TestBank CHAP5 Corporate Finance by Ross 10th

-Any project that has positive cash flows for every time period after the initial investment should beaccepted.. Câu hỏi số 3 The length of time required for an investment to generate ca

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Chapter 5

Câu hỏi số 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

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 beaccepted

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

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● E -discounted cash period.

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

discountedpayback period, given a positive discount rate

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:

● D -discounted profitability index.

● E -discounted payback period.

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.

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● 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.

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

● A -external rate of return

● C -average accounting return

● D -profitability index

● E -equalizer

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%.

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

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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.

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

● C -average accounting return.

● E -profile period.

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.

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All else constant, the net present value of a typical investment 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 thelife of the project

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.

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

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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 not an as widely used tool as payback and discounted payback.

● E -is very similar in its methodology to the average accounting return.

Payback is frequently used to analyze independent projects because:

● A -it considers the time value of money.

● B -all relevant cash flows are included in the analysis.

● C -it is easy and quick to calculate.

● D -it is the most desirable of all the available analytical methods from a financial

perspective

● E -it produces better decisions than those made using either NPV or IRR.

The advantages of the payback method of project analysis include the:

I application of a discount rate to each separate cash flow.

II bias towards liquidity.

III ease of use.

IV arbitrary cutoff point.

● A -I and II only

● B -I and III only

● C -II and III only

● D -II and IV only

● E -II, III, and IV only

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All else equal, the payback period for a project will decrease whenever the:

● A -initial cost increases.

● B -required return for a project increases.

● C -assigned discount rate decreases.

● D -cash inflows are moved earlier in time.

● E -duration of a project is lengthened.

The discounted payback period of a project will decrease whenever the:

● A -discount rate applied to the project is increased.

● B -initial cash outlay of the project is increased.

● C -time period of the project is increased.

● D -amount of each project cash inflow is increased.

● E -costs of the fixed assets utilized in the project increase.

The discounted payback rule may cause:

● A -some positive net present value projects to be rejected.

● B -the most liquid projects to be rejected in favor of less liquid projects.

● C -projects to be incorrectly accepted due to ignoring the time value of money.

● D -some projects with negative net present values to be accepted.

● E -Both some positive net present value projects to be rejected; and some projects with negative net present values to be accepted.

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The internal rate of return (IRR):

I rule states that a typical investment project with an IRR that is less than the required rate should be accepted.

II is the rate generated solely by the cash flows of an investment.

III is the rate that causes the net present value of a project to exactly equal zero.

IV can effectively be used to analyze all investment scenarios.

● A -I and IV only

● B -II and III only

● C -I, II, and III only

● D -II, III, and IV only

● E -I, II, III, and IV

Câu hỏi số 22*

The internal rate of return (IRR):

I rule states that a project is acceptable when the IRR exceeds the required rate of return.

II ignores the initial investment in a project.

III is the rate that causes the net present value of a project to equal zero.

IV can effectively be used to analyze all investment scenarios.

A.I and III only

B.II and IV only

C.I and II only

D.II, III, and IV only

E.I, II, III, and IV

The internal rate of return for a project will increase if:

● A -the initial cost of the project can be reduced.

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● B -the total amount of the cash inflows is reduced.

● C -each cash inflow is moved such that it occurs one year later than originally projected.

● D -the required rate of return is reduced.

● E -the salvage value of the project is omitted from the analysis.

The internal rate of return is:

● A -more reliable as a decision making tool than net present value whenever you are

considering mutually exclusive projects

● B -equivalent to the discount rate that makes the net present value equal to one.

● C -difficult to compute without the use of either a financial calculator or a

computer.

● D -dependent upon the interest rates offered in the marketplace.

● E -a better methodology than net present value when dealing with unconventional cash

flows

The internal rate of return tends to be:

● A -easier for managers to comprehend than the net present value.

● B -extremely accurate even when cash flow estimates are faulty.

● C -ignored by most financial analysts.

● D -used primarily to differentiate between mutually exclusive projects.

● E -utilized in project analysis only when multiple net present values apply.

You are trying to determine whether to accept project A or project B These projects are mutually exclusive As a part of your analysis, you should compute the incremental IRR by determining.

● A -the internal rate of return for the cash flows of each project.

● B -the net present value of each project using the internal rate of return as the discount

rate

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● C -the discount rate that equates the discounted payback periods for each project.

● D -the discount rate that makes the net present value of each project equal to 1.

● E -the internal rate of return for the differences in the cash flows of the two

projects.

