Student: ____________________________________________________________

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1. The difference between an investment's market value and its cost is called the: A. present value.

B. net present value.

C. capital value.

D. cash flow.

E. net income.

2. The payback period is the period of time it takes an investment to generate sufficient cash flows to: A. earn the required rate of return.

B. produce the required net income.

C. produce a yield equal to or greater than the market rate on similar investments. D. have a cash inflow, rather than an outflow, for the year. E. recover the investment's initial cost.

3. The discount rate that causes the net present value of a project to equal zero is called the: A. yield to maturity.

B. required return.

C. market rate.

D. internal rate of return.

E. average accounting return.

4. The net present value profile is a graphical relationship depicting how a change in the _____ affects the project's NPV. A. initial cost

B. discount rate

C. timing of the project's cash inflows

D. inflation rate

E. real rate of return

5. If by accepting one investment you eliminate the option of another investment, you are dealing with: A. mutually exclusive investments.

B. negative net present values.

C. conventional cash flows.

D. investments with multiple IRRs.

E. multiple rates of return.

6. Which one of the following indicates a project has a rate of return that exceeds its required return? A. a positive NPV

B. a payback period that exceeds the required period

C. a PI less than 1.0

D. a positive accounting rate of return

E. an AAR that is less than the required rate

7. The NPV rule states that you should accept an investment if the NPV: A. is negative.

B. is positive.

C. is less than or equal to zero.

D. is less than the investment's initial cost.

E. exceeds the investment's initial cost.

8. Net present value is:

A. negative when a project's benefits exceed its costs.

B. equal to the present value of an investment's benefits.

C. equal to zero when the discount rate equals the IRR.

D. negative when a project's IRR exceeds the required rate of return. E. the current measure of a project's cash inflows.

9. Which one of the following statements is correct?

A. The payback period is computed based on the present value of each of a project's cash flows. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback rule works best when applied to mutually exclusive decisions. D. The payback rule is biased in favor of short-term investments. E. The payback period considers the timing and amount of all of a project's cash flows.

10. Payback is best used to evaluate:

A. low-cost, short-term projects.

B. high-cost, short-term projects.

C. low-cost, long-term projects.

D. high-cost, long-term projects.

E. any type of project as long as it is long-term.

11. Which one of the following ignores the time value of money? A. net present value

B. internal rate of return

C. discounted cash flow analysis

D. payback

E. profitability index

12. Which one of the following methods has the greatest bias towards short-term projects? A. net present value

B. internal rate of return

C. average accounting return

D. profitability index

E. payback

13. Which one of the following methods of analysis has the least value from a financial point of view? A. profitability index

B. net present value

C. average accounting return

D. modified internal rate of return

E. internal rate of return

14. Which one of the following methods is based on net income rather than cash flows? A. profitability index

B. internal rate of return

C. average accounting return

D. modified internal rate of return

E. payback

15. The IRR decision rule states that a project should be accepted if its IRR: A. exceeds the IRRs of all other potential projects.

B. is...