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You are analyzing a project and have prepared the following data: You are analyzing a project and have prepared the following data: Based on the payback period of _____ for this project, you should _____ the project. A) 1.87 years; accept B) 2.87 years; accept C) 2.87 years; reject D) 3.13 years; reject E) 3.87 years; reject You are analyzing a project and have prepared the following data: Based on the payback period of _____ for this project, you should _____ the project. A) 1.87 years; accept B) 2.87 years; accept C) 2.87 years; reject D) 3.13 years; reject E) 3.87 years; reject You are analyzing a project and have prepared the following data: Based on the payback period of _____ for this project, you should _____ the project. A) 1.87 years; accept B) 2.87 years; accept C) 2.87 years; reject D) 3.13 years; reject E) 3.87 years; reject Based on the payback period of _____ for this project, you should _____ the project.


A) 1.87 years; accept
B) 2.87 years; accept
C) 2.87 years; reject
D) 3.13 years; reject
E) 3.87 years; reject

F) C) and D)
G) A) and B)

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Roger is considering adding toys to his general store. He estimates that the cost of inventory will be $6,400. The remodeling expenses and shelving costs are estimated at $2,100. Toy sales are Expected to produce net cash inflows of $1,400, $2,300, $3,100, and $2,000 over the next four Years, respectively. Should Roger add toys to his store if he assigns a three-year payback period to This project? Why or why not?


A) No; The payback period is 3.55 years.
B) No; The payback period is 3.85 years.
C) Yes; The payback period is 2.55 years.
D) Yes; The payback period is 2.87 years.
E) Yes; The payback period is 3.13 years.

F) C) and D)
G) A) and B)

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The internal rate of return for a project will increase if:


A) The initial cost of the project can be reduced.
B) The total amount of the cash inflows is reduced.
C) Each cash inflow is moved such that it occurs one year later than originally projected.
D) The required rate of return is reduced.
E) The salvage value of the project is omitted from the analysis.

F) D) and E)
G) B) and E)

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Which of the following is a correct statement?


A) The IRR is considered to be the most important project analysis technique.
B) The AAR is considered preferable to the PI.
C) Discounted payback analysis requires use of a discount rate.
D) It is reasonable to use IRR to analyze mutually exclusive investments.
E) Regular payback analysis is preferable to discounted payback analysis.

F) None of the above
G) A) and B)

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The internal rate of return (IRR) rule can be best stated as:


A) An investment is acceptable if its IRR is exactly equal to its net present value (NPV) .
B) An investment is acceptable if its IRR is exactly equal to zero.
C) An investment is acceptable if its IRR is less than the required return, or else it should be rejected.
D) An investment is acceptable if its IRR exceeds the required return, or else it should be rejected.
E) An investment is acceptable if its IRR exceeds its depreciation rate.

F) A) and B)
G) A) and E)

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Which capital investment evaluation technique offers the following advantages? (1) Easy to calculate; (2) Needed information will usually be available.


A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback

F) D) and E)
G) C) and D)

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Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is 8 percent? Why or why not? Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is 8 percent? Why or why not? A) Yes; because the PI is 1.008 B) Yes; because the PI is .992 C) Yes; because the PI is .999 D) No; because the PI is 1.008 E) No; because the PI is .992


A) Yes; because the PI is 1.008
B) Yes; because the PI is .992
C) Yes; because the PI is .999
D) No; because the PI is 1.008
E) No; because the PI is .992

F) A) and B)
G) A) and C)

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If a project has a net present value equal to zero, then the project is expected to produce only the minimally required cash inflows.

A) True
B) False

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For which capital investment evaluation technique is the following a complete list of its disadvantages when compared to NPV analysis? (1) Ignores cash flows beyond the cutoff date; (2) Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive NPV Projects.


A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback

F) A) and C)
G) A) and D)

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The internal rate of return method of analysis may lead to incorrect decisions when comparing mutually exclusive projects.

A) True
B) False

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Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per Year. Given this information, calculate the IRR cross-over rate.


A) 5.93%
B) 6.93%
C) 7.93%
D) 8.93%
E) 9.93%

F) C) and D)
G) A) and B)

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What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 percent. What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 percent. A) $218.68 B) $370.16 C) $768.20 D) $1,249.65 E) $1,371.02


A) $218.68
B) $370.16
C) $768.20
D) $1,249.65
E) $1,371.02

F) A) and C)
G) A) and D)

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A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the IRR of the project.


A) 19.19%
B) 20.20%
C) 21.21%
D) 22.22%
E) 23.23%

F) A) and B)
G) None of the above

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The average accounting return (AAR) rule can be best stated as:


A) An investment is acceptable if its AAR is less than a target AAR.
B) An investment is acceptable if its AAR exceeds a target AAR.
C) An investment is acceptable if its AAR exceeds the firm's return on equity (ROE) .
D) An investment is acceptable if its AAR is less than the firm's return on assets (ROA) .

E) All of the above
F) C) and D)

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Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?


A) Net present value.
B) Internal rate of return.
C) Accounting rate of return.
D) Payback.
E) Profitability index.

F) B) and C)
G) A) and D)

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A financial manager who consistently underestimates the ___________ will tend to incorrectly reject projects that would actually create wealth for the stockholders.


A) Marginal income tax rate.
B) Initial cost of projects.
C) Future cash outlays associated with projects.
D) Required return on projects.
E) Future cash inflows associated with projects.

F) C) and D)
G) All of the above

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You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life Of the project. Neither project has any salvage value. You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life Of the project. Neither project has any salvage value. You should accept Project _____ because its net present value exceeds that of the other project by _____. A) A; $418.02 B) A; $897.13 C) B; $656.94 D) B; $778.11 E) B; $813.27 You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life Of the project. Neither project has any salvage value. You should accept Project _____ because its net present value exceeds that of the other project by _____. A) A; $418.02 B) A; $897.13 C) B; $656.94 D) B; $778.11 E) B; $813.27 You should accept Project _____ because its net present value exceeds that of the other project by _____.


A) A; $418.02
B) A; $897.13
C) B; $656.94
D) B; $778.11
E) B; $813.27

F) A) and B)
G) A) and E)

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The average accounting rate of return:


A) Is actually based more on financial values than on accounting values.
B) Measures net income against the market value of a firm.
C) Is highly recommended by financial professionals as one of the two best methodologies used in the analysis of independent projects.
D) Is the primary methodology used in analyzing independent projects.
E) Is similar to the return on assets ratio.

F) None of the above
G) A) and C)

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_______________ is the focus of corporate finance as it is concerned with making the optimal choice between project alternatives.


A) Capital budgeting.
B) Capital structure.
C) Payback period.
D) Short-term budgeting.
E) Capital Allocation.

F) A) and E)
G) B) and E)

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Analysis using the profitability index:


A) Frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B) Is useful as a decision tool when investment funds are limited.
C) Is useful when trying to determine which one of two mutually exclusive projects should be accepted.
D) Utilizes the same basic variables as those used in the average accounting return.
E) Produces results which typically are difficult to comprehend or apply.

F) C) and D)
G) A) and B)

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