Question 1

If an investment is producing a return that is equal to the required return,the investment's net present value will be:
A)positive
B)greater than the project's initial investment
C)zero
D)equal to the project's net profit
E)less than,or equal to,zero

Accepted Answer

If the investment is producing a return that is equal to the required return, the net present value will be zero. This means that the initial investment is exactly matched by the present value of the expected cash flows generated by the project. Anything above zero would indicate a positive NPV, meaning the investment is generating higher returns than the required return, and anything below zero would indicate a negative NPV, meaning the investment is generating lower returns than the required return.

Question 2

The net present value:
A)decreases as the required rate of return increases
B)is equal to the initial investment when the internal rate of return is equal to the required return
C)method of analysis cannot be applied to mutually exclusive projects
D)is directly related to the discount rate
E)is unaffected by the timing of an investment's cash flows

Accepted Answer

The net present value decreases as the required rate of return increases because a higher required return makes future cash flows worth less in today's dollars.

Answer: B 
 When the internal rate of return equals the required return, the net present value is zero, which means the project's cash inflows equal its outflows.

Answer: C 
 The net present value method can only be used to compare mutually exclusive projects if they have the same initial investment amount.

Answer: D 
 The net present value is directly related to the discount rate because the discount rate represents the opportunity cost of investing in the project.

Answer: E
 The timing of an investment's cash flows can affect its net present value because earlier cash flows are worth more in today's dollars than later cash flows due to the time value of money.

Question 3

You are using a net present value profile to compare investments A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?
A)The internal rate of return for project A equals that of project B,but generally does not equal zero.
B)The internal rate of return of each project is equal to zero.
C)The net present value of each project is equal to zero.
D)The net present value of project A equals that of project B,but generally does not equal zero.
E)The net present value of each project is equal to the respective project's initial cost.

Accepted Answer

The answer of You are using a net present value...

Question 4

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
A)produce a positive annual cash flow
B)produce a positive cash flow from assets
C)offset its fixed expenses
D)offset its total expenses
E)recoup its initial cost

Accepted Answer

The payback period measures the amount of time it takes for an investment to recoup its initial cost, so the correct answer is E. Choices A, B, C, and D are incorrect because they do not fully encompass the concept of payback period.

Question 5

T.L.C. ,Inc.is considering an investment with an initial cost of $175 000 that would be depreciated straight line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76 000 for the first two years and $30 000 for the following two years.What is the internal rate of return?
A)9.27 per cent
B)9.98 per cent
C)10.62 per cent
D)10.79 per cent
E)11.58 per cent

Accepted Answer

The answer of T.L.C. ,Inc.is considering an investment with an...

Question 6

The reinvestment approach to the modified internal rate of return:
A)individually discounts each separate cash flow back to the present
B)reinvests all the cash flows,including the initial cash flow,to the end of the project
C)discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project
D)discounts all negative cash flows back to the present and combines them with the initial cost
E)compounds all of the cash flows,except for the initial cash flow,to the end of the project

Accepted Answer

The answer of The reinvestment approach to the modified internal...

Question 7

Which one of the following statements is correct?
A)A longer payback period is preferred over a shorter payback period.
B)The payback rule states that you should accept a project if the payback period is less than one year.
C)The payback period ignores the time value of money.
D)The payback rule is biased in favour of long-term projects.
E)The payback period considers the timing and amount of all of a project's cash flows.

Accepted Answer

The payback period ignores the time value of money, which makes it a flawed method for evaluating investment projects. Other methods, such as net present value and internal rate of return, take into account the time value of money and are therefore more reliable.

Question 8

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?
A)mutually exclusive projects
B)unconventional cash flows
C)long-term projects
D)negative net present values
E)crossover points

Accepted Answer

The modified internal rate of return (MIRR) addresses the problems associated with unconventional cash flows, where a project has multiple positive and negative cash flows. MIRR provides a consistent and accurate rate of return for these types of projects, whereas traditional IRR may provide multiple solutions or may not provide a solution at all. MIRR is not specifically designed for mutually exclusive projects, long-term projects, negative net present values, or crossover points.

Question 9

Which one of the following statements is correct?
A)If the IRR exceeds the required return,the profitability index will be less than 1.0.
B)The profitability index will be greater than 1.0 when the net present value is negative.
C)When the internal rate of return is greater than the required return,the net present value is positive.
D)Projects with conventional cash flows have multiple internal rates of return.
E)If two projects are mutually exclusive,you should select the project with the shortest payback period.

Accepted Answer

When the IRR exceeds the required return, it means that the project is earning more than its cost of capital and therefore the profitability index will be greater than 1.0. The profitability index is calculated as the present value of future cash flows divided by the initial investment. A net present value that is negative indicates that the project is not generating sufficient returns to cover its costs, so the profitability index will be less than 1.0. The internal rate of return is the discount rate that makes the net present value of a project zero, so when the IRR is greater than the required return, it means that the project is generating a positive net present value. Finally, projects with conventional cash flows (i.e. negative cash flows followed by positive cash flows) do not have multiple internal rates of return. The shortest payback period is not always the best choice as it does not take into account the time value of money and the project's cash flows beyond the payback period.

Question 10

Discounted cash flow valuation is the process of discounting an investment's:
A)assets
B)future profits
C)liabilities
D)costs
E)future cash flows

Accepted Answer

Discounted cash flow valuation involves discounting the future cash flows of an investment to determine its present value. Therefore, the correct answer is E.

