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FINANCE 3200 Chapter 8 Exam Questions and Answers 100%Correct/Verified New Update 2022/2023
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Net Present Value and Other Investment Criteria I. DEFINITIONS The difference between the market value of an investment and its cost is the: A) Net present value. B) Internal rate of return. C) Payback period. D) Profitability index. E) Discounted payback period. The process of valuing an investment by determining the present value of its future cash flows is called (the): A) Constant dividend growth model. B) Discounted cash flow valuation. C) Average accounting valuation. D) Expected earnings model. E) Capital Asset Pricing Model. The net present value (NPV) rule can be best stated as: A) An investment should be accepted if, and only if, the NPV is exactly equal to zero. B) An investment should be rejected if the NPV is positive and accepted if it is negative. C) An investment should be accepted if the NPV is positive and rejected if
its is negative. D) An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted. The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the: A) Net present value. B) Internal rate of return. C) Payback period. D) Profitability index. E) Discounted payback period. The payback rule can be best stated as: A)An investment is acceptable if its calculated payback period is less than some prespecified number of years. B)An investment should be accepted if the payback is positive and rejected if it is negative. C)An investment should be rejected if the payback is positive and accepted if it is negative. D) An investment is acceptable if its calculated payback period is greater than some prespecified number of years. An investment's average net income divided by its average book value is the: A)Net present value. B)Internal rate of return.
The possibility that more than one discount rate will make the NPV of an investment zero is called the problem. A)net present value profiling B)operational ambiguity C)mutually exclusive investment decisions D)issues of scale E)multiple rates of return A situation in which taking one investment prevents the taking of another is called: A)Net present value profiling. B)Operational ambiguity. C)Mutually exclusive investment decisions. D)Issues of scale. E)Multiple rates of return. The present value of an investment's future cash flows divided by its intial cost is the: A) Net present value. B) Internal rate of return. C) Average accounting return. D) Profitability index. E) Payback period.
The profitability index (PI) rule can be best stated as:
A) internal rate of return B) payback period C) average accounting return D) net present value E) profitability index Which of the following decision rules is best for evaluating projects for which cash flows beyond a specified point in time, and the time value of money, can both be ignored? A)Payback B)Net present value C)Average accounting return D)Profitability index E)Internal rate of return Which of the following decision rules has the advantage that the information needed for the calculation is readily available? A)Net present value B)Internal rate of return C)Average accounting return D)Payback period E)Profitability index Which of the following calculations ignores the impact of the time value of money?
I. Payback II. Average accounting return III. Profitability index A)I only B)II only C)III only D)I and II only E)II and III only Which of the following is considered to be a redeeming feature of average accounting return analysis? A) It incorporates time value of money. B) Estimation of the appropriate cutoff rate is straightforward and easy. C) Calculation relies on net income and not cash flows or asset values. D) Calculation relies on book values and not market values or cash flows. E) It is relatively easy to calculate. An investment generates $1.10 in present value benefits for each dollar of invested costs. This conclusion was most likely reached by calculating the project's: A) Net present value B) Profitability index C) Internal rate of return D) Payback period
E) is immaterial to the shareholder The use of which of the following would lead to correct decisions when comparing mutually exclusive investments? I. Profitability index II. Net present value III. Average accounting return A) I only B) II only C) III only D) I and II only E) I and III only To find the we begin by setting the NPV of a project equal to zero. A)payback period B)net present value C)internal rate of return D)profitability index E)average accounting return You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration. This is an example of a business decision involving projects. A)mutually exclusive
B)Independent C)Working capital D)Positive NPV E)crossover Which of the following investment criteria is the least consistent relative to the goal of maximizing shareholder wealth? A) Discounted payback B) Average accounting return C) Profitability index D) Net present value E) Internal rate of return You have $10,000 to invest and have two potential projects brought to your attention, one of which costs $2,000 and the other costs $4,000. This is an example of a business decision involving? A) mutually exclusive B) independent projects C) working capital D) positive NPV E) crossover
For a project with conventional cash flows, if PI is greater than 1, then: A) The IRR is equal to the firm's required rate of return. B) The project does not pay back on a discounted payback basis. C) The NPV is greater than zero. D) The payback period is faster than the firm's required cutoff point. E) The AAR exceeds the IRR. In comparing two projects using an NPV profile, at the point where the net present value of the projects involved are equal,. A) the IRR of each is equal to zero B) the IRR of each is equal to the cost of capital C) the discount rate that equates them is called the crossover rate D) the projects both have NPVs equal to zero E) the AAR exceeds the cost of capital Which of the following methods does not involve an interest rate from any source? A) Payback period B) Profitability index C) Net present value D) Internal rate of return E) Discounted payback
Which of the following questions are addressed in the capital budgeting process? I. What products or services will we offer or sell? II. In what markets will we compete? III. Where will we raise the capital needed to purchase our investment products? A) I only B) III only C) I and II only D) I and III only E) I, II, and III If a project with conventional cash flows has an IRR less than the required return, then: A) The profitability index is less than one. B) The IRR must be zero. C) The AAR is greater than the required return. D) The payback period is less than the maximum acceptable period. E) The NPV is positive. A firm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash flows occurring in the distant future, and avoid projects that require a large amount of research and development expenses. This firm may be justified in using the to evaluate its projects.
III. Payback A) I only B) III only C) I and II only D) I and III only E) I, II, and III According to recent surveys of business managers in practice, which investment criteria rule is used the least? A) NPV B) IRR C) AAR D) Payback period