Question 1

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:
A)accepted because the internal rate of return is positive.
B)accepted because the profitability index is greater than 1.
C)accepted because the profitability index is negative.
D)rejected because the internal rate of return is negative.
E)rejected because the net present value is negative.

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of the cash inflows by the initial cost of the project. If the PI is greater than 1, then the present value of the cash inflows exceed the initial cost of the project, indicating that the project is profitable. Therefore, the project should be accepted. The other answer choices are incorrect because they do not take into account the profitability of the project.

Question 2

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?
A)The internal rate of return decision may contradict the net present value decision.
B)Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented.
C)The payback decision rule could override the net present value decision rule should cash availability be limited.
D)The profitability index rule cannot be applied in this situation.
E)The projects cannot be accepted unless the average accounting return decision ruling is positive.

Accepted Answer

The answer of Which one of the following statements would...

Question 3

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
I.positive net present value
II.profitability index greater than zero
III.internal rate of return greater than the required rate
IV.positive internal rate of return
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of Which of the following are definite indicators...

Question 4

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?
A)conflicts with the results of the net present value decision rule
B)assumes the firm has sufficient funds to undertake both projects
C)agrees with the decision that would also apply if the projects were mutually exclusive
D)bases the accept/reject decision on the same variables as the average accounting return
E)fails to provide useful information as the firm must reject at least one of the projects

Accepted Answer

The profitability index decision rule assumes that the firm has sufficient funds to undertake all projects that have a profitability index greater than 1. This implies that if both projects are considered acceptable according to this rule, it is assumed the firm has the necessary funds to invest in both.

Question 5

Which one of the following is the best example of two mutually exclusive projects?
A)building a retail store that is attached to a wholesale outlet
B)producing both plastic forks and spoons on the same assembly line at the same time
C)using an empty warehouse to store both raw materials and finished goods
D)promoting two products during the same television commercial
E)waiting until a machine finishes molding Product A before being able to mold Product B

Accepted Answer

Mutually exclusive projects are those where the choice of one project prevents the undertaking of another. In option E, the machine can only mold one product at a time, meaning if it is used for Product A, it cannot simultaneously be used for Product B, making them mutually exclusive.

Question 6

You are considering a project with conventional cash flows and the following characteristics: $$\begin{array} { l l } 
\text { Internal rate of return } & 11.63 \text { percent } \
\text { Profitability ratio } & 1.04 \
\text { Net present value } & \$ 987 \
\text { Payback period } & 2.98 \text { years }
\end{array}$$ Which of the following statements is correct given this information?
I.The discount rate used in computing the net present value was less than 11.63 percent.
II.The discounted payback period must be more than 2.98 years.
III.The discount rate used in the computation of the profitability ratio was 11.63 percent.
IV.This project should be accepted as the internal rate of return exceeds the required return.
A)I and II only
B)III and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The NPV is positive, indicating the discount rate was less than the IRR of 11.63%. The discounted payback period is longer than the regular payback period. The IRR exceeding the required return suggests the project should be accepted.

Question 7

Mutually exclusive projects are best defined as competing projects which:
A)would commence on the same day.
B)have the same initial start-up costs.
C)both require the total use of the same limited resource.
D)both have negative cash outflows at time zero.
E)have the same life span.

Accepted Answer

Mutually exclusive projects are those that cannot be pursued simultaneously because they require the total use of the same limited resource, such as funds or time. Option A, B, D, and E are not necessarily defining characteristics of mutually exclusive projects.

Question 8

Which two methods of project analysis are the most biased towards short-term projects?
A)net present value and internal rate of return
B)internal rate of return and profitability index
C)payback and discounted payback
D)net present value and discounted payback
E)discounted payback and profitability index

Accepted Answer

Payback and discounted payback are both biased towards short-term projects as they focus on the time it takes to recoup the initial investment rather than long-term profitability. Net present value and internal rate of return take into account the time value of money and the full cash flows over the life of the project, making them less biased towards short-term projects. The profitability index also takes into account the present value of future cash flows, making it less biased towards short-term projects.

Question 9

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?
A)The net present value indicates accept while the internal rate of return indicates reject.
B)Payback indicates acceptance.
C)The payback decision rule could override the accept decision indicated by the net present value.
D)The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
E)The net present value decision rule is the only rule that matters when making the final decision.

Accepted Answer

The project has a positive NPV which indicates acceptance, but the IRR is greater than the required return indicating a potentially better alternative investment. The payback period is within the required timeframe but may not be sufficient as the sole decision-making criterion. Therefore, the project may be acceptable based on the NPV and payback period, but the decision should take into account the potentially better IRR investment and ensure the payback rule is not solely relied upon.

Question 10

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?
A)-$311.02
B)$1,048.75
C)$4,650.11
D)$9,188.98
E)$11,168.02

Accepted Answer

The answer of A project will produce cash inflows of...