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

● A -how the incremental IRR varies with changes in the discount rate

● B -how decisions concerning mutually exclusive projects are derived.

● C -how the duration of a project affects the decision as to which project to accept

● D -how the payback period and the initial cash outflow of a project are related

● E -how the profitability index and the net present value are related

The profitability index is closely related to:

● A -payback.

● B -discounted payback.

● C -average accounting return.

● D -net present value.

● E -internal rate of return.

Analysis using the profitability index:

● A -frequently conflicts with the accept and reject decisions generated by the application

of the net present value rule

● B -is useful as a decision tool when investment funds are limited.

● C -cannot be used to aid capital rationing.

● D -utilizes the same basic variables as those used in the average accounting return.

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● E -produces results which typically are difficult to comprehend or apply.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

● A -accepted because the internal rate of return is positive.

● B -accepted because the profitability index is greater than 1.

● C -accepted because the profitability index is negative.

● D -rejected because the internal rate of return is negative.

● E -rejected because the net present value is negative.

Which one of the following is the best example of two mutually exclusive projects?

● A -Planning to build a warehouse and a retail outlet side by side.

● B -Buying sufficient equipment to manufacture both desks and chairs simultaneously.

● C -Using an empty warehouse for storage or renting it entirely out to another firm.

● D -Using the company sales force to promote sales of both shoes and socks.

● E -Buying both inventory and fixed assets using funds from the same bond issue.

The Liberty Co is considering two projects Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center When trying to decide whether to build the book outlet or the restaurant, management should rely most heavily on the

analysis results from the _ method of analysis.

● A -profitability index

● B -internal rate of return

● C -payback

● D -net present value

● E -accounting rate of return

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recommendation given this information His recommendation should be to accept:

● A -project B because it has the shortest payback period.

● B -both projects as they both have positive net present values.

● C -project A and reject project B based on their net present values.

● D -project B and reject project A based on other criteria not mentioned in the problem.

● E -project B and reject project A based on both the payback period and the average

● B -You need to use the other methods since conventional practice dictates that you only

accept projects after you have generated three accept indicators

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● C -You need to use other methods because the net present value method is unreliable

when a project has unconventional cash flows

● D -The internal rate of return must always indicate acceptance since this is the best

method from a financial perspective

● E -The discounted payback method must always be computed to determine if a project

returns apositive cash flow since NPV does not measure this aspect of a project

In actual practice, managers may use the:

I IRR because the results are easy to communicate and understand.

II payback because of its simplicity.

III net present value because it is considered by many to be the best method of analysis.

● B -II and III only

● C -I and III only

● D -I, II, and III

● E -None of these

No matter how many forms of investment analysis you do:

● A -the actual results from a project may vary significantly from the expected results.

● B -the internal rate of return will always produce the most reliable results.

● C -a project will never be accepted unless the payback period is met.

● D -the initial costs will generally vary considerably from the estimated costs.

● E -only the first three years of a project ever affect its final outcome.

Which of the following methods of project analysis are biased towards short-term projects?

I Internal rate of return

II Net present value

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III Payback

IV Discounted payback

● B -III and IV only

● C -II and III only

● D -I and IV only

● E -II and IV only

If a project is assigned a required rate of return equal to zero, then:

● A -the timing of the project's cash flows has no bearing on the value of the project.

● B -the project will always be accepted.

● C -the project will always be rejected.

● D -whether the project is accepted or rejected will depend on the timing of the cash

flows

● E -the project can never add value for the shareholders.

You are considering a project with the following data:

Internal rate of return 8.7%

Profitability ratio 98

Net present value -$393

Payback period 2.44 years

Required return 9.5%

Which one of the following is correct given this information?

● A -The discount rate used in computing the net present value must have been less than

8.7%

● B -The discounted payback period will have to be less than 2.44 years.

● C -The discount rate used to compute the profitability ratio was equal to the internal rate

of return

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● D -This project should be accepted based on the profitability ratio.

● E -This project should be rejected based on the internal rate of return.

Accepting positive NPV projects benefits the stockholders because:

● A -it is the most easily understood valuation process.

● B -the present value of the expected cash flows are equal to the cost.

● C -the present value of the expected cash flows are greater than the cost.

● D -it is the most easily calculated.

● E -None of these.

Which of the following does not characterize NPV?

● A -NPV does not explicitly incorporate risk into the analysis.

● B -NPV incorporates all relevant cash flow information.

● C -NPV uses all of the project's cash flows.

● D -NPV discounts all future cash flows.

