Question: Which pair of characteristics is an advantage of the payback method?
Answer Options:
Ease of use; liquidity bias
Time value of money; objectivity
Inclusion of all cash flows; ease of use
Ease of use; consistency with NPV
Objectivity; reinvestment assumption
Answer: A — Ease of use; liquidity bias
Question: Applying the discounted payback rule may cause a firm to:
Answer Options:
accept every positive NPV project
reject some positive NPV projects
ignore the time value of money
accept some negative NPV projects
always rank projects correctly
Answer: B — reject some positive NPV projects
Question: An advantage of the average accounting return (AAR) method is its use of:
Answer Options:
discounted cash flows
market values
easily obtainable accounting information
aftertax salvage values only
real cash flows only
Answer: C — easily obtainable accounting information
Question: Which capital budgeting method provides the best information on the present value of benefits received per dollar invested?
Answer Options:
Net present value
Payback
Internal rate of return
Average accounting return
Profitability index
Answer: E — Profitability index
Question: If a project has an NPV of zero, then:
Answer Options:
the project earns a zero percent return
the project has no cash inflows
the project’s present value of inflows equals its initial cost
the sum of undiscounted cash flows equals zero
the project should always be rejected
Answer: C — the project’s present value of inflows equals its initial cost
Question: When included in an NPV analysis, an aftertax salvage value should be treated as a:
Answer Options:
reduction in the initial investment
sunk cost
cash inflow in the final year
noncash expense
financing cash flow
Answer: C — cash inflow in the final year
Question: Which one of the following will decrease the net present value of a project?
Answer Options:
Lowering the discount rate
Increasing each future cash inflow
Moving cash inflows to earlier years
Increasing the initial investment
Increasing the salvage value
Answer: D — Increasing the initial investment
Question: Which change will most likely increase a project’s internal rate of return?
Answer Options:
Increasing the initial investment
Reducing the final cash inflow
Delaying all cash inflows by one year
Condensing the same total inflows into fewer years
Increasing the discount rate
Answer: D — Condensing the same total inflows into fewer years
Question: The crossover rate for two projects is the discount rate at which the projects have the same:
Answer Options:
payback period
internal rate of return
net present value
average accounting return
profitability index
Answer: C — net present value
Question: Multiple internal rates of return are most likely to occur when a project has:
Answer Options:
conventional cash flows
only one cash outflow
positive NPV
nonconventional cash flows with more than one sign change
a short payback period
Answer: D — nonconventional cash flows with more than one sign change
Question: An independent project with conventional cash flows should be accepted if the project’s MIRR:
Answer Options:
is less than the required return
equals zero
exceeds the required return
is less than the payback period
equals the profitability index
Answer: C — exceeds the required return
Question: Which one of the following is the best example of mutually exclusive projects?
Answer Options:
Opening two stores in different cities
Running two advertisements at the same time
Using one machine to make Product A or Product B, but not both at the same time
Selling both bonds and stock
Producing two products from separate divisions
Answer: C — Using one machine to make Product A or Product B, but not both at the same time
Question: Conventional cash flows are characterized by:
Answer Options:
multiple sign changes over time
one or more initial inflows followed by only outflows
an initial outflow followed by only inflows
no initial investment
equal annual cash flows
Answer: C — an initial outflow followed by only inflows
Question: A project’s IRR is below the required return. Based on the IRR rule, the project should be:
Answer Options:
accepted
rejected
accepted only if PI exceeds 1
accepted only if payback is short
accepted only if NPV equals zero
Answer: B — rejected
Question: A project with a positive NPV will, all else constant:
Answer Options:
decrease the value of the firm
leave the value of the firm unchanged
increase the value of the firm by the amount of the NPV
always have a short payback period
always have an IRR above 20 percent
Answer: C — increase the value of the firm by the amount of the NPV