Quiz 2

16 Questions

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Quiz 2


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Questions and Answers
  • 1. 
    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. 

      Recover its initial cost.

  • 2. 
    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

  • 3. 
    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

  • 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. 
    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

  • 6. 
    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

  • 7. 
    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.

  • 8. 
    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

  • 9. 
    Which one of the following is/are characeristics of  payback analysis?
    • A. 

      Incorporation of the time value of money concept

    • B. 

      Ease of use

    • C. 

      Research and development biasesd

    • D. 

      Arbitrary detrmination

    • E. 

      Long-term biased

  • 10. 
    Which one of the following statements is correct?
    • A. 

      A shorter payback period is preferred over longer 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 towards liquidity.

    • E. 

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

  • 11. 
    Is the length of time it takes an investment to generate sufficient cash flows to enable the project to recover the initial cost
  • 12. 
    Project should be rejected if the net present value is negative
    • A. 

      True

    • B. 

      False

  • 13. 
    Project should be accepted if payback period is shorter than the requirement period
    • A. 

      True

    • B. 

      False

  • 14. 
    Is the difference between an investment’s market value (in today’s dollars) and its cost (also in today’s dollars).
  • 15. 
    Mention three characteristics of Net present value