Multiple Choice Questions
1. Capital investments should
a. Always produce an increase in market share.
b. Only be analyzed using the ARR.
c. Earn back their original capital outlay.
d. Always be done using a payback criterion.
e. Do none of these.
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. Choose a decision criterion to assess viability of the investment (such as payback period or NPV).
e. Do all of these.
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 rejected preclude the acceptance of all other competing projects.
d. If accepted 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 $ 2,000 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 $ 500 in the first year and $ 750 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 uncertainty of future cash flows.
d. It ignores the financial performance of a project beyond the payback period.
e. Both c and d.
7. The ARR 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. Is always an accurate measure of profitability.
d. Is more widely accepted by financial managers.
e. Considers the profitability of a project beyond the payback period.
8. An investment of $ 1,000 provides an average net income of $ 400. Depreciation is $ 40 per year with zero salvage value. The ARR using the original investment is
a. 44 percent.
b. 22 percent.
c. 20 percent.
d. 40 percent.
e. none of these.
9. If the NPV 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 decreased.
d. All of these.
e. Both a and b.
10. NPV 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 these.