FIN3701 questions and answers 2023
The profitability index is closely related to:
A. payback.
B. discounted payback.
C. average accounting return.
D. net present value.
E. internal rate of return - (correct answer)D. net present value.
Accepting positive NPV projects benefits the stockholders because:
A. it most easily understood valuation process.
B. the value of the expected cashflows are equal to the cost.
C. the value of the expected cashflows are greater than the cost.
D. it is the most easily calculated - (correct answer)C. the value of the expected cashflows are greater
than the cost
All else constant, the net present value of a project increases when:
a. the discount rate increases.
b. each cash inflow is delayed by one year.
c. the initial cost of a project increases.
d. the rate of return decreases.
e. all cash inflows occur during the last year of a project's life instead of periodically throughout the life
of the project - (correct answer)the rate of return decreases
*(NPV increases as rate of return decreases)
All else equal, the payback period for a project will decrease whenever the:
a. initial cost increases.
b. required return for a project increases.
c. assigned discount rate decreases.
d. cash inflows are adjusted such that they occur sooner.
e. duration of a project is lengthened - (correct answer)d. cash inflows are adjusted such that they occur
sooner.
, FIN3701 questions and answers 2023
Analysis using the profitability index:
A. frequently conflicts with the accept and reject decisions generated by the application of the net
present value rule.
B. is useful as a decision tool when investment funds are limited.
C. cannot be used to aid capital rationing.
D. utilizes the same basic variables as those used in the average accounting return.
E. produces results which typically are difficult to comprehend or apply - (correct answer)B. is useful as a
decision tool when investment funds are limited
Disadvantages: Problems with mutually exclusive investments (scale).
Advantages:
May be useful when available investment funds are limited
Easy to understand and communicate.
Correct decision when evaluating independent projects - (correct answer)profitability index
Given that the net present value (NPV) is generally considered to be the best method of analysis, why
should you still use the other methods? - (correct answer)A. You need to use other methods because the
net present value method is unreliable when a project has unconventional cash flows
If a project is assigned a required rate of return equal to zero, then:
A. the timing of the project's cash flows has no bearing on the value of the project.
B. the project will always be accepted.
C. the project will always be rejected.
D. whether the project is accepted or rejected will depend on the timing of the cash flows.
E. the project can never add value for the shareholders - (correct answer)A. the timing of the project's
cash flows has no bearing on the value of the project
If the discount rate is _____ than both projects IRR's reject both - (correct answer)Higher
If the Incremental IRR is _____ than the discount rate do the smaller project - (correct answer)Lower
If the Incremental IRR is ______ than the discount rate do the bigger project - (correct answer)Bigger
If there is a conflict between mutually exclusive projects due to the IRR, one should:
A. drop the two projects immediately.
B. spend more money on gathering information.
The profitability index is closely related to:
A. payback.
B. discounted payback.
C. average accounting return.
D. net present value.
E. internal rate of return - (correct answer)D. net present value.
Accepting positive NPV projects benefits the stockholders because:
A. it most easily understood valuation process.
B. the value of the expected cashflows are equal to the cost.
C. the value of the expected cashflows are greater than the cost.
D. it is the most easily calculated - (correct answer)C. the value of the expected cashflows are greater
than the cost
All else constant, the net present value of a project increases when:
a. the discount rate increases.
b. each cash inflow is delayed by one year.
c. the initial cost of a project increases.
d. the rate of return decreases.
e. all cash inflows occur during the last year of a project's life instead of periodically throughout the life
of the project - (correct answer)the rate of return decreases
*(NPV increases as rate of return decreases)
All else equal, the payback period for a project will decrease whenever the:
a. initial cost increases.
b. required return for a project increases.
c. assigned discount rate decreases.
d. cash inflows are adjusted such that they occur sooner.
e. duration of a project is lengthened - (correct answer)d. cash inflows are adjusted such that they occur
sooner.
, FIN3701 questions and answers 2023
Analysis using the profitability index:
A. frequently conflicts with the accept and reject decisions generated by the application of the net
present value rule.
B. is useful as a decision tool when investment funds are limited.
C. cannot be used to aid capital rationing.
D. utilizes the same basic variables as those used in the average accounting return.
E. produces results which typically are difficult to comprehend or apply - (correct answer)B. is useful as a
decision tool when investment funds are limited
Disadvantages: Problems with mutually exclusive investments (scale).
Advantages:
May be useful when available investment funds are limited
Easy to understand and communicate.
Correct decision when evaluating independent projects - (correct answer)profitability index
Given that the net present value (NPV) is generally considered to be the best method of analysis, why
should you still use the other methods? - (correct answer)A. You need to use other methods because the
net present value method is unreliable when a project has unconventional cash flows
If a project is assigned a required rate of return equal to zero, then:
A. the timing of the project's cash flows has no bearing on the value of the project.
B. the project will always be accepted.
C. the project will always be rejected.
D. whether the project is accepted or rejected will depend on the timing of the cash flows.
E. the project can never add value for the shareholders - (correct answer)A. the timing of the project's
cash flows has no bearing on the value of the project
If the discount rate is _____ than both projects IRR's reject both - (correct answer)Higher
If the Incremental IRR is _____ than the discount rate do the smaller project - (correct answer)Lower
If the Incremental IRR is ______ than the discount rate do the bigger project - (correct answer)Bigger
If there is a conflict between mutually exclusive projects due to the IRR, one should:
A. drop the two projects immediately.
B. spend more money on gathering information.
