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Chap 05 answerkey
finance-banking
Trường Đại học Tài chính - Marketing
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Corporate Finance, 12e (Ross) Chapter 5 Net Present Value and Other Investment Rules
- The difference between the present value of an investment's future cash flows and its initial cost is the: A) net present value. B) internal rate of return. C) payback period. D) profitability index. E) discounted payback period.
Answer: A Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- If a project is assigned a required rate of return of 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.
Answer: A Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A) A financing project should be accepted if, and only if, the NPV is exactly equal to zero. B) An investment project should be accepted only if the NPV is equal to the initial cash flow. C) Any type of project should be accepted if the NPV is positive and rejected if it is negative. D) Any type of project with greater total cash inflows than total cash outflows, should always be accepted. E) An investment project that has positive cash flows for every time period after the initial investment should be accepted.
Answer: C Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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 required rate of return decreases. E) all cash inflows occur during the last year instead of periodically throughout the project's life.
Answer: D Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- Proposed projects should be accepted when those projects: A) create value for the owners of the firm. B) have a positive rate of return. C) return the initial cash outlay within the life of the project. D) have required cash inflows that exceed the actual cash inflows. E) have an initial cost that exceeds the present value of the future cash flows.
Answer: A Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 2 Copyright © 2019 McGraw-Hill Education. All rights reserved.
- When a firm commences a positive net present value project, you know: A) the project will pay back within the required payback period. B) the present value of the expected cash flows is equal to the project's cost. C) the inherent risks within the project have been ignored. D) that all the projected cash flows will occur as expected. E) the stockholders' value in the firm is expected to increase.
Answer: E Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- The net present value method of capital budgeting analysis does all of the following except: A) incorporate risk into the analysis. B) consider all relevant cash flow information. C) discount all future cash flows to their current value. D) consider the initial cost of the project. E) provide a specific anticipated rate of return.
Answer: E Difficulty: 1 Easy Section: 5 Why Use Net Present Value? Topic: Net present value Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- The payback method of analysis: A) discounts cash flows. B) ignores the initial cost. C) considers all project cash flows. D) applies an industry-standard recoupment period. E) has a timing bias.
Answer: E Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- The payback method: A) is the most frequently used method of capital budgeting analysis. B) is a more sophisticated method of analysis than the profitability index. C) considers the time value of money. D) applies mainly to projects where the actual results will be known relatively soon. E) generally results in decisions that conflict with the decision suggested by NPV analysis.
Answer: D Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the ________ method of analysis. A) internal rate of return B) net present value C) modified internal rate of return D) payback E) profitability index
Answer: D Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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.
Answer: C Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- An investment is acceptable if the payback period: A) is less than some pre-specified period of time. B) exceeds the life of the investment. C) is negative. D) is equal to or greater than some pre-specified period of time. E) is equal to, and only if it is equal to, the investment's life.
Answer: A Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- Which method(s) of project analysis is(are) best suited for use by a department manager who has no knowledge of time value of money but can estimate the cash flows of small projects with short lives fairly accurately? A) Payback B) Discounted payback C) Profitability index D) Net present value E) Either payback or profitability index
Answer: A Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- The payback method: A) determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. B) determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. C) requires an arbitrary choice of a cutoff point. D) varies the cutoff point with the market rate of interest. E) is irrelevant to the accept/reject decision.
Answer: C Difficulty: 1 Easy Section: 5 The Payback Period Method Topic: Payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- Which of the following methods of project analysis are biased towards short-term projects? A) Profitability index and internal rate of return B) Discounted payback and payback C) Net present value and payback D) Payback and profitability index E) Profitability index and discounted payback
Answer: B Difficulty: 1 Easy Section: 5 The Discounted Payback Period Method Topic: Discounted payback Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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) discounted net present value. C) payback period. D) discounted profitability index. E) discounted payback period.
Answer: E Difficulty: 1 Easy Section: 5 The Discounted Payback Period Method Topic: Discounted payback Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved.
- For investment projects, the internal rate of return (IRR): A) rule indicates acceptance of an investment when the IRR is less than the discount rate. B) is the rate generated solely by the cash flows of the investment. C) is used primarily to rank projects of varying sizes. D) is the rate that causes the net present value of a project to equal the project's initial cost. E) can effectively be used to compare all types and sizes of mutually exclusive projects.
Answer: B Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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 discount rate is increased.
Answer: A Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- You are considering an investment project with an internal rate of return of 8 percent, a net present value of $393, and a payback period of 2 years. Which one of the following is correct given this information? A) The discount rate used in computing the net present value was less than 8 percent. B) The discounted payback period will be less than 2 years. C) The discount rate used to compute the net present value is equal to the internal rate of return. D) The required payback period must be greater than 2 years. E) This project should be rejected based on the net present value.
Answer: A Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- The internal rate of return is: A) more reliable 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 1. C) computed using a project's cash flows as the only source of inputs. D) dependent on the interest rates offered in the marketplace. E) a better methodology than net present value when dealing with unconventional cash flows.
