FIN 3713 - Chapter 8

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

recoup its initial cost.

The internal rate of return is the:

discount rate that results in a zero net present value for the project.

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

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?

Mutually exclusive

Which one of the following can be defined as a benefit-cost ratio?

Profitability index

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

The net present value:

decreases as the required rate of return increases.

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?

Net present value

Which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero.

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

Profitability index less than 1.0

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Positive NPV

Which one of the following statements is correct?

The payback period ignores the time value of money.

Generally speaking, payback is best used to evaluate which type of projects?

Low-cost, short-term

Which one of the following is most closely related to the net present value profile?

Internal rate of return

The internal rate of return is unreliable as an indicator of whether an investment should be accepted given which one of the following?

The investment is mutually exclusive with another investment of a different size.

Which one of the following statements is correct? Assume cash flows are conventional.

When the internal rate of return is greater than the required return, the net present value is positive.

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0.

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

The firm should increase in value each time it accepts a new project.

The profitability index reflects the value created per dollar:

invested.

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Profitability index