FINANCE EXAM 4 CH 8 TEST BANK QUESTIONS AND ANSWERS

FINANCE EXAM 4 CH 8 TEST BANK
QUESTIONS AND ANSWERS
Which one of the following indicators offers the best assurance that a project will
produce value for its owners?
A. PI equal to zero
B. Negative rate of return
C. Positive AAR
D. Positive IRR
E. Positive NPV - Answer-E. positive NPV

Generally speaking, payback is best used to evaluate which type of projects?
A. Low-cost, short-term
B. High-cost, short-term
C. Low-cost, long-term
D. High-cost, long-term
E. Any size of long-term project - Answer-A. low-cost, short-term

Which one of the following is the primary advantage of payback analysis?
A. Incorporation of the time value of money concept
B. Ease of use
C. Research and development bias
D. Arbitrary cutoff point
E. Long-term bias - Answer-B. ease of use

The payback method of analysis ignores which one of the following?
A. Initial cost of an investment
B. Arbitrary cutoff point
C. Cash flow direction
D. Time value of money
E. Timing of each cash inflow - Answer-D. time value of money

Which one of the following methods of analysis ignores the time value of money?
A. Net present value
B. Internal rate of return
C. Discounted cash flow analysis
D. Payback
E. Profitability index - Answer-D. payback

Which one of the following methods of analysis has the greatest bias toward short-
term projects?
A. Net present value
B. Internal rate of return
C. Average accounting return
D. Profitability index
E. Payback - Answer-E. payback

23. Which one of the following methods of analysis ignores cash flows?

, A. Profitability index
B. Payback
C. Average accounting return
D. Modified internal rate of return
E. Internal rate of return - Answer-C. average accounting return

24. Which one of the following methods of analysis is most similar to computing the
return on assets (ROA)?
A. Internal rate of return
B. Profitability index
C. Average accounting return
D. Net present value
E. Payback - Answer-C. average accounting return

25. The average accounting return:
A. measures profitability rather than cash flow.
B. discounts all values to today's dollars.
C. is expressed as a percentage of an investment's current market value.
D. will equal the required return when the net present value equals zero.
E. is used more often by CFOs than the internal rate of return. - Answer-A. measures
profitability rather than cash flow

26. Which one of the following analytical methods is based on net income?
A. Profitability index
B. Internal rate of return
C. Average accounting return
D. Modified internal rate of return
E. Payback - Answer-C. average accounting return

27. Which one of the following is most closely related to the net present value
profile?
A. Internal rate of return
B. Average accounting return
C. Profitability index
D. Payback
E. Discounted payback - Answer-A. internal rate of return

28. The internal rate of return is unreliable as an indicator of whether or not an
investment should be accepted given which one of the following?
A. One of the time periods within the investment period has a cash flow equal to
zero.
B. The initial cash flow is negative.
C. The investment has cash inflows that occur after the required payback period.
D. The investment is mutually exclusive with another investment of a different size.
E. The cash flows are conventional. - Answer-D. the investment is mutually exclusive
with another investment of a different size

29. Which one of the following statements is correct? Assume cash flows are
conventional.
A. If the IRR exceeds the required return, the profitability index will be less than 1.0.