Corporate finance

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 1.

The difference between the present value of an investment?s future cash flows and its initial cost is the:

net present value.

internal rate of return.

payback period.

profitability index.

discounted payback period.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 2.

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

A financing project should be accepted if, and only if, the NPV is exactly equal to zero.

An investment project should be accepted only if the NPV is equal to the initial cash flow.

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Any type of project with greater total cash inflows than total cash outflows, should always be accepted.

An investment project that has positive cash flows for every time period after the initial investment should be accepted.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 3.

The primary reason that company projects with positive net present values are considered acceptable is that:

they create value for the owners of the firm.

the project's rate of return exceeds the rate of inflation.

they return the initial cash outlay within three years or less.

the required cash inflows exceed the actual cash inflows.

the investment's cost exceeds the present value of the cash inflows.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 4.

Accepting a positive net present value (NPV) project:

indicates the project will pay back within the required period of time.

means the present value of the expected cash flows is equal to the project’s cost.

ignores the inherent risks within the project.

guarantees all cash flow assumptions will be realized.

is expected to increase the stockholders’ value by the amount of the NPV.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 5.

The net present value method of capital budgeting analysis does all of the following except:

incorporate risk into the analysis.

consider all relevant cash flow information.

use all of a project's cash flows.

discount all future cash flows.

provide a specific anticipated rate of return.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 6.

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

−$287.22

−$1,195.12

−$1,350.49

$204.36

$797.22

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

 7.

References

WorksheetSection: 5.2 The Payback Period Method

 8.

References

WorksheetSection: 6.2 The Baldwin Company: An Example

 9.

References

WorksheetSection: 6.1 Incremental Cash Flows: The Key to Capital BudgetingSection: 6.2 The Baldwin Company: An Example