of the following statements concerning net present value (NPV) is correct? A. An investment should be accepted if, and only if, the NPV is exactly equal to zero. B. An investment should be accepted only if the NPV is equal to the initial cash flow C. An investment should be accepted if the NPV is positive and rejected if it is negative. D. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV therefore should always be accepted E. Any project that has positive cash flows for every time period after the initial investment should be accepted.

An investment should be accepted if the NPV is positive and rejected if it is negative.

The internal rate of return is:

Difficult to compute without the use of either a financial calculator or a computer

Which of the following defines the internal rate of return for a project? A. Discount rate that creates a zero cash flow from assets. 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. The project's current market rate of return

Discount rate that results in a zero net present value for the project

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 investment's:

Future cash flows

which one of the following is an indicator that an investment is acceptable? A. Modified internal rate of return equal to zero B. Profitability index of zero C. Internal rate of return that exceeds the required return D. Payback period that exceeds the required period E. Negative average accounting return

Internal rate of return that exceeds the required return

Both Projects A and B are acceptable as independent projects. However, the selection of either one of those 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 is more appropriate to use when two investments are mutually exclusive?

Net present value

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

Positive net present value

A cost that has already been paid, or the liability to pay has already been incurred is a(n):

Sunk cost

Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.

The payback period ignores the time value of money.