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Question 1
Free
Multiple Choice

Multiple internal rates of return can occur when there is (are):

Choose correct answer/s
A

large abandonment costs at the end of a project's life

B

a major shutdown and rebuilding of a facility sometime during its life

C

more than one sign change in the pattern of cash flows over a project's life.

D

all of the above are correct

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Question 2
Free
Multiple Choice

The ____ measures the present value return for each dollar of initial investment.

Choose correct answer/s
A

payback period

B

internal rate of return

C

net present value

D

profitability index

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Question 3
Free
Multiple Choice

The payback method is at best a crude measure of the risk of a project because it fails to consider the ____ of a project's returns.

Choose correct answer/s
A

liquidity

B

variability

C

timing

D

magnitude

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Question 4
Free
Multiple Choice

According to the profitability index criterion, a project is acceptable if its profitability index is

Choose correct answer/s
A

greater than 1 plus the cost of capital

B

greater than 0

C

greater than or equal to 1

D

greater than 1.1

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Question 5
Free
Multiple Choice

The payback period of an investment is defined as:

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A

the number of years required for cumulative profits from a project to equal the initial outlay.

B

the number of years required for the cumulative cash flows from a project to equal the initial outlay.

C

the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered.

D

a period of time sufficient to earn a rate of return equal to the firm's cost of capital.

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Question 6
Multiple Choice

The advantages of the payback approach include all of the following except:

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A
it is easy to compute
B
it considers a project's liquidity
C
it considers cash flows, not net income
D
it provides an objective measure of profitability
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Question 7
Multiple Choice

The disadvantages of the payback approach include:

Choose correct answer/s
A
cash flows after the payback period are ignored in the calculation
B
payback ignores the time value of money
C
payback fails to provide an objective decision-making criterion
D
all of the above
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Question 8
Multiple Choice

One weakness of the internal rate of return approach is that:

Choose correct answer/s
A
it does not directly consider the timing of the cash flows from a project
B
it fails to provide a straightforward decision-making criterion
C
it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital.
D
none of the above
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Question 9
Multiple Choice

The relationship between NPV and IRR is such that:

Choose correct answer/s
A
both approaches always provide the same ranking of alternative investment projects.
B
the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0.
C
if the NPV of a project is negative, the IRR must be greater than the cost of capital.
D
none of the above
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Question 10
Multiple Choice

When a project has multiple internal rates of return:

Choose correct answer/s
A
the analyst should choose the highest rate to compare with the firm's cost of capital.
B
the analyst should choose the lowest rate to compare with the firm's cost of capital
C
the analyst should choose the rate that seems most "reasonable", given the project's cash flows, to compare with the firm's cost of capital.
D
the analyst should compute the project's net present value and accept the project if its NPV is greater than $0
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Question 11
Multiple Choice

The profitability index (PI) approach:

Choose correct answer/s
A
fails to directly consider the timing of a project's cash flows
B
considers only a project's contributions to net income and does not consider cash flow effects
C
always gives the same accept-reject decisions for independent projects as does NPV and IRR
D
always gives the same accept-reject decisions for mutually exclusive projects as does NPV and IRR
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Question 12
Multiple Choice

In the case of mutually exclusive projects, NPV and PI are likely to yield conflicting decisions when:

Choose correct answer/s
A
the projects require the same net investment
B
the projects are significantly different in size
C
multiple rates of return are a possibility
D
none of the above
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Question 13
Multiple Choice

The objective in solving capital rationing problems is to:

Choose correct answer/s
A
accept all projects with a PI greater than 1.1
B
maximize the IRR of the projects that are accepted
C
maximize the NPV of the projects that are accepted
D
minimize the opportunity cost of the firm's funds
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Question 14
Multiple Choice

Which of the following is not a technique to handle the capital rationing problem?

Choose correct answer/s
A
linear programming
B
goal programming
C
ranking projects according to payback
D
ranking projects according to profitability index
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Question 15
Multiple Choice

In order to compensate for inflation in capital budgeting procedures, it is necessary to:

Choose correct answer/s
A
use constant dollar estimates of costs and revenues
B
use a low discount rate to avoid double counting for inflationary effects
C
rely heavily on the payback procedures
D
none of the above
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Question 16
Multiple Choice

If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return ____ the required rate of return for the firm.

Choose correct answer/s
A
greater than
B
less than
C
equal to
D
cannot be determined from the information given
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Question 17
Multiple Choice

When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.

Choose correct answer/s
A
coincident
B
mutually exclusive
C
independent
D
none of the above
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Question 18
Multiple Choice

The net present value method assumes that the cash flows over the life of the project are reinvested at

Choose correct answer/s
A
the computed internal rate of return
B
the risk-free rate
C
the market capitalization rate
D
the firm's cost of capital
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Question 19
Multiple Choice

The internal rate of return method assumes that the cash flows over the life of the project are reinvested at:

Choose correct answer/s
A
the risk-free rate
B
the firm's cost of capital
C
the computed internal rate of return
D
the market capitalization rate
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Question 20
Multiple Choice

In the absence of capital rationing, the ____ method is normally superior to the ____ method when choosing among mutually exclusive investments.

Choose correct answer/s
A
net present value, internal rate of return
B
internal rate of return, profitability index
C
net present value, profitability index
D
a and c
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