公司理财原版题库Chap006

PAGE71PAGE71Ross/Westerfield/Jaffe,CorporateFinance,7/ePAGE72PAGE72TestBank,Chapter6Chapter6SomeAlternativeInvestmentRulesMultipleChoiceQuestionsA$25investmentproduces$27.50attheendoftheyearwithnorisk.Whichofthefollowingtrue?NPVispositiveiftheinterestrateislessthan10%.NPVisnegativeiftheinterestrateislessthan10%.NPViszeroiftheinterestrateisequalto10%.BothAandC.Noneoftheabove.Answer:D Difficulty:Medium Page:Rationale:NPV=($27.50/1.1)-$25.00=$0AcceptingpositiveNPVprojectsbenefitsthestockholdersbecauseitisthemosteasilyunderstoodvaluationprocess.thepresentvalueoftheexpectedcashflowsareequaltothecost.thepresentvalueoftheexpectedcashflowsaregreaterthanthecost.itisthemosteasilycalculated.Noneoftheabove.Answer:C Difficulty:Easy Page:145WhichofthefollowingdoesnotcharacterizeNPV?NPVdoesnotincorporateriskintotheanalysis.NPVincorporatesallrelevantinformation.NPVusesalloftheproject'scashflows.NPVdiscountsallfuturecashflows.UsingNPVwillleadtodecisionsthatmaximizeshareholderAnswer:A Difficulty:Medium Page:144-146Thepaybackperiodrulediscountscashflows.ignoresinitialcost.alwaysusesallpossiblecashflowsinitscalculation.BothAandC.Noneoftheabove.Answer:E Difficulty:Medium Page:146-148Thepaybackperiodruleacceptsallinvestmentprojectsinwhichthepaybackperiodfortheflowsisequaltothecutoffpoint.greaterthanthecutoffpoint.lessthanthecutoffpoint.positive.Noneoftheabove.Answer:C Difficulty:Easy Page:147Consideraninvestmentwithaninitialcostof$20,000andisexpectedtolastfor5years.Theexpectedcashflowinyears1and2are$5,000,inyears3and4are$5,500andinyear5is$1,000.Thetotalcashinflowisexpectedtobe$22,000oranaverageof$4,400peryear.Computethepaybackperiodinyears.3.18years3.82years4.00years4.55yearsNoneoftheabove.Answer:B Difficulty:Medium Page:Rationale:PaybackPeriod=($5,000+$5,000+$5,500=$15,500for3years;remainder$20,000$15,500=4,500.$4,500/$5,500=.81818=.82)=PaybackPeriod=3.82yearsAninvestmentprojectismostlikelytobeacceptedbythepaybackperiodruleandnotacceptedtheNPVruleiftheprojecthasalargeinitialinvestmentwithmoderatepositivecashflowsoveraverylongperiodoftime.averylargenegativecashflowattheterminationoftheproject.mostofthecashflowsatthebeginningoftheproject.AllprojectsapprovedbythepaybackperiodrulewillbeacceptedbytheNPVrule.ThepaybackperiodruleandtheNPVrulecannotbeusedtoevaluatethesametypeofprojects.Answer:B Difficulty:Medium Page:147Thepaybackperiodruleisaconvenientandusefultoolbecauseitprovidesaquickestimateofhowrapidlytheinitialinvestmentwillberecouped.resultsofashortpaybackruledecisionwillbequicklyseen.itdoesnottakeintoaccounttimevalueofmoney.Alloftheabove.Noneoftheabove.Answer:D Difficulty:Medium Page:146-148Aninvestmentwithaninitialcostof$15,000producescashflowsof$5,000annuallyfor5years.thecashflowisevenlyspreadoutovertheyearandthefirmcanborrowat10%,thediscountedpaybackperiodis years.3B) 3.2C) 3.7545Answer:C Difficulty:Medium Page:Rationale:DiscountedPayback:A.1,n23

