Multiple-Choice Questions
1. Capital investments should
a. Earn back their original capital outlay.
b. Only be analyzed using the ARR.
c. Always produce an increase in market share.
d. Always be done using a payback criterion.
e. Do none of the above.
2. To make a capital investment decision, a manager must
a. Estimate the quantity and timing of cash flows.
b. Assess the risk of the investment.
c. Consider the impact of the investment on the firm’s profits.
d. Select investments with a positive NPV.
e. Do all of the above.
3. Mutually exclusive capital budgeting projects are those that
a. If accepted or rejected do not affect the cash flows of other projects.
b. If accepted will produce a negative NPV.
c. If accepted preclude the acceptance of all other competing projects.
d. If rejected preclude the acceptance of all other competing projects.
e. If rejected imply that all other competing projects have a positive NPV.
4. An investment of $1,000 produces a net annual cash inflow of $500 for each of five years. What is the payback period?
a. Two years
b. One-half year
c. Unacceptable
d. Three years
e. Cannot be determined
5. An investment of $1,000 produces a net cash inflow of $600 in the first year and $2,000 in the second year. What is the payback period?
a. 1.67 years
b. 0.50 year
c. 2.00 years
d. 1.20 years
e. Cannot be determined
6. The payback period suffers from which of the following deficiencies?
a. It is a rough measure of the uncertainty of future cash flows.
b. It helps control the risk of obsolescence.
c. It ignores the time value of money.
d. It ignores the financial performance of a project beyond the payback period.
e. Both c and d.
7. The accounting rate of return has one specific advantage not possessed by the payback period in that it
a. Considers the time value of money.
b. Measures the value added by a project.
c. Considers the profitability of a project beyond the payback period.
d. Is more widely accepted by financial managers.
e. Is always an accurate measure of profitability.
8. An investment of $1,000 provides an average net income of $220 with zero salvage value. Depreciation is $20 per year. The accounting rate of return using the original investment is
a. 44 percent.
b. 22 percent.
c. 20 percent.
d. 40 percent.
e. None of the above.
9. If the net present value is positive, it signals
a. That the initial investment has been recovered.
b. That the required rate of return has been earned.
c. That the value of the firm has increased.
d. All of the above.
e. Both a and b.
10. net present value measures
a. The profitability of an investment.
b. The change in wealth.
c. The change in firm value.
d. The difference in present value of cash inflows and outflows.
e. All of the above.