Fundamentals of Corporate Finance, 12e (Ross)
Chapter 9 Net Present Value and Other Investment Criteria
1) A project has a net present value of zero. Which one of the following best describes this
project?
A) The project has a zero percent rate of return.
B) The project requires no initial cash investment.
C) The project has no cash flows.
D) The summation of all of the project’s cash flows is zero.
E) The project’s cash inflows equal its cash outflows in current dollar terms.
2) Which one of the following will decrease the net present value of a project?
A) Increasing the value of each of the project’s discounted cash inflows
B) Moving each cash inflow forward one time period, such as from Year 3 to Year 2
C) Decreasing the required discount rate
D) Increasing the project’s initial cost at time zero
E) Increasing the amount of the final cash inflow
3) Which one of the following methods predicts the amount by which the value of a firm will
change if a project is accepted?
A) Net present value
B) Discounted payback
C) Internal rate of return
D) Profitability index
E) Payback
4) If a project has a net present value equal to zero, then:
A) the total of the cash inflows must equal the initial cost of the project.
B) the project earns a return exactly equal to the discount rate.
C) a decrease in the project’s initial cost will cause the project to have a negative NPV.
D) any delay in receiving the projected cash inflows will cause the project to have a positive
NPV.
E) the project’s PI must also be equal to zero.
5) Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the
project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the
$45,000 salvage value handled when computing the net present value of the project?
A) Reduction in the cash outflow at Time 0
B) Cash inflow in the final year of the project
C) Cash inflow for the year following the final year of the project
D) Cash inflow prorated over the life of the project
E) Excluded from the net present value calculation
6) The net present value of a project will increase if:
A) the required rate of return increases.
B) the initial capital requirement increases.
C) some of the cash inflows are deferred until a later year.
D) the aftertax salvage value of the fixed assets increases.
E) the final cash inflow decreases.
7) Net present value:
A) is the best method of analyzing mutually exclusive projects.
B) is less useful than the internal rate of return when comparing different-sized projects.
C) is the easiest method of evaluation for nonfinancial managers.
D) cannot be applied when comparing mutually exclusive projects.
E) is very similar in its methodology to the average accounting return.
8) A project has an initial cost of $31,800 and a market value of $29,600. What is the difference
between these two values called?
A) Net present value
B) Accounting return
C) Payback value
D) Profitability index
E) Discounted payback
9) Which one of the following methods of project analysis is defined as computing the value of a
project based on the present value of the project’s anticipated cash flows?
A) Constant dividend growth model
B) Discounted cash flow valuation
C) Average accounting return
D) Expected earnings model
E) Internal rate of return
10) The length of time a firm must wait to recoup the money it has invested in a project is called
the:
A) internal return period.
B) payback period.
C) profitability period.
D) discounted cash period.
E) valuation period.
11) Why is payback often used as the sole method of analyzing a proposed small project?
A) Payback considers the time value of money.
B) All relevant cash flows are included in the payback analysis.
C) The benefits of payback analysis usually outweigh the costs of the analysis.
D) Payback is the most desirable of the various financial methods of analysis.
E) Payback is focused on the long-term impact of a project.
12) Which of the following are advantages of the payback method of project analysis?
A) Considers time value of money, liquidity bias
B) Liquidity bias, arbitrary cutoff point
C) Liquidity bias, ease of use
D) Ignores time value of money, ease of use
E) Ease of use, arbitrary cutoff point
13) Samuelson Electronics has a required payback period of three years for all of its projects.
Currently, the firm is analyzing two independent projects. Project A has an expected payback
period of 2.9 years and a net present value of $4,200. Project B has an expected payback period
of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on
the payback decision rule?
A) Project A only
B) Project B only
C) Both A and B
D) Neither A nor B
E) Either, but not both projects
14) A project has a required payback period of three years. Which one of the following
statements is correct concerning the payback analysis of this project?
A) The cash flows in each of the three years must exceed one-third of the project’s initial cost if
the project is to be accepted.
B) The cash flow in Year 3 is ignored.
C) The project’s cash flow in Year 3 is discounted by a factor of (1 + R)3.
D) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.
E) The project is acceptable whenever the payback period exceeds three years.
