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
3)internal rate of return
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
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.
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?
The problem set deals with questions in finance: Capital budgeting.
Finance - Multiple Choice Questions
1. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.
1. 1. risk-free rate
2. 2. nominal cost
3. 3. risk premium
4. 4. cost of capital
2. The firm's optimal mix of debt and equity is called its
1. 1. optimal ratio.
2. 2. maximum wealth.
3. 3. target capital structure.
4. 4. maximum book value.
3. If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is
1. 1. 4.8 percent.
2. 2. 3.6 percent.
3. 3. 6 percent.
4. 4. 8 percent.
4. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
1. 1. decrease the proportion of common stock equity to decrease financial risk.
2. 2. increase short-term debt to decrease the cost of capital.
3. 3. increase the proportion of long-term debt to decrease the cost of capital.
4. 4. increase the proportion of common stock equity to decrease financial risk.
5.________ leverage is concerned with the relationship between sales revenue and earnings per share.
1. 1. Operating
2. 2. Financial
3. 3. Total
4. 4. Variable
6.Breakeven analysis is used by the firm
1. 1. none of these.
2. 2. Both to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales.
3. 3. to determine the level of operations necessary to cover all operating costs.
4. 4. to evaluate the profitability associated with various levels of sales.
7.Noncash charges such as depreciation and amortization ________ the firm's breakeven point.
1. 1. understate
2. 2. decrease
3. 3. overstate
4. 4. do not affect
8.If a firm's fixed operating costs decrease, the firm's operating breakeven point will
1. 1. decrease.
2. 2. change in an undetermined direction.
3. 3. increase.
4. 4. remain unchanged.
9.________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.
1. 1. Ratio analysis
2. 2. Operating leverage
3. 3. Total leverage
4. 4. Financial leverage