Aninvestmentprojecthasthecashflowstreamof$-250,$75,$125,$100,and$50.Thecostcapitalis12%.Whatisthediscountpaybackperiod?3.15years3.38years3.45years3.60years4.05yearsAnswer:B Difficulty:Medium Page:Rationale:3yr.CF: $250-$66.96-$99.65-$71.18=$12.21+Fraction=$12.21/$31.78=.38Thediscountedpaybackperiodruleconsidersthetimevalueofmoney.discountsthecutoffpoint.ignoresuncertaincashflows.ispreferredtotheNPVrule.Noneoftheabove.Answer:A Difficulty:Easy Page:149ThepaybackperiodruledeterminesacutoffpointsothatallprojectsacceptedbytheNPVrulewillbeacceptedbypaybackperiodrule.determinesacutoffpointsothatdepreciationisjustequaltopositivecashflowsinthepaybackyear.requiresanarbitrarychoiceofacutoffpoint.variesthecutoffpointwiththeinterestrate.BothAandD.Answer:C Difficulty:Easy Page:147Theaverageaccountingreturnisdeterminedbydividingtheyearlycashflowsbytheinvestment.dividingtheaveragecashflowsbytheinvestment.dividingtheaveragenetincomebytheaverageinvestment.dividingtheaveragenetincomebytheinitialinvestment.dividingthenetincomebythecashAnswer:C Difficulty:Medium Page:150Theinvestmentdecisionrulethatrelatesaveragenetincometoaverageinvestmentisthediscountedcashflowmethod.averageaccountingreturnmethod.averagepaybackmethod.averageprofitabilityindex.Noneoftheabove.Answer:B Difficulty:Easy Page:150ModifiedinternalrateofreturnhandlesthemultipleIRRproblembycombiningcashflowsuntilonlyonechangeinchangeremains.requirestheuseofadiscountrate.doesnotrequiretheuseofadiscountrate.BothAandB.BothAandC.Answer:D Difficulty:Medium Page:157-158Theshortcoming(s)oftheaverageaccountingreturn(AAR)methodis(are)theuseofnetincomeinsteadofcashflows.thepatternofincomeflowshasnoimpactontheAAR.thereisnoclear-cutdecisionrule.Alloftheabove.Noneoftheabove.Answer:D Difficulty:Medium Page:151Thetwofatalflawsoftheinternalrateofreturnrulearearbitrarydeterminationofadiscountrateandfailuretoconsiderinitialexpenditures.arbitrarydeterminationofadiscountrateandfailuretocorrectlyanalyzemutuallyexclusiveinvestmentprojects.arbitrarydeterminationofadiscountrateandthemultiplerateofreturnproblem.failuretoconsiderinitialexpendituresandfailuretocorrectlyanalyzemutuallyexclusiveinvestmentprojects.failuretocorrectlyanalyzemutuallyexclusiveinvestmentprojectsandthemultipleratereturnproblem.Answer:E Difficulty:Medium Page:154-156Amutuallyexclusiveprojectisaprojectwhoseacceptanceorrejectionhasnoeffectonotherprojects.NPVisalwaysnegative.IRRisalwaysnegative.acceptanceorrejectionaffectsotherprojects.cashflowpatternexhibitsmorethanonesignAnswer:D Difficulty:Easy Page:154AprojectwillhavemorethanoneIRRiftheIRRispositive.theIRRisnegative.theNPViszero.thecashflowpatternexhibitsmorethanonesignchange.thecashflowpatternexhibitsexactlyonesignAnswer:D Difficulty:Easy Page:156Usinginternalrateofreturn,aconventionalprojectshouldbeacceptediftheinternalrateofisequaltothediscountrate.greaterthanthediscountrate.lessthanthediscountrate.negative.positive.Answer:B Difficulty:Easy Page:152Aninvestmentcost$10,000withexpectedcashflowsof$3,000for5years.Thediscountrate15.2382%.TheNPVis andtheIRRis fortheproject.A) $0;15.2382%.B) $3.33;27.2242%.C) $5,000;0%.Cannotanswerwithoutoneortheothervalueasinput.Noneoftheabove.Answer:A Difficulty:Medium