Question 11

Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?
A)discounted payback
B)profitability index
C)internal rate of return
D)payback
E)average accounting return

Accepted Answer

Kristi is assigning projects with initial costs less than $1,000 to Amy, which indicates that these are likely small and relatively simple projects. The payback method is a simple and straightforward way to analyze such projects, as it measures the time it takes to recover the initial investment, based on the cash inflows generated by the project. This method is easy to understand and apply, and does not require extensive financial knowledge or complex calculations, making it the most appropriate choice for Amy's level of experience and expertise.

Question 12

In actual practice,managers frequently use the:
I.average accounting return method because the information is so readily available.
II.internal rate of return because the results are easy to communicate and understand.
III.discounted payback because of its simplicity.
IV.net present value because it is considered by many to be the best method of analysis.
A)I and III only
B)II and III only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The answer of In actual practice,managers frequently use the:
I.average accounting...

Question 13

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? Year Cash Flow
$0 - \$ 42,398$
$1 \quad 18,201$
$2 \quad 21,219$
$3 \quad 17,800$
A)-$1,574.41
B)-$1,208.19
C)$5,904.65
D)$6,029.09
E)$6,311.16

Accepted Answer

The net present value (NPV) of a project is the sum of the present values of all the cash flows that the project is expected to generate, discounted back to the present at the required rate of return. In this case, the required rate of return is 9 percent. The NPV of the project is calculated as follows:NPV = -42,398 + 18,201/(1.09) + 21,219/(1.09)^2 + 17,800/(1.09)^3 = $5,904.65Therefore, the correct answer is C) $5,904.65.

Question 14

Which two methods of project analysis were the most widely used by CEO's as of 1999?
A)net present value and payback
B)internal rate of return and payback
C)net present value and average accounting return
D)internal rate of return and net present value
E)payback and average accounting return

Accepted Answer

According to the text, the two most widely used methods of project analysis by CEO's as of 1999 were internal rate of return (IRR) and net present value (NPV).

Question 15

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
A)initial cost of each project
B)timing of the cash inflows
C)total cash inflows of each project
D)required rate of return
E)length of each project's life

Accepted Answer

The answer of The final decision on which one of...

Question 16

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?
A)profitability index
B)internal rate of return
C)payback
D)net present value
E)accounting rate of return

Accepted Answer

The best method for evaluating these projects is net present value because it takes into account the time value of money and provides a more accurate measure of the potential profitability of each project. The profitability index, internal rate of return, payback, and accounting rate of return all have their own limitations and may not fully consider the cost of capital or the cash flows over time. Therefore, the net present value is the most appropriate method to use in this scenario.

Question 17

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. 
A)-$3,383.25
B)-$2,784.62
C)-$2,481.53
D)$52,311.08
E)$66,416.75

Accepted Answer

The answer of What is the net present value of...

Question 18

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
A)net present value
B)payback
C)internal rate of return
D)average accounting return
E)profitability index

Accepted Answer

The answer of Which one of the following methods of...

Question 19

You are considering the following two mutually exclusive projects.The required rate of return is 14.6 percent for project A and 13.8 percent for project B.Which project should you accept and why? 
 
A) project A; because it has the higher required rate of return
B) project A; because its NPV is about $4,900 more than the NPV of project B
C) project B; because it has the largest total cash inflow
D) project B; because it has the largest cash inflow in year one
E) project B; because it has the lower required return

Accepted Answer

The best choice is project A, because it has a higher required rate of return and generates a higher net present value (NPV) than project B. The difference in NPV between the two projects is about $4,900, which indicates that project A is more profitable. The required rate of return is used to evaluate the riskiness of the projects, and project A has a higher risk than project B, so it offers a higher return to investors. Therefore, project A is the best choice based on financial analysis.

Question 20

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives.  Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:
A)both projects.
B)project B because it has the shortest payback period.
C)project B and reject project A based on their net present values.
D)project A and reject project B based on their average accounting returns.
E)neither project.

Accepted Answer

Based on the information provided, Isaac's best recommendation would be to accept project B and reject project A based on their net present values. This approach considers the time value of money, and the net present value method shows the difference between the present value of cash inflows and the present value of cash outflows. Choosing the project with the highest net present value generally indicates the best financial return. Therefore, project B should be accepted, while project A should be rejected.

Quiz 9: Net Present Value and Other Investment Criteria

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I.positive net present value II.profitability index greater than zero III.internal rate of return greater than the required rate IV.positive internal rate of return

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

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

Mutually exclusive projects are best defined as competing projects which:

Which two methods of project analysis are the most biased towards short-term projects?

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? Year Cash Flow 0−$42,3980 - \$ 42,3980−$42,398 118,2011 \quad 18,201118,201 221,2192 \quad 21,219221,219 317,8003 \quad 17,800317,800

Which two methods of project analysis were the most widely used by CEO's as of 1999?

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

You are considering the following two mutually exclusive projects.The required rate of return is 14.6 percent for project A and 13.8 percent for project B.Which project should you accept and why?

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? Year Cash Flow $0 - \$ 42,398$ $1 \quad 18,201$ $2 \quad 21,219$ $3 \quad 17,800$