15) A project has a discounted payback period that is equal to the required payback period.
Given this, the project:
A) will not be acceptable under the payback rule.
B) must have a profitability index that is equal to or greater than 1.0.
C) must have a zero net present value.
D) must have an internal rate of return equal to the required return.
E) will still be acceptable if the discount rate is increased.
16) Which one of these statements related to discounted payback is correct?
A) Payback is a better method of analysis than discounted payback.
B) Discounted payback is used more frequently in business than payback.
C) Discounted payback does not require a cutoff point.
D) Discounted payback is biased towards short-term projects.
E) The discounted payback period increases as the discount rate decreases.
17) Applying the discounted payback decision rule to all projects may cause:
A) some positive net present value projects to be rejected.
B) the most liquid projects to be rejected in favor of the less liquid projects.
C) projects to be incorrectly accepted due to ignoring the time value of money.
D) a firm to become more long-term focused.
E) some projects to be accepted which would otherwise be rejected under the payback rule.
18) The length of time a firm must wait to recoup, in present value terms, the money it has
invested in a project is referred to as the:
A) net present value period.
B) internal return period.
C) payback period.
D) discounted profitability period.
E) discounted payback period.
19) A project’s average net income divided by its average book value is referred to as the
project’s average:
A) net present value.
B) internal rate of return.
C) accounting return.
D) profitability index.
E) payback period.
20) The average accounting rate of return (AAR):
A) considers the time value of money.
B) measures net income as a percentage of the sales generated by a project.
C) is the best method of financially analyzing mutually exclusive projects.
D) is the primary methodology used in analyzing independent projects.
E) is similar to the return on assets ratio.
21) An advantage of the average accounting return method of analysis is its:
A) use of easily obtained information.
B) inclusion of time value of money considerations.
C) use of a cutoff rate as a benchmark.
D) use of pretax income in its computation.
E) use of real, versus nominal, average income.
22) A strength of the average accounting return (AAR) method of project analysis is the fact that
AAR:
A) ignores the issue of taxes.
B) uses a cutoff rate.
C) considers the time value of money.
D) is easy to calculate.
E) is based on accounting values.
23) Which one of the following statements related to the internal rate of return (IRR) is correct?
A) The IRR yields the same accept and reject decisions as the net present value method given
mutually exclusive projects.
B) A project with an IRR equal to the required return would reduce the value of a firm if
accepted.
C) The IRR is equal to the required return when the net present value is equal to zero.
D) Financing type projects should be accepted if the IRR exceeds the required return.
E) The average accounting return is a better method of analysis than the IRR from a financial
point of view.
24) The internal rate of return:
A) may produce multiple rates of return when cash flows are conventional.
B) is best used when comparing mutually exclusive projects.
C) is rarely used in the business world today.
D) is principally used to evaluate small dollar projects.
E) is easy to understand.
25) Tedder Mining has analyzed a proposed expansion project and determined that the internal
rate of return is lower than the firm desires. Which one of the following changes to the project
would be most expected to increase the project’s internal rate of return?
A) Decreasing the required discount rate
B) Increasing the initial investment in fixed assets
C) Condensing the firm’s cash inflows into fewer years without lowering the total amount of
those inflows
D) Eliminating the salvage value
E) Decreasing the amount of the final cash inflow
26) The internal rate of return is:
A) the discount rate that makes the net present value of a project equal to the initial cash outlay.
B) equivalent to the discount rate that makes the net present value equal to one.
C) tedious to compute without the use of either a financial calculator or a computer.
D) highly dependent upon the current interest rates offered in the marketplace.
E) a better methodology than net present value when dealing with unconventional cash flows.
27) The IRR that causes the net present value of the differences between two project’s cash flows
to equal zero is called the:
A) required return.
B) zero-sum rate.
C) present value rate.
D) break-even rate.
E) crossover rate.
28) Swenson’s is considering two mutually exclusive projects, Projects A and B, and has
determined that the crossover rate for these projects is 11.7 percent. Given this you know that:
A) neither project will be accepted if the discount rate is less than 11.7 percent.
B) both projects have a negative NPV at discount rates greater than 11.7 percent.
C) both projects provide an internal rate of return of 11.7 percent.
