FINA Chapter 8: Net Present Value & Other Investment Criteria

Net present value involves discounting an investment's:

future cash flows.

The average accounting return:

measures profitability rather than cash flow.

Which one of the following statements is correct? (internal rate)

If the internal rate of return equals the required return, the net present value will equal zero.

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? Assume cash flows are conventional.

Internal rate of return that exceeds the required return

Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?

Modified internal rate of return

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero.

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

Generally speaking, payback is best used to evaluate which type of projects?

Low-cost, short-term

Which one of the following analytical methods is based on net income?

Average accounting return

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 methods of analysis is most appropriate to use when two investments are mutually exclusive?

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 indicates that a project is expected to create value for its owners?

Positive net present value

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 it accepts a new project.

Which one of the following can be defined as a benefit-cost ratio?

Profitability index

Which one of the following indicates that an independent project is definitely acceptable?

Profitability index greater than 1.0

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.

Which one of the following statements is correct? (payback method)

The payback method is biased toward short-term projects.

Which one of the following statements is correct? (payback)

The payback period ignores the time value of money.

Which one of the following statements is correct? Assume cash flows are conventional.

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

The net present value of an investment represents the difference between the investment's:

cost and its market value.

The internal rate of return is the:

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