Answer: C Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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 managers. D) used primarily to differentiate between mutually exclusive projects. E) utilized in project analysis only when multiple net present values apply.
Answer: A Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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.
Answer: B Difficulty: 1 Easy Section: 5 The Internal Rate of Return Topic: Internal rate of return Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- A financing project is acceptable if its internal rate of return is: A) exactly equal to its net present value. B) exactly equal to zero. C) greater than the discount rate. D) less than the discount rate. E) negative.
Answer: D Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the: A) discount rate and scale problems. B) timing and scale problems. C) discount rate and timing problems. D) scale and reversing flow problems. E) timing and reversing flow problems.
Answer: B Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Mutually exclusive projects Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- Assume you use all available methods to evaluate projects. If there is a conflict in the indicated accept/reject decision between two mutually exclusive projects due to the IRR-based indicator, you should: A) accept both projects if both are acceptable according to NPV. B) combine both projects into one larger project. C) ignore the IRR and rely on the decision indicated by the NPV method. D) base the final decision on the payback method. E) reject both projects due to ambiguity in the decision-making process.
Answer: C Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Mutually exclusive projects Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 13 Copyright © 2019 McGraw-Hill Education. All rights reserved.
- Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either project, you should rely most heavily on the ________ method of analysis. A) profitability index B) internal rate of return C) payback D) net present value E) discounted payback
Answer: D Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Mutually exclusive projects Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as: A) net present value profiling. B) operational ambiguity. C) the mutually exclusive investment decision. D) issues of scale. E) multiple rates of return.
Answer: E Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Internal rate of return Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- A project will have more than one IRR if, and only if, the: A) primary IRR is positive. B) primary IRR is negative. C) NPV is zero. D) cash flow pattern exhibits more than one sign change. E) cash flow pattern exhibits exactly one sign change.
Answer: D Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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 incremental IRR by determining the: A) internal rate of return for the cash flows of each project. B) net present value of each project using the internal rate of return as the discount rate. C) discount rate that equates the discounted payback periods for each project. D) discount rate that makes the net present value of each project equal to 1. E) internal rate of return for the differences in the cash flows of the two projects.
Answer: E Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Mutually exclusive projects Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- Comparing the NPV profile of an investment project to that of a financing project demonstrates why the: A) incremental IRR is computed differently for financing projects than for investment projects. B) IRR decision rule for investment projects is the opposite of the rule for financing projects. C) life span of a project affects the decision as to which project to accept. D) NPV rule for financing projects is the opposite of the rule for investment projects. E) profitability index and the net present value are related.
Answer: B Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Internal rate of return Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 16 Copyright © 2019 McGraw-Hill Education. All rights reserved.
- Blue Bird Café is considering a project with an initial cost of $46,800, and cash flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have? A) 0 B) 1 C) 4 D) 3 E) 2
Answer: E Difficulty: 2 Medium Section: 5 Problems with the IRR Approach Topic: Internal rate of return Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation
- 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) Renting out a company warehouse or selling it outright D) Using the company's sales force to promote sales of both shoes and socks E) Buying both inventory and fixed assets using funds from the same bank loan
Answer: C Difficulty: 1 Easy Section: 5 Problems with the IRR Approach Topic: Mutually exclusive projects Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- The profitability index: A) rule often results in decisions that conflict with the decisions based on the net present value rule. B) is useful as a decision tool when investment funds are limited and all available funds are allocated. C) method is most commonly used when deciding between mutually exclusive projects of varying size. D) rule states that the project with the lower index value should be accepted. E) produces results which typically are difficult to comprehend.
Answer: B Difficulty: 1 Easy Section: 5 The Profitability Index Topic: Profitability index Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- 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) discounted payback E) profitability index
Answer: E Difficulty: 1 Easy Section: 5 The Profitability Index Topic: Profitability index Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
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- The profitability index of an investment project is the ratio of the: A) average net income from the project to the average investment cost. B) internal rate of return to the current market rate of interest. C) net present value of the project's cash outflows divided by the net present value of its inflows. D) net present value of every cash flow related to the project compared to the initial cost. E) present value of the cash flows subsequent to the initial cost compared to the initial cost.
Answer: E Difficulty: 1 Easy Section: 5 The Profitability Index Topic: Profitability index Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- An independent investment is acceptable if the profitability index (PI) of the investment is: A) greater than 1. B) less than 1. C) greater than the internal rate of return. D) less than the internal rate of return. E) greater than a pre-specified rate of return.
Answer: A Difficulty: 1 Easy Section: 5 The Profitability Index Topic: Profitability index Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
- No matter how many forms of investment analysis you employ: 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.
Answer: A Difficulty: 1 Easy Section: 5 The Practice of Capital Budgeting Topic: Capital budgeting Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
20 Copyright © 2019 McGraw-Hill Education. All rights reserved.
Chap 05 answerkey
Course: finance-banking
University: Trường Đại học Tài chính - Marketing
