24 Questions

Questions and Answers

- 1.Differentiate between
__Primary Market__and__Secondary Market__ - 2.You will receive $500 at the end of each of the next five years. The current interest rate is 9 per cent per year. What is the present value of this series of cash flows?
- 3.The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
- A.
Produce a positive annual cash flow.

- B.
Produce a positive cash flow from assets.

- C.
Offset its fixed expenses.

- D.
Offset its total expenses.

- E.
Recoup its initial cost.

- 4.Which one of the following can be defined as a benefit-cost ratio?
- A.
Net present value

- B.
Internal rate of return

- C.
Profitability index

- D.
Accounting rate of return

- E.
Modified internal rate of return

- 5.Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
- A.
Payback

- B.
Profitability index

- C.
Accounting rate of return

- D.
Internal rate of return

- E.
Net present value

- 6.Which one of the following is the primary advantage of payback analysis?
- A.
Incorporation of the time value of money concept

- B.
Ease of use

- C.
Research and development bias

- D.
Arbitrary cutoff point

- E.
Long-term bias

- 7.Which one of the following is an indicator that an investment is acceptable?
- A.
Modified internal rate of return equal to zero

- B.
Profitability index of zero

- C.
Internal rate of return that exceeds the required return

- D.
Payback period that exceeds the required period

- E.
Negative average accounting return

- 8.Discounted cash flow valuation is the process of discounting an investment's:
- A.
Assets.

- B.
Future profits.

- C.
Liabilities.

- D.
Costs.

- E.
Future cash flows.

- 9.The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
- A.
Produce a positive annual cash flow.

- B.
Produce a positive cash flow from assets.

- C.
Offset its fixed expenses.

- D.
Offset its total expenses.

- E.
Recoup its initial cost.

- 10.Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
- A.
Mutually exclusive

- B.
Conventional

- C.
Multiple choice

- D.
Dual return

- E.
Crosswise

- 11.Which one of the following can be defined as a benefit-cost ratio?
- A.
Net present value

- B.
Internal rate of return

- C.
Profitability index

- D.
Accounting rate of return

- E.
Modified internal rate of return

- 12.Which one of the following indicates that a project is expected to create value for its owners?
- A.
Profitability index less than 1.0

- B.
Payback period greater than the requirement

- C.
Positive net present value

- D.
Positive average accounting rate of return

- E.
Internal rate of return that is less than the requirement

- 13.The net present value:
- A.
Decreases as the required rate of return increases.

- B.
Is equal to the initial investment when the internal rate of return is equal to the required return.

- C.
Method of analysis cannot be applied to mutually exclusive projects.

- D.
Is directly related to the discount rate.

- E.
Is unaffected by the timing of an investment's cash flows.

- 14.Which one of the following indicates that a project should be rejected?
- A.
Average accounting return that exceeds the requirement

- B.
Payback period that is shorter than the requirement period

- C.
Positive net present value

- D.
Profitability index less than 1.0

- E.
Internal rate of return that exceeds the required return

- 15.Which one of the following statements is correct?
- A.
A longer payback period is preferred over a shorter payback period.

- B.
The payback rule states that you should accept a project if the payback period is less than one year.

- C.
The payback period ignores the time value of money.

- D.
The payback rule is biased in favor of long-term projects.

- E.
The payback period considers the timing and amount of all of a project's cash flows.

- 16.The value of an investment after one or more times periods is called the
- A.
Present value

- B.
Discount rate

- C.
Future value

- D.
Compounding

- 17.The process of adding the interest earned on an investment to the original investment in order to earn more interest is call
- A.
Discounting

- B.
Compounding

- C.
Future value

- D.
Present Value

- 18.The current value of future cash flows discounted at the appropriate discount rate is call
- A.
Future value

- B.
Present value

- C.
Discount rate

- D.
Discount Factor

- 19.
**Please fill answer below_______** - 20.Compound Interest refers to interest earned only on the original capital investment amount.
- A.
True

- B.
False

- 21.By definition a bank that pays simple interest on a savings account will pay interest only on the original investment
- A.
True

- B.
False

- 22.Which one of the following is the correct formula for computing the current value of one or more future cash flows from an investment.
- A.
Fv=pv(1+r)t

- B.
Pv=fv/(1+r)t

- C.
Pv=fv(1+r)-t

- D.
Pv=fv/(1+r)-t

- 23.is a series of equal cash flows that occur at the end of each period for some fixed number of periods.