Question 1

Which one of the following is an advantage of the average accounting return method of analysis?
A)easy availability of information needed for the computation
B)inclusion of time value of money considerations
C)the use of a cutoff rate as a benchmark
D)the use of pre-tax income in the computation
E)use of real, versus nominal, average income

Accepted Answer

The advantage of the average accounting return method is the easy availability of information needed for the computation. This method only requires accounting information that is readily available in financial statements, making it a simple and convenient analysis tool. However, this method does not take into account the time value of money, making it less accurate compared to other methods that do consider this factor.

Question 2

Which one of the following statements related to payback and discounted payback is correct?
A)Payback is a better method of analysis than is discounted payback.
B)Discounted payback is used more frequently in business than is payback.
C)Discounted payback does not require a cutoff point like the payback method does.
D)Discounted payback is biased towards long-term projects while payback is biased towards short-term projects.
E)Payback is used more frequently even though discounted payback is a better method.

Accepted Answer

Discounted payback takes into account the time value of money, making it a more accurate method than the traditional payback method, which does not. However, due to its simplicity, the payback method is still used more frequently in practice.

Question 3

Applying the discounted payback decision rule to all projects may cause:
A)some positive net present value projects to be rejected.
B)the most liquid projects to be rejected in favor of the less liquid projects.
C)projects to be incorrectly accepted due to ignoring the time value of money.
D)a firm to become more long-term focused.
E)some projects to be accepted which would otherwise be rejected under the payback rule.

Accepted Answer

Discounted payback takes into account the time value of money, which means that future cash flows are discounted to their present value. This may result in some projects that have a positive net present value (NPV) being rejected based on their longer payback period. The discounted payback rule is more conservative than the traditional payback rule and may result in fewer projects being accepted.

Question 4

A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A)conventional cash flows
B)cash flows that extend beyond the acceptable payback period
C)a year or more in the middle of a project where the cash flows are equal to zero
D)a cash inflow at time zero
E)cash inflows which are equal in amount

Accepted Answer

A project with financing type cash flows typically starts with a cash inflow at time zero, representing the initial financing received to start the project. This is in contrast to conventional or investment type projects, which usually begin with an outflow of cash for the investment.

Question 5

A project has a required payback period of three years.Which one of the following statements is correct concerning the payback analysis of this project? A)The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B)The cash flow in year three is ignored. C)The project's cash flow in year three is discounted by a factor of (1 + R)³. D)The cash flow in year two is valued just as highly as the cash flow in year one. E)The project is acceptable whenever the payback period exceeds three years.

Accepted Answer

The payback period analysis does not discount future cash flows, meaning all cash flows within the payback period are valued equally regardless of when they occur. Therefore, cash flow in year two is valued just as highly as in year one.

Question 6

The internal rate of return:
A)may produce multiple rates of return when cash flows are conventional.
B)is best used when comparing mutually exclusive projects.
C)is rarely used in the business world today.
D)is principally used to evaluate small dollar projects.
E)is easy to understand.

Accepted Answer

The answer of The internal rate of return:
A)may produce multiple...

Question 7

The internal rate of return is:
A)the discount rate that makes the net present value of a project equal to the initial cash outlay.
B)equivalent to the discount rate that makes the net present value equal to one.
C)tedious to compute without the use of either a financial calculator or a computer.
D)highly dependent upon the current interest rates offered in the marketplace.
E)a better methodology than net present value when dealing with unconventional cash flows.

Accepted Answer

The answer of The internal rate of return is:
A)the discount...

Question 8

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?
A)decreasing the required discount rate
B)increasing the initial investment in fixed assets
C)condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
D)eliminating the salvage value
E)decreasing the amount of the final cash inflow

Accepted Answer

By condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows, the project's cash flows would be more concentrated and occur earlier in the project's life. This would increase the project's internal rate of return by improving the timing and concentration of cash flows. A decrease in the required discount rate would also increase the internal rate of return, but this may not be feasible or practical. Increasing the initial investment in fixed assets would likely decrease the internal rate of return by increasing the project's costs. Eliminating the salvage value or decreasing the amount of the final cash inflow would also likely decrease the internal rate of return by decreasing the project's cash inflows.

