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FIN 342 Exam 1 Questions With Complete Solutions 2024|2025
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FIN 342 Exam 1 Questions With Complete Solutions 2024|2025
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FIN 342 Exam 1 Questions WithComplete Solutions 2024|2025
builds shareholder value; destroys shareholder value CORRECT ANSWERS A positive
NPV investment _____ while a negative NPV investment ______.
benefit-cost ratio CORRECT ANSWERS The Profitability Index is also known as the
_____.
FALSE CORRECT ANSWERS T/F
The payback rule states that a project should be accepted if its payback period is
greater than a specified cutoff period.
discounted cash flow (DCF) rate of return CORRECT ANSWERS The internal rate of
return (IRR) is also called the:
1. Gives equal weight to all CF arriving before the cutoff period
2. Does not consider CF after the payback period
3. Biases the firm against long-term projects in favor of short-term ones CORRECT
ANSWERS What are three limitations of the payback rule for accepting projects?
it is enough simply to compare the NPV of the projects CORRECT ANSWERS If
choices you make today do not affect future investment opportunities, then
equivalent annual annnuity CORRECT ANSWERS The cash flow per period with the
same present value as the cost of buying and operating a machine is called the:
select the project with the lowest EAA of costs CORRECT ANSWERS When comparing
investments in assets with different lives you should:
PI= NPV/initial investment CORRECT ANSWERS The correct equation for the PI is
given by:
gives equal weight to all cash flows arriving before the cutoff period CORRECT
ANSWERS Which of the three limitations of the Payback Rule can be overcome with a
modification to it?
1. net present value
2. internal rate of return CORRECT ANSWERS Which two investment criterion methods
are most used by firms?
select the project with the lowest equivalent annual annuity of costs CORRECT
ANSWERS When comparing investments in assets with different lives you should:
, a stream of cash flows or payments that have the same present value as a project or
investment's cash flows CORRECT ANSWERS which of the following is the correct
definition of the EAA?
declining CORRECT ANSWERS The relationship between the NPV profile and the
discount rate is
profitability index (PI) CORRECT ANSWERS In simple cases of capital rationing, the
_______ can tell a firm which projects to accept.
soft capital rationing CORRECT ANSWERS self-imposed by firm management a a
fiscal discipline mechanism
hard capital rationing CORRECT ANSWERS imposed externally by investors who will
no longer provide funds to the firm
the graph of NPV versus discount rate declines smoothly as discount rate increases
CORRECT ANSWERS When evaluating a single project for acceptance, the NPV and
IRR decision rules will give the same result when _____.
capital rationing CORRECT ANSWERS the limit set on the amount of funds available
for investment is referred to as:
TRUE CORRECT ANSWERS T/F
When choosing among mutually exclusive projects, choose the one that offers the
highest NPV
equals 0 CORRECT ANSWERS The rate of return rule states that the rate of return is
the discount rate at which NPV:
discounted payback period CORRECT ANSWERS which capital budgeting decision
method finds the present value of each CF before calculating a payback period?
NPV CORRECT ANSWERS the single variable of interest for the investment timing
problem is
the opportunity cost of capital CORRECT ANSWERS the discount rate used to value
capital investments is often referred to as _____.
risk CORRECT ANSWERS The opportunity cost of capital is determined by the _____
of a project.
the length of time before you recover your initial investment CORRECT ANSWERS the
payback period for a project can best be defined as:
FALSE CORRECT ANSWERS T/F
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