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Finance Flashcards

Finance Chapter 8

Which one of the following statements is correct? Assume cash flows are conventional. A. The profitability index will be greater than 1.0 when the net present value is negative.B. If the IRR exceeds the required return, the profitability index will be less than 1.0.C. Projects with conventional cash flows have multiple internal rates of return.D. If two projects are mutually exclusive, you should select the project with the shortest payback period.E. When the internal rate of return is greater than the required return, the net present value is positive. E. When the internal rate of return is greater than the required return, the net present value is positive.
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. What term best describes the relationship between Project A and Project B? Mutually Exclusive
Which one of the following statements is correct?A. If the initial cost of a project is increased, the net present value of that project will also increase.B. The net present value is positive when the required return exceeds the internal rate of return.C. If the internal rate of return equals the required return, the net present value will equal zero.D. Net present value is equal to an investment’s cash inflows discounted to today’s dollars.E. The net present value is a measure of profits expressed in today’s dollars. C. If the internal rate of return equals the required return, the net present value will equal zero.
What is most closely related to the net present value profile? IRR
The net present value: decreases as the required rate of return increases.
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?A. The initial cash flow is negative.B. The investment is mutually exclusive with another investment of a different size.C. One of the time periods within the investment period has a cash flow equal to zero.D. The investment has cash inflows that occur after the required payback period.E. The cash flows are conventional. B. The investment is mutually exclusive with another investment of a different size.
The internal rate of return is the: discount rate that results in a zero net present value for the project.
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 is expected to create value for its owners?A. Profitability index less than 1.0B. Payback period greater than the requirementC. Internal rate of return that is less than the requirementD. Positive average accounting rate of returnE. Positive net present value E. Positive net present value
Which one of the following statements is correct?A. The payback rule states that you should accept a project if the payback period is less than one year.B. A longer payback period is preferred over a shorter payback period.C. The payback rule is biased in favor of long-term projects.D. The payback period ignores the time value of money.E. The payback period considers the timing and amount of all of a project’s cash flows. D. The payback period ignores the time value of money.

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