# Finance 327 Chapter 9

 A project has an initial cost of \$27,400 and a market value of \$32,600. What is the difference between these two values called? net present value Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project’s anticipated cash flows? discounted cash flow valuation The length of time a firm must wait to recoup the money it has invested in a project is called the: payback period The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the: discounted payback period A project’s average net income divided by its average book value is referred to as the project’s average: accounting return The internal rate of return is defined as the: discount rate which causes the net present value of a project to equal zero You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project’s cash flows. What is the name given to this graph? NPV profile There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: have multiple rates of return If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: mutually exclusive The present value of an investment’s future cash flows divided by the initial cost of the investment is called the: profitability index A project has a net present value of zero. Which one of the following best describes this project? The project’s cash inflows equal its cash outflows in current dollar terms Which one of the following will decrease the net present value of a project? increasing the project’s initial cost at time zero Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? net present value If a project has a net present value equal to zero, then: the project earns a return exactly equal to the discount rate Rossiter Restaurants is analyzing a project that requires \$180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of \$45,000. How is the \$45,000 salvage value handled when computing the net present value of the project? cash inflow in the final year of the project Which one of the following increases the net present value of a project? an increase in the aftertax salvage value of the fixed assets Net present value: is the best method of analyzing mutually exclusive projects Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? modified internal rate of return that exceeds the required return Why is payback often used as the sole method of analyzing a proposed small project? It is the only method where the benefits of the analysis outweigh the costs of that analysis Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point II and III only Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of \$6,800. Project B has an expected payback period of 3.1 years with a net present value of \$28,400. Which projects should be accepted based on the payback decision rule? Project A only A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? The cash flow in year two is valued just as highly as the cash flow in year one A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule. II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project’s internal rate of return must equal the required return. I and II only Which one of the following statements related to payback and discounted payback is correct? Payback is used more frequently even though discounted payback is a better method Applying the discounted payback decision rule to all projects may cause: some positive net present value projects to be rejected Which one of the following correctly applies to the average accounting rate of return? It can be compared to the return on assets ratio Which one of the following is an advantage of the average accounting return method of analysis? easy availability of information needed for the computation Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values I, II, and IV only Which one of the following statements related to the internal rate of return (IRR) is correct? The IRR is equal to the required return when the net present value is equal to zero The internal rate of return: is easy to understand Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project’s internal rate of return? condensing the firm’s cash inflows into fewer years without lowering the total amount of those inflows The internal rate of return is: tedious to compute without the use of either a financial calculator or a computer Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project’s cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project’s cash flows affect the value of the project’s IRR I, II, III, and IV Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct? You cannot determine which project should be accepted given the information provided You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should: always accept project A if the required return exceeds the crossover rate Graphing the crossover point helps explain: how decisions concerning mutually exclusive projects are derived A project with financing type cash flows is typified by a project that has which one of the following characteristics? a cash inflow at time zero Which of the following statements generally apply to the cash flows of a financing type project? I. nonconventional cash flows II. cash outflows exceed cash inflows prior to any time value adjustments III. cash for services rendered is received prior to the cash that is spent providing the services IV. the total of all cash flows must equal zero on an unadjusted basis I, II, and III Which one of the following statements is correct in relation to independent projects? A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return The profitability index is most closely related to which one of the following? net present value Roger’s Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? assumes the firm has sufficient funds to undertake both projects Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? profitability index When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: accepted because the profitability index is greater than 1 Which one of the following is the best example of two mutually exclusive projects? waiting until a machine finishes molding Product A before being able to mold Product B Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant’s property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? net present value Mutually exclusive projects are best defined as competing projects which: both require the total use of the same limited resource The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? required rate of return Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. project B and reject project A based on their net present values Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows? The payback decision rule could override the net present value decision rule should cash availability be limited In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis. I, II, and IV only Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than \$1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? payback Which two methods of project analysis were the most widely used by CEO’s as of 1999? internal rate of return and net present value Which two methods of project analysis are the most biased towards short-term projects? payback and discounted payback Western Beef Exporters is considering a project that has an NPV of \$32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? The payback decision rule could override the accept decision indicated by the net present value You are considering a project with conventional cash flows and the following characteristics:Internal rate of return 11.63%Profitability ratio 1.04Net present value \$987Payback period 2.98 yearsWhich of the following statements is correct given this information? I. The discount rate used in computing the net present value was less than 11.63 percent. II. The discounted payback period must be less than 2.98 years. III. The discount rate used in the computation of the profitability ratio was 11.63 percent. IV. This project should be accepted as the internal rate of return exceeds the required return. I, II, and IV only Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return I and III only
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