Question 9

Graphing the crossover point helps explain:
A)why one project is always superior to another project.
B)how decisions concerning mutually exclusive projects are derived.
C)how the duration of a project affects the decision as to which project to accept.
D)how the net present value and the initial cash outflow of a project are related.
E)how the profitability index and the net present value are related.

Accepted Answer

Graphing the crossover point helps in making decisions concerning mutually exclusive projects as it identifies the point at which the projects have the same net present value. This allows for an objective comparison of the two projects and a clear determination of which project is more financially viable.

Question 10

Which of the following statements related to the internal rate of return (IRR)are correct?
I.The IRR method of analysis can be adapted to handle non-conventional cash flows.
II.The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III.The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV.Both the timing and the amount of a project's cash flows affect the value of the project's IRR.
A)I and II only
B)III and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

All statements about the internal rate of return (IRR) are correct. IRR can indeed be adapted for non-conventional cash flows, the crossover rate is defined as stated, IRR's ease of understanding often makes it more popular than NPV, and both the timing and amount of cash flows influence the IRR value.

Question 11

A project has a discounted payback period that is equal to the required payback period.Given this,which of the following statements must be true?
I.The project must also be acceptable under the payback rule.
II.The project must have a profitability index that is equal to or greater than 1.0.
III.The project must have a zero net present value.
IV.The project's internal rate of return must equal the required return.
A)I only
B)I and II only
C)II and III only
D)I, III, and IV only
E)I, II, III, and IV

Accepted Answer

The discounted payback period is the length of time it takes to recover the initial investment considering the time value of money. If the discounted payback period is equal to the required payback period, then the project is acceptable under the payback rule (statement I). Additionally, the fact that the discounted payback period is less than or equal to the required payback period implies that the project has a positive net present value, which means that its profitability index must be greater than 1.0 (statement II). However, we cannot conclude that the project has a zero net present value (statement III) or that its internal rate of return equals the required return (statement IV). Therefore, the correct answer is B) I and II only.

Question 12

Which one of the following correctly applies to the average accounting rate of return?
A)It considers the time value of money.
B)It measures net income as a percentage of the sales generated by a project.
C)It is the best method of analyzing mutually exclusive projects from a financial point of view.
D)It is the primary methodology used in analyzing independent projects.
E)It can be compared to the return on assets ratio.

Accepted Answer

The average accounting rate of return (AARR) compares the average annual profit of an investment to the initial or average investment cost. This method is similar to the return on assets ratio, which also compares net income to the total assets to assess a company's efficiency in using its assets to generate earnings.

Question 13

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:
A) always accept project A.
B) be indifferent to the projects at any discount rate above 13.1 percent.
C) always accept project A if the required return exceeds the crossover rate.
D) accept project B only when the required return is equal to the crossover rate.
E) accept project B if the required return is less than 13.1 percent.

Accepted Answer

EThe crossover point is the discount rate at which the net present values (NPVs) of two projects are equal. If you should accept project A at a required return of 13.1 percent, which is above the crossover rate of 12.3 percent, it implies that project A has a higher NPV at discount rates above the crossover point. Therefore, you should always accept project A if the required return exceeds the crossover rate (C). Additionally, since project B would be preferable at discount rates below the crossover point, you should accept project B if the required return is less than 13.1 percent (E), as it implies the required return is also below the crossover rate where project B's NPV would be higher.

Question 14

Which one of the following statements is correct in relation to independent projects?
A)The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows.
B)A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.
C)A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return.
D)The net present value profile is upsloping for projects with both investing and financing type cash flows.
E)Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

Accepted Answer

For independent projects, the internal rate of return can be used to determine the acceptability of a project with investing type cash flows. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. For projects with financing type cash flows, the net present value method should be used to determine acceptability. The net present value profile can be either upsloping or downsloping for projects with both investing and financing type cash flows, depending on the timing and magnitude of cash flows. Projects with financing type cash flows can have positive internal rates of return and be acceptable. There is no requirement for the internal rate of return to be negative.