Question 11

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
A)internal rate of return
B)profitability index
C)net present value
D)modified internal rate of return
E)average accounting return

Accepted Answer

Net Present Value (NPV) is the most appropriate method of analysis when two investments are mutually exclusive. This is because NPV takes into account the time value of money and provides the difference between the present value of cash inflows and the present value of cash outflows. The investment with the higher NPV would be the more profitable one. In the case of mutually exclusive investments, choosing the investment with the higher NPV would result in higher profitability. The other methods of analysis (internal rate of return, profitability index, modified internal rate of return, and average accounting return) would not be appropriate in the case of mutually exclusive investments.

Question 12

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyse a variety of investment opportunities?
A)payback
B)profitability index
C)accounting rate of return
D)internal rate of return
E)net present value

Accepted Answer

Net present value (NPV) is generally considered to be the best form of analysis for a variety of investment opportunities because it takes into account the time value of money and provides a measure of the project's contribution to shareholder wealth. It compares the present value of cash inflows to the present value of cash outflows, and if the NPV is positive, the investment is expected to increase shareholder wealth. Other methods such as payback, profitability index, accounting rate of return, and internal rate of return may provide useful information, but do not consider the time value of money in the same way that NPV does.

Question 13

Rural Feed Mill Pty Ltd is spending $250 000 to update its facility.The company estimates that this investment will improve its cash inflows by $56 500 a year for 10 years.What is the payback period?
A)4.24 years
B)5.05 years
C)4.13 years
D)4.42 years
E)The project never pays back.

Accepted Answer

The answer of Rural Feed Mill Pty Ltd is spending...

Question 14

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted,given which one of the following?
A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment under consideration.
E)The cash flows are conventional.

Accepted Answer

The internal rate of return (IRR) can be unreliable in making investment decisions when comparing mutually exclusive investments. This is because IRR assumes that the cash flows from the investment can be reinvested at the same rate, which may not be the case when choosing between multiple investments with different cash flow patterns. In these situations, other methods such as net present value (NPV) or profitability index (PI) should be used to evaluate the investments. Choices A, B, C, and E are not necessarily factors that make IRR unreliable as an indicator of whether or not an investment should be accepted.

Question 15

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?
A)average accounting return
B)profitability index
C)internal rate of return
D)indexed rate of return
E)modified internal rate of return

Accepted Answer

The modified internal rate of return (MIRR) is specifically designed to calculate the rate of return on a project with unconventional cash flows. Unlike the traditional internal rate of return (IRR), which assumes that cash flows are reinvested at the same rate as the IRR, the MIRR assumes that positive cash flows are reinvested at a finance rate, and negative cash flows are financed at a borrowing rate. This makes MIRR a more accurate measure of a project's true rate of return.

Question 16

Which one of the following is an indicator that an investment is acceptable?
A)a modified internal rate of return equal to zero
B)a profitability index of zero
C)an internal rate of return that exceeds the required return
D)a payback period that exceeds the required period
E)a negative average accounting return

Accepted Answer

An investment is considered acceptable if its internal rate of return (IRR) exceeds the required return. The IRR is the discount rate that makes the net present value of the investment equal to zero, and if it is higher than the required return, it means that the investment will generate a positive NPV and will be profitable. Option A (modified IRR equal to zero) and option B (profitability index of zero) both indicate that the investment will not generate a positive return, and options D and E (payback period and average accounting return) do not consider the time value of money and do not provide a comprehensive measure of the profitability of the investment.

Question 17

The net present value of an investment represents the difference between the investment's:
A)cash inflows and outflows
B)cost and net profit
C)cost and market value
D)cash flows and profits
E)assets and liabilities

Accepted Answer

The answer of The net present value of an investment...

Question 18

You are considering the following two mutually exclusive projects.What is the crossover point?
A)10.76
B)13.72
C)15.89
D)18.79
E)22.56

Accepted Answer

The answer of You are considering the following two mutually...

Question 19

Which one of the following indicates that a project is expected to create value for its owners?
A)a profitability index less than 1.0
B)a payback period greater than the requirement
C)a positive net present value
D)a positive average accounting rate of return
E)an internal rate of return that is less than the requirement

Accepted Answer

A positive net present value indicates that the present value of the expected cash inflows from the project exceeds the present value of the cash outflows. This means that the project is expected to generate value for its owners. Option A (profitability index less than 1.0) and option E (internal rate of return that is less than the requirement) both indicate that the project may not be profitable enough to create value for its owners. Option B (payback period greater than the requirement) only gives information about the time it takes for the initial investment to be recovered and does not indicate value creation. Option D (positive average accounting rate of return) is a measure of the average return on the investment and does not take into account the timing of the cash flows or the value created for the owners.

Question 20

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?
A)mutually exclusive
B)conventional
C)multiple choice
D)dual return
E)crosswise

Accepted Answer

The term "mutually exclusive" describes a situation where selecting one option eliminates the possibility of selecting another option. This accurately describes the relationship between Project A and Project B, as choosing one project means the other project cannot be selected.

Quiz 8: Net Present Value and Other Investment Criteria

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

The net present value:

You are using a net present value profile to compare investments A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

The reinvestment approach to the modified internal rate of return:

Which one of the following statements is correct?

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?

Which one of the following statements is correct?

Discounted cash flow valuation is the process of discounting an investment's:

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyse a variety of investment opportunities?

Rural Feed Mill Pty Ltd is spending $250 000 to update its facility.The company estimates that this investment will improve its cash inflows by $56 500 a year for 10 years.What is the payback period?

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted,given which one of the following?

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?

Which one of the following is an indicator that an investment is acceptable?

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

You are considering the following two mutually exclusive projects.What is the crossover point?

Which one of the following indicates that a project is expected to create value for its owners?

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?