FIN 3309 Test 3 - (CH. 8)

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

The payback period ignores the time value of money.

Which one of the following statements is correct? - The net present value is a measure of profits expressed in today's dollars. - If the internal rate of return equals the required return, the net present value will equal zero. - Net present value is equal to an investment's cash inflows discounted to today's dollars. - The net present value is positive when the required return exceeds the internal rate of return. - If the initial cost of a project is increased, the net present value of that project will also increase.

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? - Average accounting return - Internal rate of return - Profitability index - Payback - Discounted payback

Internal rate of return

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 - Crosswise - Dual return - Multiple choice - Conventional

Mutually exclusive

Which one of the following indicates that a project is expected to create value for its owners? - Payback period greater than the requirement - Profitability index less than 1.0 - Internal rate of return that is less than the requirement - Positive average accounting rate of return - Positive net present value

Positive net present value

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 cash flows are conventional. - The investment has cash inflows that occur after the required payback period. - The initial cash flow is negative. - One of the time periods within the investment period has a cash flow equal to zero. - The investment is mutually exclusive with another investment of a different size.

The investment is mutually exclusive with another investment of a different size.

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

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

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

decreases as the required rate of return increases.

The internal rate of return is the: - project's current market rate of return. - discount rate that causes a project's aftertax income to equal zero. - rate of return required by the project's investors. - discount rate that results in a zero net present value for the project. - discount rate that results in a net present value equal to the project's initial cost.

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

If an investment is producing a return that is equal to the required return, the investment's net present value will be: - positive. - greater than the project's initial investment. - less than, or equal to, zero. - zero. - equal to the project's net profit.

zero.