Ch.8 Quiz

Instructions
Please read the questions carefully.

This assessment is worth 100 points.

  1. An investment's average net income divided by its average book value is the:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  2. The possibility that more than one discount rate will make the NPV of an investment zero is called the ______ problem.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  3. A situation in which taking one investment prevents the taking of another is called:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  4. The profitability index (PI) rule can be best stated as:   (4 points)

    a.  
    b.  
    c.  
    d.  

  5. Which of the following is NOT correct?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  6. The ______ decision rule is considered the "best" in principle.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  7. Which of the following decision rules has the advantage that the information needed for the calculation is readily available?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  8. Which of the following calculations takes the time value of money into account?
    1. Payback
    2. Average accounting return
    3. Profitability index
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  9. Ranking conflicts can arise if one relies on IRR instead of NPV when:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  10. To find the _______ we begin by setting the NPV of a project equal to zero.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  11. Your firm's CFO presents you with two capital budgeting analyses: one that involves buying a new delivery truck to replace the existing truck and one that involves the purchase of a 3-ton metal stamping press to replace the existing press on the plant floor. This is an example of a decision involving _______.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  12. Rank the following decision rules from worst to best in terms of their overall usefulness in capital budgeting analysis.
    1. NPV
    2. Payback
    3. IRR
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  13. Which of the following is calculated using ONLY accounting numbers?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  14. In which of the following cases can NPV and IRR lead to different decisions?
    1. Project cash flows are conventional.
    2. The IRR is negative.
    3. An investment decision involves mutually exclusive choices.
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  15. Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect decisions when applied to mutually exclusive investments.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  16. Which of the following is NOT a true statement?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  17. A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  18. You are considering an investment which has the following cash flows. If you require a 4-year payback period, should you take the investment?


       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  19. You are considering an investment with the following cash flows. Your required return is 10% and you require a payback of 3 years. If your objective is to maximize your wealth, should you take this investment?


       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  20. You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for 4 years while investment B pays $30,000 a year for 5 years. If your required return is 13%, which should you choose?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  21. For a project with an initial investment of $40,000 and cash inflows of $11,000 a year for 5 years, calculate NPV given a required return of 11.65%.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  22. You are looking at an investment which has an initial cost of $400,000 and a salvage value of zero after five years. What is the average accounting return for this investment given the following annual net incomes:


       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  23. Please answer:


    If the discount rate is 14% and the firm has limited funds, which of the following is true?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  24. Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for 7 years, after which he plans to scrap the equipment and retire to the beaches of Jamaica.

    What is the project's payback period?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  25. You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.

    From your viewpoint, what is the percentage cost of this transaction?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  



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