● E -Using NPV will lead to decisions that maximize shareholder wealth.

The payback period rule:

● A -discounts cash flows.

● B -ignores initial cost.

● C -always uses all possible cash flows in its calculation.

● D -Both discounts cash flows; and always uses all possible cash flows in its calculation.

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The payback period rule accepts all investment projects in which the payback period for the cash flows is:

● A -greater than one.

● B -greater than the cutoff point.

● C -less than the cutoff point.

● D -positive.

The payback period rule is a convenient and useful tool because:

● A -it provides a quick estimate of how rapidly the initial investment will be recouped.

● B -results of a short payback rule decision will be quickly seen.

● C -it does not have to take into account time value of money.

● D -All of these.

The discounted payback period rule:

● A -considers the time value of money.

● B -discounts the cutoff point.

● C -ignores uncertain cash flows.

● D -is preferred to the NPV rule.

The payback period rule:

● A -determines a cutoff point so that all projects accepted by the NPV rule will be

accepted by the payback period rule

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● B -determines a cutoff point so that depreciation is just equal to positive cash flows in

the payback year

● C -requires an arbitrary choice of a cutoff point.

● D -varies the cutoff point with the interest rate.

● E -Both determines a cutoff point so that all projects accepted by the NPV rule will be

accepted by the payback period rule; and varies the cutoff point with the interest rate

Modified internal rate of return:

● A -handles the multiple IRR problem by combining cash flows until only one change in

sign change remains

● B -requires the use of a discount rate.

● C -does not require the use of a discount rate.

● D -Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and requires the use of a discount rate.

● E -Both handles the multiple IRR problem by combining cash flows until only one

change in signchange remains; and does not require the use of a discount rate

A mutually exclusive project is a project whose:

● A -acceptance or rejection has no effect on other projects.

● B -NPV is always negative.

● C -IRR is always negative.

● D -acceptance or rejection affects other projects.

● E -cash flow pattern exhibits more than one sign change.

The two fatal flaws of the internal rate of return rule are:

● A -arbitrary determination of a discount rate and failure to consider initial expenditures.

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● B -arbitrary determination of a discount rate and failure to correctly analyze mutually

exclusive investment projects

● C -arbitrary determination of a discount rate and the multiple rate of return problem.

● D -failure to consider initial expenditures and failure to correctly analyze mutually

exclusive investment projects

● E -failure to correctly analyze mutually exclusive investment projects and the multiple rate of returnproblem.

A project will have more than one IRR if:

● A -the IRR is positive.

● B -the IRR is negative.

● C -the NPV is zero.

● D -the cash flow pattern exhibits more than one sign change.

● E -the cash flow pattern exhibits exactly one sign change.

Using internal rate of return, a conventional project should be accepted if the internal rate

of return is:

● A -equal to the discount rate.

● B -greater than the discount rate.

● C -less than the discount rate.

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● A -the discount rate that makes the NPV equal to zero.

● B -the difference between the market rate of interest and the NPV.

● C -the market rate of interest less the risk-free rate.

● D -the project acceptance rate set by management.

The problem of multiple IRRs can occur when:

● A -there is only one sign change in the cash flows.

● B -the first cash flow is always positive.

● C -the cash flows decline over the life of the project.

● D -there is more than one sign change in the cash flows.

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

● A -the discount rate and scale problems.

● B -timing and scale problems.

● C -the discount rate and timing problems.

● D -scale and reversing flow problems.

● E -timing and reversing flow problems.

If there is a conflict between mutually exclusive projects due to the IRR, one should:

● A -drop the two projects immediately.

● B -spend more money on gathering information.

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● C -depend on the NPV as it will always provide the most value.

● D -depend on the payback because it does not suffer from these same problems.

The profitability index is the ratio of:

● A -average net income to average investment.

● B -internal rate of return to current market interest rate.

● C -net present value of cash flows to internal rate of return.

● D -net present value of cash flows to return on equity.

● E -present value of cash flows to initial investment cost.

Which of the following statement is true?

● A -One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate.

● B -One must know the discount rate to compute the IRR of a project but one can

compute the NPV without referring to the discount rate

● C -Payback accounts for time value of money.

● D -There will always be one IRR regardless of cash flows.

● E -Return on equity is the ratio of total assets to total net income.

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● B -Internal Rate of Return; Net Present Value

● C -Net Present Value; Payback Period

● D -Modified Internal Rate of Return; Internal Rate of Return

● E -Modified Internal Rate of Return; Net Present Value

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