CHAPTER 3

Question 1
Question text
Mario's Home Systems has sales of $2,800, cost of goods sold of $2,100, inventory of $600,
and accounts receivable of $600. How many days, on average, does it take Mario's to sell its
inventory?
Select one:
a. 42.10 days
b. 66.37 days
c. 78.21 days
d. 104.29 days
e. 273.75 days
Feedback
The correct answer is: 104.29 days

Question 2
Question text
The three parts of the Du Pont identity can be generally described as:I. operating efficiency,
asset use efficiency and firm profitability; II. financial leverage, operating efficiency and asset
use efficiency; III. the equity multiplier, the profit margin and the total asset turnover; IV. the
debt-equity ratio, the capital intensity ratio and the profit margin
Select one:
a. I and II only
b. II and III only
c. I and IV only
d. I and III only
e. III and IV only
Feedback
The correct answer is: II and III only

Question 3
Question text
The main objective of long-term financial planning models is to:
Select one:
a. determine the asset requirements given the investment activities of the firm.
b. plan for contingencies or uncertain events.
c. determine the external financing needs.
d. All of the above.
e. None of the above.
Feedback
The correct answer is: All of the above.

Question 4
Question text
A firm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-
ratio of 10, and a book value per share of $.50. What is the market-to-book ratio?
Select one:
a. 1.6
b. 2.4
c. 3.0
d. 3.2
e. 3.6
Feedback
The correct answer is: 3.2

Question 5
Question text
The market-to-book ratio is measured as:
Select one:
a. total equity divided by total assets.
b. net income times market price per share of stock.
c. net income divided by market price per share of stock.
d. market price per share of stock divided by earnings per share.
e. market value of equity per share divided by book value of equity per share.
Feedback
The correct answer is: market value of equity per share divided by book value of equity per
share.

Question 6
Question text
Financial ratios that measure a firm's ability to pay its bills over the short run without undue
stress are known as _____ ratios.
Select one:
a. asset management
b. long-term solvency
c. short-term solvency
d. profitability
e. market value
Feedback
The correct answer is: short-term solvency

Question 7
Question text
A supplier, who requires payment within ten days, is most concerned with which one of the
following ratios when granting credit?
Select one:
a. current
b. cash
c. debt-equity
d. quick
e. total debt
Feedback
The correct answer is: cash

Question 8
Question text
The cash ratio is measured as:
Select one:
a. current assets divided by current liabilities.
b. current assets minus cash on hand, divided by current liabilities.
c. current liabilities plus current assets, divided by cash on hand.
d. cash on hand plus inventory, divided by current liabilities.
e. cash on hand divided by current liabilities.
Feedback
The correct answer is: cash on hand divided by current liabilities.

Question 9
Question text
The financial ratio days' sales in receivables is measured as:
Select one:
a. receivables turnover plus 365 days.
b. accounts receivable times 365 days.
c. accounts receivable plus sales, divided by 365 days.
d. 365 days divided by the receivables turnover.
e. 365 days divided by the accounts receivable.
Feedback
The correct answer is: 365 days divided by the receivables turnover.

Question 10
Question text
A firm has a market capitalization of $2 million, market value of interest bearing debt of $1
million, book value of interest bearing debt of $500,000 and cash of $100,000. What is the
enterprise value?
Select one:
a. $2.5 million
b. $2.9 million
c. $3.0 million
d. $3.5 million
e. $3.6 million
Feedback
The correct answer is: $2.9 million

Question 11
Question text
Which one of the following sets of ratios applies most directly to shareholders?
Select one:
a. return on assets and profit margin
b. quick ratio and times interest earned
c. price-earnings ratio and debt-equity ratio
d. market-to-book ratio and price-earnings ratio
e. cash coverage ratio and times equity multiplier
Feedback
The correct answer is: market-to-book ratio and price-earnings ratio

