Question 1

Assume a project is independent with financing cash flows. Which one of these statements is correct?

Accepted Answer

The project is acceptable if the required return exceeds the IRR.

Question 2

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

Accepted Answer

The best analytical method in this case would be net present value (NPV), as both projects involve investing in the restaurant's property and would likely have long-term financial implications. NPV takes into account the time value of money and calculates the present value of future cash flows, which is a better indicator of the project's true profitability than other methods such as payback or accounting rate of return. Profitability index and internal rate of return (IRR) could also be used, but NPV is typically considered to be more accurate and reliable.

Question 3

The internal rate of return is defined as the:

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value of a project equal to zero. This means that the present value of the cash inflows from the project is equal to the present value of the cash outflows. A project with an IRR greater than the required rate of return is considered to be profitable, while a project with an IRR less than the required rate of return is considered unprofitable. Therefore, option D is the correct choice as it describes the definition of IRR.

Question 4

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:

Accepted Answer

The projects are considered mutually exclusive as they are dependent on the same resource and cannot be executed simultaneously. Choosing one project necessarily means rejecting the other.

Question 5

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Accepted Answer

Financing type cash flows typically involve an initial cash inflow at Time 0, representing the acquisition of funds or investment capital, which is opposite to the conventional investment cash flows that start with an outflow.

Question 6

The internal rate of return:

Accepted Answer

The internal rate of return (IRR) is easy to understand because it represents the discount rate at which the net present value of a project's cash flows equals zero, making it intuitive for decision-makers.

Question 7

An advantage of the average accounting return method of analysis is its:

Accepted Answer

The advantage of the average accounting return method of analysis is its use of easily obtained information, which makes it a simple and cost-effective way to evaluate projects. This method calculates the average net income over the life of an investment and divides it by the initial investment to determine the average accounting return. However, it does not consider the time value of money or use a benchmark rate of return, which can limit its usefulness for complex investment decisions.

Question 8

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR:

Accepted Answer

A strength of AAR is its simplicity and ease of calculation. It is based on accounting values, which may be a disadvantage in some respects, but it does make the method more straightforward to apply. However, AAR does not consider the time value of money or taxes, and it does not use a cutoff rate, which are potential weaknesses of the method.

Question 9

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?

Accepted Answer

This graph is called the NPV profile, which shows how the NPV of a project changes with different discount rates. By analyzing the NPV profile, analysts can determine the discount rate at which the project has the highest NPV or the rate at which the project breaks even. It helps in evaluating the project's sensitivity to the discount rate, which is a crucial factor that impacts the project's profitability.

Question 10

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

Accepted Answer

The IRR that causes the NPV of the difference between two projects' cash flows to be zero is called the crossover rate. This is the rate at which the cash flows of the two projects intersect, making the decision between the two projects dependent on which project has a higher initial investment. The crossover rate helps determine the threshold at which one project becomes more profitable than the other.

Question 11

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that:

Accepted Answer

The crossover rate is the discount rate at which the NPVs of two projects are equal. If the discount rate is below the crossover rate, one project may be preferred, but if it is above, the other project may be preferred. Thus, a project acceptable at 11% may not be acceptable at 12%.

Question 12

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

Mutually exclusive projects are those where the acceptance of one project prevents the acceptance of another. In option E, the machine can only mold one product at a time, meaning if it's molding Product A, it cannot simultaneously mold Product B, making them mutually exclusive.

Question 13

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:

Accepted Answer

If a project has two distinct discount rates at which it has a zero net present value, it means that there are multiple rates of return. This indicates that the project has multiple potential outcomes and could result in different levels of profitability depending on the discount rate used. Therefore, the correct answer is E, which states that the project has multiple rates of return.

Question 14

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:

Accepted Answer

The crossover rate is the point where the two projects have equal net present values. So, if the required return is greater than the crossover rate (in this case, 12.3%), Project A will have a higher net present value than Project B. Therefore, you should always accept Project A if the required return exceeds the crossover rate.

Question 15

The internal rate of return is:

Accepted Answer

The answer of The internal rate of return is: 
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Question 16

Which one of the following characteristics is most associated with financing type projects?

Accepted Answer

The answer of Which one of the following characteristics is...

Question 17

Graphing the crossover point helps explain:

Accepted Answer

Graphing the crossover point helps explain how decisions concerning mutually exclusive projects are derived by showing at what point one project becomes more favorable than another based on the discount rate or other relevant factors.

Question 18

Which one of the following statements related to the internal rate of return (IRR) is correct?

Accepted Answer

The IRR is the discount rate at which the net present value of the project equals zero. Therefore, statement C is correct. Statement A is incorrect because the IRR and the net present value method can yield different accept/reject decisions for mutually exclusive projects. Statement B is incorrect because a project with an IRR equal to the required return would have a net present value of zero, and therefore would not affect the value of a firm if accepted. Statement D is incorrect because financing type projects should be accepted if their cost of capital is less than the IRR. Statement E is incorrect because the IRR is a superior method of analysis since it considers the time value of money, whereas the average accounting return does not.

Question 19

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?

Accepted Answer

By condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows, the project's overall cash flow will increase in the shorter time period, leading to a higher internal rate of return. This is because the time value of money will have a greater impact due to the shorter period. The other options either decrease the cash inflows or increase the cost of the project, which will decrease the internal rate of return.

Question 20

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

Accepted Answer

The Modified Internal Rate of Return (MIRR) that exceeds the required return is an acceptance indicator when considering an independent project with investing type cash flows. MIRR is a modified version of IRR that assumes the reinvestment of cash flows at the required rate of return instead of the project's own rate of return. By selecting projects that have a higher MIRR than the required return, the investor can ensure that the project generates enough cash flows to cover the required rate of return and compensate for the opportunity cost of investing in the project.

Quiz 9: Net Present Value and Other Investment Criteria