D) both projects have a zero NPV at a discount rate of 11.7 percent.
E) the project that is acceptable at a discount rate of 11 percent should be rejected at a discount
rate of 12 percent.
29) You are comparing two mutually exclusive projects. The crossover point is 12.3 percent.
You have determined that you should accept project A if the required return is 13.1 percent. This
implies you should:
A) always accept Project A.
B) be indifferent to the projects at any discount rate above 13.1 percent.
C) always accept Project A if the required return exceeds the crossover rate.
D) accept Project B only when the required return is equal to the crossover rate.
E) accept Project B if the required return is less than 13.1 percent.
30) Graphing the crossover point helps explain:
A) why one project is always superior to another project.
B) how decisions concerning mutually exclusive projects are derived.
C) how the duration of a project affects the decision as to which project to accept.
D) how the net present value and the initial cash outflow of a project are related.
E) how the profitability index and the net present value are related.
31) A project with financing type cash flows is typified by a project that has which one of the
following characteristics?
A) Conventional cash flows
B) Cash flows that extend beyond the acceptable payback period
C) One year or more in the middle of a project where the cash flows are equal to zero
D) A cash inflow at Time 0
E) Cash inflows that are equal in amount
32) Which one of the following characteristics is most associated with financing type projects?
A) Long payback period
B) Multiple internal rates of return
C) Cash inflows that equal cash outflows when ignoring the time value of money
D) Prepaid services
E) Conventional cash flows
33) Assume a project is independent with financing cash flows. Which one of these statements is
correct?
A) The IRR cannot be used to determine the acceptability of the project.
B) The project is acceptable if the required return exceeds the IRR.
C) The project is acceptable only if the NPV is zero or negative.
D) The project’s required rate of return will always be negative.
E) The project is acceptable if the internal rate of return is negative.
34) The internal rate of return is defined as the:
A) maximum rate of return a firm expects to earn on a project.
B) rate of return a project will generate if the project is financed solely with internal funds.
C) discount rate that equates the net cash inflows of a project to zero.
D) discount rate which causes the net present value of a project to equal zero.
E) discount rate that causes the profitability index for a project to equal zero.
35) You are viewing a graph that plots the NPVs of a project to various discount rates that could
be applied to the project’s cash flows. What is the name given to this graph?
A) Project tract
B) Projected risk profile
C) NPV profile
D) NPV route
E) Present value sequence
36) There are two distinct discount rates at which a particular project will have a zero net
present value. In this situation, the project is said to:
A) have two net present value profiles.
B) have operational ambiguity.
C) create a mutually exclusive investment decision.
D) produce multiple economies of scale.
E) have multiple rates of return.
37) If a firm accepts Project A it will not be feasible to also accept Project B because both
projects would require the simultaneous and exclusive use of the same piece of machinery. These
projects are considered to be:
A) independent.
B) interdependent.
C) mutually exclusive.
D) economically scaled.
E) operationally distinct.
38) Which one of the following is a project acceptance indicator given an independent project
with investing type cash flows?
A) Profitability index that is less than 1.0
B) Project’s internal rate of return that is less than the required return
C) Discounted payback period that is greater than the required return
D) Average accounting return that is less than the internal rate of return
E) Modified internal rate of return that exceeds the required return
39) Which one of the following is the best example of two mutually exclusive projects?
A) Building a furniture store beside a clothing outlet in the same shopping mall
B) Producing both plastic forks and spoons on the same assembly line
C) Using an empty warehouse to store both raw materials and finished goods
D) Promoting two products during the same television commercial
E) Waiting until a machine finishes molding Product A before being able to mold Product B
40) Southern Chicken is considering two projects. Project A consists of creating an outdoor
eating area on the unused portion of the restaurant’s property. Project B would use that outdoor
space for creating a drive-thru service window. When trying to decide which project to accept,
the firm should rely most heavily on which one of the following analytical methods?
A) Profitability index
B) Internal rate of return
C) Payback
D) Net present value
E) Accounting rate of return
41) Mutually exclusive projects are best defined as competing projects that:
A) would need to commence on the same day.
B) have the same initial start-up costs.
C) both require the total use of the same limited resource.
D) both have negative cash outflows at time zero.
E) have the same life span.