Page:145-153TheinternalrateofreturnmaybedefinedasthediscountratethatmakestheNPVcashflowsequaltozero.thedifferencebetweenthemarketrateofinterestandtheNPV.themarketrateofinterestlesstherisk-freerate.theprojectacceptanceratesetbymanagement.Noneoftheabove.Answer:A Difficulty:Easy Page:152TheBalistanRugCompanyisconsideringinvestinginanewloomthatwillcost$12,000.Theloomwillcreatepositiveendofyearcashflowof$5,000foreachofthenext3years.TheinternalrateofreturnforthisprojectisA) 10%.B) 11%.C) 12%.D) 13%.E) 14%.Answer:C Difficulty:Medium Page:153TheCarnationChemicalCompanyisinvestinginanincineratortodisposeofwaste.Theincineratorcosts$2.5millionandwillgenerateend-of-yearcashof$1millionforthenext3TheinternalrateofreturnforthisprojectisA) 6.4%.B) 8.6%.C) 9.7%.D) 10.4%.E) 12.0%.Answer:C Difficulty:Medium Page:153ThegraphofNPVandIRRshowstheNPVatdifferentdiscountrates.theNPVof0attheIRRasNPVcutsthehorizontalaxis.theNPVata0%discountrateAlloftheabove.Noneoftheabove.Answer:D Difficulty:Medium Page:153-154Twosignchangesinthecashflowsresultsinhowmanyinternalratesofreturn?01234Answer:C Difficulty:Medium Page:156Whichofthefollowingcorrectlyorderstheinvestmentrulesofaverageaccountingreturninternalrateofreturn(IRR),andnetpresentvalue(NPV)fromthemostdesirabletotheleastdesirable?AAR,IRR,NPVAAR,NPV,IRRIRR,AAR,NPVNPV,AAR,IRRNPV,IRR,AARAnswer:E Difficulty:Easy Page:144-158Apresentvalueiszero.Answer:A Difficulty:Easy Page:152-157LaPorteCompanyisconsideringaprojectthatwouldinvolveaninitialcashoutflowof$1,000.Attheendofyear1,thecashinflowis$1,500andattheendofyear2,thereisanothercashoutflow$200.CalculatethemodifiedinternalrateofreturnifthecostofcapitalisA) 22.1%B) 27.6%C) 31.8%D) 35.2%E)Noneoftheabovewithin1percentagepoint.Answer:CDifficulty:MediumPage:157-158Rationale:TheproblemofmultipleIRRscanoccurwhenthereisonlyonesignchangeinthecashflows.thefirstcashflowisalwayspositive.thecashflowsdeclineoverthelifeoftheproject.thereismorethanonesignchangeinthecashflows.Noneoftheabove.Answer:D Difficulty:Medium Page:156TheelementsthatcauseproblemswiththeuseoftheIRRinprojectsthataremutuallyexclusivearethediscountrateandscaleproblems.timingandscaleproblems.thediscountrateandtimingproblems.scaleandreversingflowproblems.timingandreversingflowproblems.Answer:B Difficulty:Medium Page:IfthereisaconflictbetweenmutuallyexclusiveprojectsduetotheIRR,oneshoulddropthetwoprojectsimmediately.spendmoremoneyongatheringinformation.dependontheNPVasitwillalwaysprovidethemostvalue.dependontheAARbecauseitdoesnotsufferfromthesesameproblems.Noneoftheabove.Answer:C Difficulty:Easy Page:159-163Tpresentvalueofcashflowstoaverageaccountingreturn.presentvalueofcashflowstoinitialinvestmentAnswer:E Difficulty:Easy Page:164Undercapitalrationingtheprofitabilityindexisusedtoselectinvestmentsbyitsexcessprofittoachievethehighestpayoff.rewardperdollarcosttoachievethehighestincrementalNPV.incrementalIRRtomaximizethetotalrateofreturn.capitalusageratetostaywithinbudget.Noneoftheabove.Answer:B Difficulty:Medium Page:165Whichofthefollowingstatementistrue?OnemustknowthediscountratetocomputetheNPVofaprojectbutonecancomputethewithoutreferringtothediscountrate.OnemustknowthediscountratetocomputetheIRRofaprojectbutonecancomputethewithoutreferringtothediscountrate.Paybackaccountsfortimevalueofmoney.TherewillalwaysbeoneIRRregardlessofcashflows.Averageaccountingreturnistheratiooftotalassetstototalnetincome.Answer:A