CHAPTER 7 Net Present Value and Other Investment Rules Multiple Choice Questions I DEFINITIONS NET PRESENT VALUE a1 The difference between the present value of an investment and its cost is the present value b internal rate of return c payback period d profitability index e discounted payback period Difficulty level Easy NET PRESENT VALUE RULE c2 Which one of the following statements concerning net present value NPV is correct a An investment should be accepted if and only if the NPV is exactly equal to zero b An investment should be accepted only if the NPV is equal to the initial cash flow c An investment should be accepted if the NPV is positive and rejected if it is negative d An investment with greater cash inflows than cash outflows regardless of when the cash flows occur will always have a positive NPV and therefore should always be accepted e Any project that has positive cash flows for every time period after the initial investment should be accepted Difficulty level Easy PAYBACK c3 The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the present value b internal rate of return c payback period d profitability index e discounted cash period Difficulty level Easy PAYBACK RULE a4 Which one of the following statements is correct concerning the payback period a An investment is acceptable if its calculated payback period is less than some pre specified period of time b An investment should be accepted if the payback is positive and rejected if it is negative c An investment should be rejected if the payback is positive and accepted if it is negative d An investment is acceptable if its calculated payback period is greater than some pre specified period of time e An investment should be accepted any time the payback period is less than the discounted payback period given a positive discount rate Difficulty level Easy DISCOUNTED PAYBACK e5 The length of time required for a project s discounted cash flows to equal the initial cost of the project is called the present value b internal rate of return c payback period d discounted profitability index e discounted payback period Difficulty level Easy DISCOUNTED PAYBACK RULE d6 The discounted payback rule states that you should accept projects a which have a discounted payback period that is greater than some pre specified period of time b if the discounted payback is positive and rejected if it is negative c only if the discounted payback period equals some pre specified period of time d if the discounted payback period is less than some pre specified period of time e only if the discounted payback period is equal to zero Difficulty level Easy AVERAGE ACCOUNTING RETURN c7 An investment s average net income divided by its average book value defines the average present value b internal rate of return c accounting return d profitability index e payback period Difficulty level Easy AVERAGE ACCOUNTING RETURN RULE b8 An investment is acceptable if its average accounting return AAR a is less than a target AAR b exceeds a target AAR c exceeds the firm s return on equity ROE d is less than the firm s return on assets ROA e is equal to zero and only when it is equal to zero Difficulty level Easy INTERNAL RATE OF RETURN b 9 The discount rate that makes the net present value of an investment exactly equal to zero is called the a external rate of return b internal rate of return c average accounting return d profitability index e equalizer Difficulty level Easy INTERNAL RATE OF RETURN RULE d10 An investment is acceptable if its IRR a is exactly equal to its net present value NPV b is exactly equal to zero c is less than the required return d exceeds the required return e is exactly equal to 100 percent Difficulty level Easy MULTIPLE RATES OF RETURN e11 The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the problem present value profiling b operational ambiguity c mutually exclusive investment decision d issues of scale e multiple rates of return Difficulty level Medium MUTUALLY EXCLUSIVE PROJECTS c12 A situation in which accepting one investment prevents the acceptance of another investment is called the present value profile b operational ambiguity decision c mutually exclusive investment decision d issues of scale problem e multiple choices of operations decision Difficulty level Easy PROFITABILITY INDEX d 13 The present value of an investment s future cash flows divided by the initial cost of the investment is called the present value b internal rate of return c average accounting return d profitability index e profile period Difficulty level Easy PROFITABILITY INDEX RULE a14 An investment is acceptable if the profitability index PI of the investment is a greater than one b less than one c greater than the internal rate of return IRR d less than the net present value NPV e greater than a pre specified rate of return Difficulty lev