Question 12
Question text
Which of the following will increase sustainable growth?
Select one:
a. Buy back existing stock
b. Decrease debt
c. Increase profit margin
d. Increase asset requirement or asset turnover ratio
e. Increase dividend payout ratio
Feedback
The correct answer is: Increase profit margin

Question 13
Question text
A firm has a return on equity of 15%. The debt-equity ratio is 50%. The total asset turnover is
1.25 and the profit margin is 8%. The total equity is $3,200. What is the amount of the net
income?
Select one:
a. $480
b. $500
c. $540
d. $600
e. $620
Feedback
The correct answer is: $480

Question 14
Question text
On a common-size balance sheet, all _____ accounts are shown as a percentage of _____.
Select one:
a. income; total assets
b. liability; net income
c. asset; sales
d. liability; total assets
e. equity; sales
Feedback
The correct answer is: liability; total assets

Question 15
Question text
The inventory turnover ratio is measured as:
Select one:
a. total sales minus inventory.
b. inventory times total sales.
c. cost of goods sold divided by inventory.
d. inventory times cost of goods sold.
e. inventory plus cost of goods sold.
Feedback
The correct answer is: cost of goods sold divided by inventory.

Question 16
Question text
Samuelson's has a debt-equity ratio of 40%, sales of $8,000, net income of $600, and total
debt of $2,400. What is the return on equity?
Select one:
a. 6.25%
b. 7.50%
c. 9.75%
d. 10.00%
e. 11.25%
Feedback
The correct answer is: 10.00%

Question 17
Question text
The financial ratio measured as net income divided by total equity is known as the firm's:
Select one:
a. profit margin.
b. return on assets.
c. return on equity.
d. asset turnover.
e. earnings before interest and taxes.
Feedback
The correct answer is: return on equity.

Question 18
Question text
The long-term debt ratio is probably of most interest to a firm's:
Select one:
a. credit customers.
b. employees.
c. suppliers.
d. mortgage holder.
e. shareholders.
Feedback
The correct answer is: mortgage holder.

Question 19
Question text
The financial ratio measured as earnings before interest and taxes, divided by interest
expense is the:
Select one:
a. cash coverage ratio.
b. debt-equity ratio.
c. times interest earned ratio.
d. gross margin.
e. total debt ratio.
Feedback
The correct answer is: times interest earned ratio.

Question 20
Question text
Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the
internal growth rate?
Select one:
a. 7.11%
b. 7.70%
c. 8.34%
d. 8.46%
e. 11.99%
Feedback
The correct answer is: 8.34%

Question 21
Question text
Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a
_____ of 5%.
Select one:
a. return on assets
b. return on equity
c. profit margin
d. Du Pont measure
e. total asset turnover
Feedback
The correct answer is: profit margin

Question 22
Question text
Which one of the following statements is correct concerning ratio analysis?
Select one:
a. A single ratio is often computed differently by different individuals.
b. Ratios do not address the problem of size differences among firms.
c. Only a very limited number of ratios can be used for analytical purposes.
d. Each ratio has a specific formula that is used consistently by all analysts.
e. Ratios can not be used for comparison purposes over periods of time.
Feedback
The correct answer is: A single ratio is often computed differently by different individuals.

Question 23
Question text
The _____ breaks down return on equity into three component parts.
Select one:
a. Du Pont identity
b. return on assets
c. statement of cash flows
d. asset turnover ratio
e. equity multiplier
Feedback
The correct answer is: Du Pont identity

Question 24
Question text
A banker considering loaning a firm money for ten years would most likely prefer the firm
have a debt ratio of _____ and a times interest earned ratio of _____.
Select one:
a. .75; .75
b. .50; 1.00
c. .45; 1.75
d. .40; 2.50
e. .35; 3.00
Feedback
The correct answer is: .35; 3.00

