CHAPTER 7Net Present Value and Other Investment RulesMultiple Choice Questions:I.DEFINITIONSNET PRESENT VALUEa1.The difference between the present value of an investment and its cost is the:a.net present value.b.internal rate of return.c.payback period.d.profitability index.e.discounted payback period.Difficulty level: EasyNET PRESENT VALUE RULEc2.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: EasyPAYBACKc3.The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:a.net present value.b.internal rate of return.c.payback period.d.profitability index.e.discounted cash period.Difficulty level: EasyPAYBACK RULEa4.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: EasyDISCOUNTED PAYBACKe5.The length of time required for a projects discounted cash flows to equal the initial cost of the project is called the:a.net present value.b.internal rate of return.c.payback period.d.discounted profitability index.e.discounted payback period.Difficulty level: EasyDISCOUNTED PAYBACK RULEd6.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: EasyAVERAGE ACCOUNTING RETURNc7.An investments average net income divided by its average book value defines the average:a.net present value.b.internal rate of return.c.accounting return.d.profitability index.e.payback period.Difficulty level: EasyAVERAGE ACCOUNTING RETURN RULEb8.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 firms return on equity (ROE).d.is less than the firms return on assets (ROA).e.is equal to zero and only when it is equal to zero.Difficulty level: EasyINTERNAL RATE OF RETURNb.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: EasyINTERNAL RATE OF RETURN RULEd10.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: EasyMULTIPLE RATES OF RETURNe11.The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _ problem.a.net present value profilingb.operational ambiguityc.mutually exclusive investment decisiond.issues of scalee.multiple rates of returnDifficulty level: MediumMUTUALLY EXCLUSIVE PROJECTSc12.A situation in which accepting one investment prevents the acceptance of another investment is called the:a.net 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: EasyPROFITABILITY INDEXd.13.The present value of an investments future