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Consider an investment with an initial cost of $20,000 and is expected to last for 5 years.The expected cash flow in years 1 and 2 are $5,000,in years 3 and 4 are $5,500 and in year 5 is $1,000.The total cash inflow is expected to be $22,000 or an average of $4,400 per year.Compute the payback period in years.


A) 3.18 years
B) 3.82 years
C) 4.00 years
D) 4.55 years
E) None of the above.

F) A) and B)
G) A) and E)

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An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not? An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not? A) Yes; because the IRR exceeds the required return by about 0.39% B) Yes; because the IRR is less than the required return by about 3.9% C) Yes; because the IRR is positive D) No; because the IRR exceeds the required return by about 3.9% E) No; because the IRR is 9.89%


A) Yes; because the IRR exceeds the required return by about 0.39%
B) Yes; because the IRR is less than the required return by about 3.9%
C) Yes; because the IRR is positive
D) No; because the IRR exceeds the required return by about 3.9%
E) No; because the IRR is 9.89%

F) B) and C)
G) A) and E)

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Given the goals of firm value and shareholder wealth maximization,we have stressed the importance of net present value (NPV).And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

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This is an open-ended question which all...

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Based upon the average accounting return (AAR) and the information provided in the problem,you:


A) cannot compute the AAR of either project.
B) should accept project A because the AAR exceeds the required rate.
C) should accept project A because the AAR is less than the required rate.
D) should accept whichever project you prefer as they are equivalent from an AAR perspective.
E) should accept both project A and project B.

F) A) and E)
G) A) and D)

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


A) duration of a project is lengthened.
B) cash inflows are moved earlier in time.
C) assigned discount rate decreases.
D) required return for a project increases.
E) initial cost increases.

F) A) and D)
G) C) and E)

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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

F) A) and E)
G) None of the above

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Which of the following methods of project analysis are biased towards short-term projects? I.internal rate of return II.accounting rate of return III.payback IV.discounted payback


A) I and II only
B) III and IV only
C) II and III only
D) I and IV only
E) II and IV only

F) A) and B)
G) C) and D)

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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.

F) A) and B)
G) C) and D)

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List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

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The advantages of the rule are its close...

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An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.If the cash flow is evenly spread out over the year and the firm can borrow at 10%,the discounted payback period is _____ years.


A) 3
B) 3.2
C) 3.75
D) 4
E) 5

F) A) and B)
G) All of the above

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The profitability index is the ratio of:


A) average net income to average investment.
B) present value of cash flows to initial investment cost.
C) net present value of cash flows to internal rate of return.
D) net present value of cash flows to average accounting return.
E) internal rate of return to current market interest rate.

F) A) and C)
G) A) and B)

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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.

F) A) and B)
G) C) and E)

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Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 7%? Why or why not? Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 7%? Why or why not? A) Yes; because the PI is 1.008 B) Yes; because the PI is .992 C) Yes; because the PI is .999 D) No; because the PI is 1.008 E) No; because the PI is .992


A) Yes; because the PI is 1.008
B) Yes; because the PI is .992
C) Yes; because the PI is .999
D) No; because the PI is 1.008
E) No; because the PI is .992

F) A) and D)
G) A) and C)

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A project will have more than one IRR if:


A) the IRR is negative.
B) the IRR is positive.
C) the NPV is zero.
D) the cash flow pattern exhibits exactly one sign change.
E) the cash flow pattern exhibits more than one sign change.

F) B) and C)
G) A) and E)

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A project has an initial cost of $40,000 and a four-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,200,$3,500,and $2,700 a year for the next four years,respectively.What is the average accounting return?


A) 3.55%
B) 4.13%
C) 4.28%
D) 7.11%
E) 12.00%

F) A) and B)
G) D) and E)

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A project has an initial cost of $2,300.The cash inflows are $300,$500,$900,and $700 over the next four years,respectively.What is the payback period?


A) 2.71 years
B) 2.98 years
C) 3.11 years
D) 3.86 years
E) Never

F) D) and E)
G) A) and C)

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