CHAPTER 9
Net Present Value and Other Investment Criteria
I. DEFINITIONS
NET PRESENT VALUE
a 1. The difference between the present 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.
DISCOUNTED CASH FLOW VALUATION
b 2. 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.
NET PRESENT VALUE RULE
c 3. Which one of the following statements concerning net present value (NPV) is correct? a. An investment should be accepted if, and only if, the NPV is exactly equal to zero. b. An investment should be accepted only if the NPV is equal to the initial cash flow. c. An investment should be accepted if the NPV is positive and rejected if it 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.
e. Any project that has positive cash flows for every time period after the initial
investment should be accepted.
PAYBACK
c 4. The length of time required for an investment to generate cash flows sufficient to
recover the initial cost of the investment is called the:
a. net present value. b. internal rate of return. c. payback period. d. profitability index. e. discounted cash period.
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PAYBACK RULE
a 5. Which one of the following statements is correct concerning the payback period? a. An investment is acceptable if its calculated payback period is less than some pre-specified period of time. 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 pre-specified period of time. e. An investment should be accepted any time the payback period is less than the
discounted payback period, given a positive discount rate.
DISCOUNTED PAYBACK
e 6. The length of time required for a project’s discounted cash flows to equal the initial
cost of the project is called the:
a. net present value. b. internal rate of return. c. payback period. d. discounted profitability index. e. discounted payback period.
DISCOUNTED PAYBACK RULE
d 7. The discounted payback rule states that you should accept projects: a. which have a discounted payback period that is greater than some pre-specified period
of time.
b. if the discounted payback is positive and rejected if it is negative. c. only if the discounted payback period equals some pre-specified period of time. d. if the discounted payback period is less than some pre-specified period of time. e. only if the discounted payback period is equal to zero.
AVERAGE ACCOUNTING RETURN
c 8. An investment’s average net income divided by its average book value defines the
average:
a. net present value. b. internal rate of return. c. accounting return. d. profitability index. e. payback period.
AVERAGE ACCOUNTING RETURN RULE
b 9. An investment is acceptable if its average accounting return (AAR): a. is less than a target AAR. b. exceeds a target AAR. c. exceeds the firm’s return on equity (ROE). d. is less than the firm’s return on assets (ROA). e. is equal to zero and only when it is equal to zero.
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INTERNAL RATE OF RETURN
b. 10. The discount rate that makes the net present value of an investment exactly equal to zero is called the: a. external rate of return. b. internal rate of return. c. average accounting return. d. profitability index. e. equalizer.
INTERNAL RATE OF RETURN RULE
d 11. An investment is acceptable if its IRR: a. is exactly equal to its net present value (NPV). b. is exactly equal to zero. c. is less than the required return. d. exceeds the required return. e. is exactly equal to 100 percent.
MULTIPLE RATES OF RETURN
e 12. The possibility that more than one discount rate will make the NPV of an investment
equal to zero is called the _____ problem.
a. net present value profiling b. operational ambiguity c. mutually exclusive investment decision d. issues of scale e. multiple rates of return
MUTUALLY EXCLUSIVE PROJECTS
c 13. A situation in which accepting one investment prevents the acceptance of another
investment is called the:
a. net present value profile. b. operational ambiguity decision. c. mutually exclusive investment decision. d. issues of scale problem. e. multiple choices of operations decision.
PROFITABILITY INDEX
d. 14. The present value of an investment’s future cash flows divided by the initial cost of the
investment is called the:
a. net present value. b. internal rate of return. c. average accounting return. d. profitability index. e. profile period.
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PROFITABILITY INDEX RULE
a 15. An investment is acceptable if the profitability index (PI) of the investment is: a. greater than one. b. less than one. c. greater than the internal rate of return (IRR). d. less than the net present value (NPV). e. greater than a pre-specified rate of return.
II. CONCEPTS
CAPITAL BUDGETING DECISIONS
a 16. Capital budgeting decisions generally: a. have long-term effects on a firm. b. are of short-duration. c. are easy to revise once implemented. d. focus solely on whether or not a particular asset should be purchased. e. have minimal effects on a firm’s operations.
CAPITAL BUDGETING DECISIONS
e 17. Which of the following are capital budgeting decisions? I. determining whether to sell bonds or issue stock II. deciding which product markets to enter III. deciding whether or not to purchase a new piece of equipment IV. determining which, if any, new products should be produced a. I only b. III only c. II and IV only d. I, III, and IV only e. II, III, and IV only
NET PRESENT VALUE
d 18. All else constant, the net present value of a project increases when: a. the discount rate increases. b. each cash inflow is delayed by one year. c. the initial cost of a project increases. d. the rate of return decreases. e. all cash inflows occur during the last year of a project’s life instead of periodically throughout the life of the project.
NET PRESENT VALUE
a 19. The primary reason that company projects with positive net present values are considered acceptable is that: a. they create value for the owners of the firm. b. the project’s rate of return exceeds the rate of inflation. c. they return the initial cash outlay within three years or less. d. the required cash inflows exceed the actual cash inflows. e. the investment’s cost exceeds the present value of the cash inflows.
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NET PRESENT VALUE
d 20. If a project has a net present value equal to zero, then: I. the present value of the cash inflows exceeds the initial cost of the project. II. the project produces a rate of return that just equals the rate required to accept the project. III. the project is expected to produce only the minimally required cash inflows. IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value. a. II and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, and III only
NET PRESENT VALUE
b 21. When computing the net present value of a project, the net amount received from salvaging the fixed assets used in the project is: a. subtracted from the initial cash outlay. b. included in the final cash flow of the project. c. excluded from the analysis since it occurs only when the project ends. d. subtracted from the original cost of the assets. e. added to the net present value of the project to determine if the project is acceptable.
NET PRESENT VALUE d 22. Net present value: I. when applied properly, can accurately predict the cash flows that will occur if a project is implemented. II. is highly independent of the rate of return assigned to a particular project. III. is the preferred method of analyzing a project even though the cash flows are only estimates. IV. is affected by the timing of each and every cash flow related to a project. a. I only b. III only c. II and IV only d. III and IV only e. I, III, and IV only
NET PRESENT VALUE b 23. Net present value: a. cannot be used when deciding between two mutually exclusive projects. b. is more useful to decision makers than the internal rate of return when comparing different sized projects. c. is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. d. is computed the same as present value when using excel spreadsheets to analyze a project. e. is very similar in its methodology to the average accounting return.
公司理财 习题库 Chap009
