Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1)
1)
When using the incremental net present value, what happens when the net present value is
positive?
A)
The competing alternative becomes the current best alternative.
B)
The current best alternative is accepted.
C)
The competing alternative is eliminated.
D)
The current best alternative remains the current best alternative.
Answer:
A
A)
B)
C)
D)
2)
2)
The capital recovery with return is most similar to which of the following?
A)
Incremental net present value
B)
Future value
C)
Annual equivalent
D)
Rate of return
Answer:
C
A)
B)
C)
D)
3)
3)
Which of the following may not be used to adjust the lives of the alternatives so that they are
equal?
A)
Repurchasing an alternative
B)
Averaging the lives of the alternatives
C)
Shortening an alternative’s life
D)
Lengthening an alternative’s life
Answer:
B
A)
B)
C)
D)
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4)
4)
Which of the following would not make an alternative infeasible?
A)
Contains a contingent alternative without the alternative it is contingent on
B)
Contains two mutually exclusive alternatives
C)
Rejects all the alternatives
D)
Does not meet the requirements of the external factors
Answer:
C
A)
B)
C)
D)
5)
5)
Which of the following can be read off of the project balance graph?
A)
Payback period with interest
B)
Payback period without interest
C)
Future value
D)
A and C
Answer:
D
A)
B)
C)
D)
6)
6)
Which of the following describes a set of alternatives where the acceptance of one of the
alternatives precludes investing in the other alternatives?
A)
Independent alternatives
B)
Contingent alternatives
C)
Do nothing alternative
D)
Mutually exclusive alternatives
Answer:
D
A)
B)
C)
D)
7)
7)
Which of the following assumes that the alternatives are repurchased until the useful lives end in
the same period?
A)
Annual equivalent
B)
Future value
C)
Net present value
D)
Incremental net present value
Answer:
A
A)
B)
C)
D)
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8)
8)
Which of the following ignores the time value of money?
A)
Payback period with interest
B)
Annual equivalent
C)
Payback period without interest
D)
Rate of return
Answer:
C
A)
B)
C)
D)
9)
9)
What is the first step in preparing an incremental net present value analysis?
A)
Subtract the cash flows
B)
Rank all of the alternatives based on initial cost, highest to lowest
C)
Rank all of the alternatives based on initial cost, lowest to highest
D)
Calculate the net present value
Answer:
C
A)
B)
C)
D)
10)
10)
Which of the following produces a return equal to the MARR?
A)
An alternative with an NPV less than zero
B)
An alternative with an NPV greater than zero
C)
An alternative with a payback period greater than zero
D)
An alternative with an NPV equal to zero
Answer:
D
A)
B)
C)
D)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
11)
Define rate of return.
Answer:
The rate of return is the interest rate that produces an NPV of zero.
12)
Define MARR.
Answer:
Minimum attractive rate of return. The MARR is the lowest rate of return or interest paid by an
investment that is acceptable to the investor.
13)
How does the incremental rate of return compare alternatives?
Answer:
The incremental rate of return compares alternatives by determining the rate of return on the
difference in initial costs. The incremental rate of return is determined by setting the incremental net
present value to zero.
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14)
How does the payback period without interest compare the alternatives?
Answer:
The payback period without interest compares alternatives based on how long it takes to pay back the
initial costs.
15)
What are sunk costs?
Answer:
Costs that have already been spent are known as sunk costs. Sunk costs also include all costs that have
been committed to be spent, for which the commitment cannot be canceled.
16)
Which alternative is selected when using the payback period with interest?
Answer:
When comparing investments using the payback period with interest, the alternative with the smallest
payback period is selected.
17)
Define study period.
Answer:
The time over which alternatives are compared is known as the study period.
18)
How does the future worth method compare alternatives?
Answer:
The future worth method compares alternatives based on their future values at the end of the study
period.
19)
How are sunk cost handled when analyzing investment alternatives?
Answer:
When analyzing investment alternatives, sunk costs should not be included because they must be paid
regardless of which alternative is chosen.
20)
Besides economic factors, what other factors should be taken into account when making decisions?
Answer:
When considering alternatives, there are other considerations that may sway the decision in one
direction or another. These include environmental factors, ergonomic factors, and personal preferences.
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Answer Key
Testname: C17
1)
A
2)
C
3)
B
4)
C
5)
D
6)
D
7)
A
8)
C
9)
C
10)
D
11)
The rate of return is the interest rate that produces an NPV of zero.
12)
Minimum attractive rate of return. The MARR is the lowest rate of return or interest paid by an investment that is
acceptable to the investor.
13)
The incremental rate of return compares alternatives by determining the rate of return on the difference in initial
costs. The incremental rate of return is determined by setting the incremental net present value to zero.
14)
The payback period without interest compares alternatives based on how long it takes to pay back the initial costs.
15)
Costs that have already been spent are known as sunk costs. Sunk costs also include all costs that have been
committed to be spent, for which the commitment cannot be canceled.
16)
When comparing investments using the payback period with interest, the alternative with the smallest payback
period is selected.
17)
The time over which alternatives are compared is known as the study period.
18)
The future worth method compares alternatives based on their future values at the end of the study period.
19)
When analyzing investment alternatives, sunk costs should not be included because they must be paid regardless of
which alternative is chosen.
20)
When considering alternatives, there are other considerations that may sway the decision in one direction or another.
These include environmental factors, ergonomic factors, and personal preferences.
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