Question: An independent project with a profitability index of 0.94 should be:

Answer Options:
accepted because PI is positive
accepted because PI is less than 1
rejected because PI is less than 1
rejected only if payback exceeds one year
accepted if MIRR is positive

Answer: C — rejected because PI is less than 1

Question: The modified internal rate of return (MIRR) assumes positive project cash flows are reinvested at the:

Answer Options:
project’s IRR
coupon rate
current yield
reinvestment rate specified for the project
inflation rate

Answer: D — reinvestment rate specified for the project

Question: When capital is rationed, which method can be especially useful for ranking projects by value created per dollar invested?

Answer Options:
Payback
Profitability index
Average accounting return
Discounted payback
Dividend growth model

Answer: B — Profitability index

Question: For independent projects with conventional cash flows, the IRR and NPV methods will generally:

Answer Options:
always conflict
always be unusable
give the same accept-reject decision
rank mutually exclusive projects identically
ignore project scale

Answer: C — give the same accept-reject decision

Question: One major weakness of the payback rule is that it:

Answer Options:
uses discounted cash flows
ignores cash flows occurring after the cutoff date
is difficult to compute
requires market values
always accepts negative NPV projects

Answer: B — ignores cash flows occurring after the cutoff date

Question: The discounted payback rule improves on the regular payback rule by:

Answer Options:
including average book value
using accounting income instead of cash flows
considering the time value of money
including only terminal cash flows
eliminating the cutoff period

Answer: C — considering the time value of money

Question: The denominator in the average accounting return calculation is generally:

Answer Options:
initial market value
average book value
present value of inflows
future value of outflows
net working capital

Answer: B — average book value

Question: A project costs $14,000 and has expected cash inflows of $4,200, $5,100, $4,600, and $3,900 over the next four years, respectively. What is the payback period?

Answer Options:
2.45 years
2.87 years
3.03 years
3.57 years
4.00 years

Answer: C — 3.03 years

Question: A project costs $15,000 and has expected cash inflows of $5,400, $6,100, $5,900, and $4,800 over the next four years, respectively. If the discount rate is 9.5 percent, what is the discounted payback period?

Answer Options:
2.98 years
3.15 years
3.57 years
Never
2.45 years

Answer: B — 3.15 years

Question: A project has an initial cost of $55,000 and expected inflows of $17,000, $21,000, $25,000, and $19,000 over the next four years. If the discount rate is 11 percent, what is the NPV?

Answer Options:
$8,155.06
$11,262.91
-$1,952.40
$3,277.66
$15,874.22

Answer: A — $8,155.06

Question: A project has an initial cost of $42,000 and expected inflows of $15,000, $18,000, and $16,000 in Years 1 through 3. If the discount rate is 10 percent, what is the profitability index?

Answer Options:
1.08
1.00
0.92
0.97
1.14

Answer: D — 0.97

Question: A project costs $74,200 and has expected cash inflows of $23,900, $34,700, and $40,200 in Years 1 through 3. What is the project’s IRR?

Answer Options:
11.88%
14.44%
19.89%
10.48%
7.81%

Answer: B — 14.44%

Question: A project has cash flows of -$251,000, $127,400, $209,300, and -$46,000 in Years 0 through 3. If both the finance rate and reinvestment rate are 12.5 percent, what is the MIRR?

Answer Options:
14.44%
11.33%
11.88%
8.04%
19.89%

Answer: C — 11.88%