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Finance: Multiple choice questions.

Which of the following statements related to the internal rate of return (IRR) are correct?
I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

1)I and II only
2)III and IV only
3)I, II, and III only
4)II, III, and IV only
5)I, II, III, and IV

Net present value:

1)is less useful than the profitability index when comparing mutually exclusive projects.
2)is less useful than the internal rate of return when comparing different sized projects.
3)is the easiest method of evaluation for non-financial managers to use.
4)is very similar in its methodology to the average accounting return.
5)is the best method of analyzing mutually exclusive projects.

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

1)net present value
2)discounted payback
3)internal rate of return
4)profitability index
5)payback

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

1)constant dividend growth model
2)expected earnings model
3discounted cash flow valuation
4)average accounting return
5)internal rate of return

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

1)internal rate of return
2)profitability index
3)payback
4)net present value
5)average accounting return

Which two methods of project analysis were the most widely used by CEO's as of 1999?

1)payback and average accounting return
2)internal rate of return and payback
3)net present value and payback
4)net present value and average accounting return
5)internal rate of return and net present value

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years. The profit margin is estimated at 6 percent. The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project. The firm has a required accounting return of 11 percent. This project should be _____ because the AAR is _____ percent.

1)rejected; 10.25
2)accepted; 10.25
3)rejected; 11.60
4)accepted; 11.60
5)rejected; 10.03

It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period?

1)1.95 years
2)1.82 years
3)1.48 years
4)2.00 years
5)1.67 years

Solution Summary

The problem set deals with questions in finance: Capital budgeting.

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