## Test Bank For Corporate Finance 7th Canadian Edition By Ross, Westerfield

Chapter 07 Net Present Value and Other Investment Rules

Student: ___________________________________________________________________________

1. A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is not true?

A. NPV is positive if the interest rate is less than 10%.

B. NPV is negative if the interest rate is less than 10%.

C. NPV is zero if the interest rate is equal to 10%.

2. 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.

3. Which of the following does not characterize NPV?

A. NPV is the simplest of all investment rules.

B. NPV incorporates all relevant information.

C. NPV uses all of the project’s cash flows.

D. NPV discounts all future cash flows.

4. 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.

5. Payback is frequently used to analyze independent projects because:

A. it considers the time value of money.

B. all relevant cash flows are included in the analysis.

C. it is easy and quick to calculate.

D. it is the most desirable of all the available analytical methods from a financial perspective.

6. The payback period rule accepts all investment projects in which the payback period for the cash flows is:

A. greater than or equal to the cut-off point.

B. greater than the cut-off point.

C. less than the cut-off point.

D. positive.

7. Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.

A. 3.18

B. 3.82

C. 4.55

D. 4.00

8. An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has:

A. a large initial investment with moderate positive cash flows over a very long period of time.

B. a very large negative cash flow at the termination of the project.

C. most of the cash flow at the beginning of the project.

D. All projects approved by the payback period rule will be accepted by the NPV rule.

E. The payback period rule and the NPV rule cannot be used to evaluate the same type of projects.

9. The discounted payback rule states that you should accept projects:

A. which have a discounted payback period that is greater than some pre-specified period of time.

B. if the discounted payback is positive and rejected if it is negative.

C. only if the discounted payback period equals some pre-specified period of time.

D. if the discounted payback period is less than some pre-specified period of time.

10. An investment with an initial cost of $16,000 produces cash flows of $5000 annually. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years.

A. 4.55

B. 4.05

C. 3.20

D. 3.52

11. An investment project has the cashflow stream of -250, 75, 125, 100, and 50. The cost of capital is 12%. What is the discount payback period?

A. 2.5 years.

B. 2.7 years.

C. 3.38 years.

D. 1.40 years.

E. 1.25 years.

12. The discounted payback period rule:

A. considers the time value of money.

B. discounts the cutoff point.

C. ignores uncertain cash flows.

D. is preferred to the NPV rule.

13. The payback period rule:

A. determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule.

B. determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year.

C. requires an arbitrary choice of a cut-off point.

D. varies the cut-off point with the interest rate.

14. Which one of the following statements is correct concerning the payback period?

A. An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

B. An investment should be accepted if the payback is positive and rejected if it is negative.

C. An investment should be rejected if the payback is positive and accepted if it is negative.

D. An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.

E. An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

15. It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

A. 0.83 years.

B. 1.14 years.

C. 1.83 years.

D. 2.14 years.

E. 2.83 years.

16. A project has an initial cost of $8,600 and produces cash inflows of $3,200, $4,900, and $1,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 8%?

A. 2.05 years

B. 2.13 years

C. 2.33 years

D. 3.00 years

E. never

17. Ginny is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Ginny should _______ this project because the discounted payback period is ______.

A. accept; 2.03 years

B. accept; 2.97 years

C. accept; 3.97 years

D. reject; 3.03 years

E. reject; 3.97 years

18. The average accounting rate of return is determined by:

A. dividing the yearly cashflows by the investment.

B. dividing the average cashflows by the investment.

C. dividing the average net income by the average investment.

D. dividing the average net income by the initial investment.

E. dividing the net income by the cashflow.

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