公司理财原版题库Chap006

Chapter 6

Some Alternative Investment Rules Multiple Choice Questions

1. A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is

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%.

D) Both A and C.

E) None of the above.

Answer: D Difficulty: Medium Page: 144-145

Rationale:

NPV = ($27.50/1.1) - $25.00 = $0

2. Accepting positive NPV projects benefits the stockholders because

A) it is the most easily understood valuation process.

B) the present value of the expected cash flows are equal to the cost.

C) the present value of the expected cash flows are greater than the cost.

D) it is the most easily calculated.

E) None of the above.

Answer: C Difficulty: Easy Page: 145

3. Which of the following does not characterize NPV?

A) NPV does not incorporate risk into the analysis.

B) NPV incorporates all relevant information.

C) NPV uses all of the project's cash flows.

D) NPV discounts all future cash flows.

E) Using NPV will lead to decisions that maximize shareholder wealth.

Answer: A Difficulty: Medium Page: 144-146

4. The payback period rule

A) discounts cash flows.

B) ignores initial cost.

C) always uses all possible cash flows in its calculation.

D) Both A and C.

E) None of the above.

Answer: E Difficulty: Medium Page: 146-148

5. The payback period rule accepts all investment projects in which the payback period for the cash

flows is

A) equal to the cutoff point.

B) greater than the cutoff point.

C) less than the cutoff point.

D) positive.

E) None of the above.

Answer: C Difficulty: Easy Page: 147

6. 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 $5,000, 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 years

B) 3.82 years

C) 4.00 years

D) 4.55 years

E) None of the above.

Answer: B Difficulty: Medium Page: 146-147

Rationale:

Payback Period = ($5,000 + $5,000 + $5,500 = $15,500 for 3 years; remainder $20,000 $15,500 = 4,500. $4,500/$5,500 = .81818 = .82) = Payback Period = 3.82 years

7. 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 flows 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.

Answer: B Difficulty: Medium Page: 147

8. The payback period rule is a convenient and useful tool because

A) it provides a quick estimate of how rapidly the initial investment will be recouped.

B) results of a short payback rule decision will be quickly seen.

C) it does not take into account time value of money.

D) All of the above.

E) None of the above.

Answer: D Difficulty: Medium Page: 146-148