公司理财(英文版)题库7.doc

CHAPTER 7
Net Present Value and Other Investment Rules

Multiple Choice Questions:

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.

Difficulty level: Easy

NET PRESENT VALUE RULE
c 2. 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.

Difficulty level: Easy

PAYBACK
c 3. 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.

Difficulty level: Easy

PAYBACK RULE
a 4. 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.

Difficulty level: Easy

DISCOUNTED PAYBACK
e 5. 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.

Difficulty level: Easy

DISCOUNTED PAYBACK RULE
d 6. 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.

Difficulty level: Easy

AVERAGE ACCOUNTING RETURN
c 7. 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.

Difficulty level: Easy

AVERAGE ACCOUNTING RETURN RULE
b 8. 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.

Difficulty level: Easy

INTERNAL RATE OF RETURN
b. 9. 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.

Difficulty level: Easy

INTERNAL RATE OF RETURN RULE
d 10. 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.

Difficulty level: Easy

MULTIPLE RATES OF RETURN
e 11. 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

Difficulty level: Medium

MUTUALLY EXCLUSIVE PROJECTS
c 12. 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.

Difficulty level: Easy

PROFITABILITY INDEX
d. 13. 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.

Difficulty level: Easy

PROFITABILITY INDEX RULE
a 14. 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.

Difficulty level: Easy

II. CONCEPTS

NET PRESENT VALUE
d 15. 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.

Difficulty level: Easy

NET PRESENT VALUE
a 16. 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.

Difficulty level: Easy

NET PRESENT VALUE
d 17. 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

Difficulty level: Medium

NET PRESENT VALUE
b 18. 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.

Difficulty level: Easy

PAYBACK
c 19. 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.

Difficulty level: Easy

PAYBACK
c 20. 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

Difficulty level: Medium

PAYBACK
d 21. 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 forward in time.
e. duration of a project is lengthened.

Difficulty level: Medium

DISCOUNTED PAYBACK
d 22. 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 flow is increased.
e. costs of the fixed assets utilized in the project increase.

Difficulty level: Medium

DISCOUNTED PAYBACK
a 23. 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. projects with negative net present values to be accepted.
e. some projects to be accepted which would otherwise be rejected under the payback
rule.

Difficulty level: Easy

INTERNAL RATE OF RETURN
b 24. The internal rate of return (IRR):
I. rule states that a 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

Difficulty level: Medium

INTERNAL RATE OF RETURN
a 25. The internal rate of return for a project will increase if:
a. the initial cost of the project can be reduced.
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.

Difficulty level: Medium

INTERNAL RATE OF RETURN
c 26. 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.

Difficulty level: Medium

INTERNAL RATE OF RETURN
a 27. 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.

Difficulty level: Easy

INCREMENTAL INTERNAL RATE OF RETURN
e 28. You are trying to determine whether to accept project A or project B. These projects
are mutually exclusive. As part of your analysis, you should compute the incremented 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.
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.

Difficulty level: Medium

INCREMENTAL INTERNAL RATE OF RETURN
b 29. Graphing the incremental IRR helps explain:
a. why one project is always superior to another project.
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 net present value and the initial cash outflow of a project are related.
e. how the profitability index and the net present value are related.

Difficulty level: Medium

PROFITABILITY INDEX
d 30. The profitability index is closely related to:
a. payback.
b. discounted payback.
c. the average accounting return.
d. net present value.
e. mutually exclusive projects.

Difficulty level: Easy

PROFITABILITY INDEX
b 31. 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. is useful when trying to determine which one of two mutually exclusive projects
should be accepted.
d. utilizes the same basic variables as those used in the average accounting return.
e. produces results which typically are difficult to comprehend or apply.

Difficulty level: Medium

PROFITABILITY INDEX
e 32. If you want to review a project from a benefit-cost perspective, you should use the
_____ method of analysis.
a. net present value
b. payback
c. internal rate of return
d. average accounting return
e. profitability index

Difficulty level: Easy

PROFITABILITY INDEX
b 33. 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.

Difficulty level: Easy

MUTUALLY EXCLUSIVE PROJECTS
c 34. 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

Diff