Question 15

Samuelson Electronics has a required payback period of three years for all of its projects.Currently,the firm is analyzing two independent projects.Project A has an expected payback period of 2.8 years and a net present value of $6,800.Project B has an expected payback period of 3.1 years with a net present value of $28,400.Which projects should be accepted based on the payback decision rule?
A)Project A only
B)Project B only
C)Both A and B
D)Neither A nor B
E)Answer cannot be determined based on the information given.

Accepted Answer

Since Samuelson Electronics has a required payback period of three years for all of its projects, only Project A meets this criterion with an expected payback period of 2.8 years. Project A also has a positive net present value, which further supports the decision to accept this project. Project B exceeds the required payback period by 0.1 years and therefore should not be accepted based on the payback decision rule.

Question 16

Which of the following are considered weaknesses in the average accounting return method of project analysis?
I.exclusion of time value of money considerations
II.need of a cutoff rate
III.easily obtainable information for computation
IV.based on accounting values
A)I only
B)I and IV only
C)II and III only
D)I, II, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of Which of the following are considered weaknesses...

Question 17

The profitability index is most closely related to which one of the following?
A)payback
B)discounted payback
C)average accounting return
D)net present value
E)modified internal rate of return

Accepted Answer

The profitability index (PI) is a ratio used to evaluate the potential profitability of an investment by dividing the present value of future cash flows by the initial investment. The higher the PI, the more profitable the investment. This closely relates to net present value (NPV) which also involves calculating the present value of future cash flows minus the initial investment. Therefore, the best choice is D, net present value.

Question 18

Which one of the following statements related to the internal rate of return (IRR)is correct?
A)The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.
B)A project with an IRR equal to the required return would reduce the value of a firm if accepted.
C)The IRR is equal to the required return when the net present value is equal to zero.
D)Financing type projects should be accepted if the IRR exceeds the required return.
E)The average accounting return is a better method of analysis than the IRR from a financial point of view.

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. Therefore, when the NPV is equal to zero, the IRR is equal to the required return. Options A, B, D, and E are incorrect statements about the IRR.

Question 19

Which of the following statements generally apply to the cash flows of a financing type project?
I.nonconventional cash flows
II.cash outflows exceed cash inflows prior to any time value adjustments
III.cash for services rendered is received prior to the cash that is spent providing the services
IV.the total of all cash flows must equal zero on an unadjusted basis
A)I only
B)I and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The answer of Which of the following statements generally apply...

Question 20

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent.Project A has an internal rate of return (IRR)of 15.3 percent and Project B has an IRR of 16.5 percent.Given this information,which one of the following statements is correct?
A)Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR.
B)Project B should be accepted as it has the higher IRR.
C)Both projects should be accepted as both of the project's IRRs exceed the crossover rate.
D)Neither project should be accepted since both of the project's IRRs exceed the crossover rate.
E)You cannot determine which project should be accepted given the information provided.

Accepted Answer

The answer of Douglass Interiors is considering two mutually exclusive...

Quiz 9: Net Present Value and Other Investment Criteria

Which one of the following is an advantage of the average accounting return method of analysis?

Which one of the following statements related to payback and discounted payback is correct?

Applying the discounted payback decision rule to all projects may cause:

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

A project has a required payback period of three years.Which one of the following statements is correct concerning the payback analysis of this project?

The internal rate of return:

The internal rate of return is:

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?

Graphing the crossover point helps explain:

Which one of the following correctly applies to the average accounting rate of return?

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:

Which one of the following statements is correct in relation to independent projects?

Which of the following are considered weaknesses in the average accounting return method of project analysis? I.exclusion of time value of money considerations II.need of a cutoff rate III.easily obtainable information for computation IV.based on accounting values

The profitability index is most closely related to which one of the following?

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