Core Chapter 7 Exam Questions And Correct Answers
28. The profitability index is closely related to:
A. payback.
B. discounted payback.
C. average accounting return.
D. net present value.
E. internal rate of return - Answer -D. net present value.
.Accepting positive NPV projects ben...
28. The profitability index is closely related to:
A. payback.
B. discounted payback.
C. average accounting return.
D. net present value.
E. internal rate of return - Answer -D. net present value.
.Accepting positive NPV projects benefits the stockholders because:
A. it most easily understood valuation process.
B. the value of the expected cashflows are equal to the cost.
C. the value of the expected cashflows are greater than the cost.
D. it is the most easily calculated - Answer -C. the value of the expected cashflows are
greater than the cost
.All else constant, the net present value of a 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 rate of return decreases.
e. all cash inflows occur during the last year of a project's life instead of periodically
throughout the life of the project - Answer -the rate of return decreases
*(NPV increases as rate of return decreases)
.All else equal, the payback period for a project will decrease whenever the:
a. initial cost increases.
b. required return for a project increases.
c. assigned discount rate decreases.
d. cash inflows are adjusted such that they occur sooner.
e. duration of a project is lengthened - Answer -d. cash inflows are adjusted such that
they occur sooner.
.Analysis using the profitability index:
A. frequently conflicts with the accept and reject decisions generated by the application
of the net present value rule.
B. is useful as a decision tool when investment funds are limited.
C. cannot be used to aid capital rationing.
D. utilizes the same basic variables as those used in the average accounting return.
, E. produces results which typically are difficult to comprehend or apply - Answer -B. is
useful as a decision tool when investment funds are limited
.Disadvantages: Problems with mutually exclusive investments (scale).
Advantages:
May be useful when available investment funds are limited
Easy to understand and communicate.
Correct decision when evaluating independent projects - Answer -profitability index
.Given that the net present value (NPV) is generally considered to be the best method
of analysis, why should you still use the other methods? - Answer -A. You need to use
other methods because the net present value method is unreliable when a project has
unconventional cash flows
.If a project is assigned a required rate of return equal to 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. the timing of the
project's cash flows has no bearing on the value of the project
.If the discount rate is _____ than both projects IRR's reject both - Answer -Higher
.If the Incremental IRR is _____ than the discount rate do the smaller project - Answer -
Lower
.If the Incremental IRR is ______ than the discount rate do the bigger project - Answer -
Bigger
.If there is a conflict between mutually exclusive projects due to the IRR, one should:
A. drop the two projects immediately.
B. spend more money on gathering information.
C. depend on the NPV as it will always provide the most value.
D. depend on the AAR because it does not suffer from these same problems.
E. None of the above - Answer -C. depend on the NPV as it will always provide the
most value.
.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. average accounting return
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