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Finance Flashcards

business finance chapter 8

The net present value of an investment represents the difference between the investment’s: cost and its market value
Net present value involves discounting an investment’s future cash flows
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to recoup its initial cost
The average net income of a project divided by the project’s average book value is referred to as the project’s: average accounting return
The internal rate of return is the discount rate that results in a zero net present value for the project.
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? discount rate
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as multiple rates of return
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? mutually exclusive
Which one of the following can be defined as a benefit-cost ratio? probability index
Which one of the following indicates that a project is expected to create value for its owners? postive net present value
The net present value Decreases as the requires rate of return increases
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? net present value
Which one of the following statements is correct? If the internal rate of return equals the required return, the net present value will equal zero.
If an investment is producing a return that is equal to the required return, the investment’s net present value will be zero
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. profitability index less than 1.0
Which one of the following indicators offers the best assurance that a project will produce value for its owners? positive NPV
Which one of the following statements is correct? The payback period ignores the time value of money
Generally speaking, payback is best used to evaluate which type of projects? low costs, short term
Which one of the following is the primary advantage of payback analysis? ease of use
The payback method of analysis ignores which one of the following? time value of money
Which one of the following methods of analysis ignores the time value of money? payback
Which one of the following methods of analysis has the greatest bias toward short-term projects? payback
Which one of the following methods of analysis ignores cash flows? average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? average accounting return
The average accounting return: measures profitability rathe than cash return
Which one of the following analytical methods is based on net income? average accounting return
Which one of the following is most closely related to the net present value profile? interest rate of return
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? The investment is mutually exclusive with another investment of a different size.
Which one of the following statements is correct? Assume cash flows are conventional. When the internal rate of return is greater than the required return, the net present value is positive.
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. Internal rate of return that exceeds the required return
The modified internal rate of return is specifically designed to address the problems associated with: unconventional cash flow
The reinvestment approach to the modified internal rate of return: compounds all the cash flows except for the initial cash flow to the end of the project
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? modified internal rate of return
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? net present value
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? The net present value of Project A equals that of Project B, but generally does not equal zero.
Which one of the following will occur when the internal rate of return equals the required return?
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The net present value is equal to zero
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? The firm should increase in value each time the firm accepts a new project.
If a project with conventional cash flows has a profitability index of 1.0, the project will: have an internal rate of return that equals the required return.
The profitability index reflects the value created per dollar invested
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Internal rate of return and net present value
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? net present value
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? profitability index
In which one of the following situations would the payback method be the preferred method of analysis? Investment funds available only for a limited period of time
Which one of the following statements is correct? The payback method is biased toward short-term projects
Which one of the following indicates that an independent project is definitely acceptable? Profitability index greater than 1.0

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