Difficulty:Easy Page:163GrahamandHarvey(2001)foundthat and werethetwomostpopularcapitalbudgetingmethods.InternalRateofReturn;PaybackPeriodInternalRateofReturn;NetPresentValueNetPresentValue;PaybackPeriodModifiedInternalRateofReturn;InternalRateofReturnModifiedInternalRateofReturn;NetPresentAnswer:B Difficulty:Easy Page:166EssayQuestionsTheZiggyTrimandCutCompanycanpurchaseequipmentonsalefor$4,300.Theassethasathree-yearlife,willproduceacashflowof$1,200inthefirstandsecondyear,and$3,000inthethirdyear.Theinterestrateis12%.Calculatetheproject'spayback.Also,calculateproject'sShouldtheprojectbetaken?Checkyouranswerbycomputingtheproject'sNPV.Difficulty:Medium Page:146;Answer:Payback-2.63years.IRR=10.41%.DonottakeprojectasIRR<12%RejecttheprojectNPV=($136.60)TheZiggyTrimandCutCompanycanpurchaseequipmentonsalefor$4,300.Theassethasathree-yearlife,willproduceacashflowof$1,200inthefirstandsecondyear,and$3,000inthethirdyear.Theinterestrateis12%.Calculatetheproject'sDiscountedPaybackandProfitabilityIndexassumingendofyearcashflows.Shouldtheprojectbetaken?IftheAverageAccountingReturnwaspositive,howwouldthisaffectyourdecision?Difficulty:Medium Page:149,150,152Answer:Time0–Cashflows=$-4,300,PresentValueofCashflows=$-4,300Time1and2–Cashflows=$1,200eachperiod,PresentValueofCashflows=$2,028.06forbothperiods,SumofPresentValueofCashflows=$-2,271.94attheendoftime2PI= CFATt/InitialInvestment=$4,163.40/$4,300=.968=.97Bothmeasuresindicaterejection.Apositiveaccountingrateofreturnshouldnotchangethedecision.DPPandPIindicatethatthecostofcapitalisnotbeingcovered.TheWalkerLandscapingCompanycanpurchaseapieceofequipmentfor$3,600.Theassethasatwo-yearlife,willproduceacashflowof$600inthefirstyearand$4,200erestrateis15%.Calculatetheproject'spaybackassumingsteadycashflows.Alsocalculatetheproject'sIRR.Shouldtheprojectbetaken?Checkyouranswerbycomputingtheproject'sNPV.Difficulty:Medium Page:146,Answer:Payback=1.714yearsCalculatedIRR=16.67%.Accepttheproject.NPV=$97.54.Ross/Westerfield/Jaffe,CorporateFinance,7/e 73PAGE74PAGE74TestBank,Chapter6TheWalkerLandscapingCompanycanpurchaseapieceofequipmentfor$3,600.Theassethasatwo-yearlife,willproduceacashflowof$600inthefirstyearand$4,200erestrateis15%.Calculatetheproject'sDiscountedPaybackandProfitabilityIndexassumingsteadycashflows.Shouldtheprojectbetaken?IftheAverageAccountingReturnwaspositive,howwouldthisaffectyourdecision?Difficulty:Medium Page:149,150,152Answer:Time0–Cashflows=$-3,600,PresentValueofCashflows=$-3,600DPP=1+($3,078.26/$3,175.80)=1.969=1.97yearsPI=CFATtBothmeasuresindicateacceptance.Apositiveaccountingrateofreturnwouldbeconsistentwiththisdecision.RelianceonAARshouldnotbethekey,asDPPandPIindicateearningarategreaterthancostofcapital.CutlerCompactswillgeneratecashflowsof$30,000inyearone,and$65,000inyeartwo.However,iftheymakeanimmediateinvestmentof$20,000,theycanexpecttohavecashstreamsof$55,000inyear1and$63,000inyear2instead.Theinterestrateis9%.CalculatetheNPVoftheproposedproject.Whywouldthe