Question 25
Question text
Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest
earned ratio is 3.8 and the depreciation expense is $80. What is the value of the cash
coverage ratio?
Select one:
a. 2.71
b. 3.64
c. 4.12
d. 5.78
e. 6.10
Feedback
The correct answer is: 4.12
Question 26
Question text
A firm has net working capital of $600, net fixed assets of $2,400, sales of $8,000, and
current liabilities of $800. How many dollars worth of sales are generated from every $1 in
total assets?
Select one:
a. $2.11
b. $2.32
c. $3.73
d. $4.52
e. $6.70
Feedback
The correct answer is: $2.11

Question 27
Question text
If a firm decreases its operating costs, all else constant, then:
Select one:
a. the profit margin increases while the equity multiplier decreases.
b. the return on assets increases while the return on equity decreases.
c. the total asset turnover rate decreases while the profit margin increases.
d. both the profit margin and the equity multiplier increase.
e. both the return on assets and the return on equity increase.
Feedback
The correct answer is: both the return on assets and the return on equity increase.

Question 28
Question text
Catherine’s Consulting has a net income of $ 1,400 and a total equity of $ 12,000. The debt-
equity ratio is 1.0 and the plowback is 30%. What is the return on assets?
Select one:
a. 4.24%
b. 4.64%
c. 5.23%
d. 5.83%
e. None of the above
Feedback
The correct answer is: 5.83%

Question 29
Question text
Rosita's Restaurant has sales of $5,000, total debt of $1,300, total equity of $2,400, and a
profit margin of 6%. What is the return on assets?
Select one:
a. 8.11%
b. 12.50%
c. 23.08%
d. 27.13%
e. 135.13%
Feedback
The correct answer is: 8.11%

Question 30
Question text
A firm has sales of $1,500, net income of $100, total assets of $1,000, and total equity of
$700. Interest expense is $50. What is the common-size statement value of the interest
expense?
Select one:
a. 3.3%
b. 5.0%
c. 7.1%
d. 16.7%
e. 50.0%
Feedback
The correct answer is: 3.3%

Question 31
Question text
The receivables turnover ratio is measured as:
Select one:
a. sales plus accounts receivable.
b. sales divided by accounts receivable.
c. sales minus accounts receivable, divided by sales.
d. accounts receivable times sales.
e. accounts receivable divided by sales.
Feedback
The correct answer is: sales divided by accounts receivable.

Question 32
Question text
From a cash flow position, which one of the following ratios best measures a firm's ability to
pay the interest on its debts?
Select one:
a. times interest earned ratio
b. cash coverage ratio
c. cash ratio
d. quick ratio
e. Interval measure
Feedback
The correct answer is: cash coverage ratio

Question 33
Question text
It is easier to evaluate a firm using its financial statements when the firm:
Select one:
a. is a conglomerate.
b. is global in nature.
c. uses the same accounting procedures as other firms in its industry.
d. has a different fiscal year than other firms in its industry.
e. tends to have one-time events such as asset sales and property acquisitions.
Feedback
The correct answer is: uses the same accounting procedures as other firms in its industry.

Question 34
Question text
The External Funds Needed (EFN) equation does not measure the:
Select one:
a. additional asset requirements given a change in sales.
b. additional total liabilities raised given the change in sales.
c. rate of return to shareholders given the change in sales.
d. net income expected to be earned given the change in sales.
e. None of the above.
Feedback
The correct answer is: rate of return to shareholders given the change in sales.

Question 35
Question text
The sustainable growth rate will be equivalent to the internal growth rate when:
Select one:
a. a firm has no debt.
b. the growth rate is positive.
c. the plowback ratio is positive but less than 1.
d. a firm has a debt-equity ratio exactly equal to 1.
e. net income is greater than zero.
Feedback
The correct answer is: a firm has no debt.

Question 36
Question text
Syed's Industries has accounts receivable of $700, inventory of $1,200, sales of $4,200, and
cost of goods sold of $3,500. How long does it take Syed's to both sell its inventory and then
collect the payment on the sale?
Select one:
a. 110 days
b. 131 days
c. 145 days
d. 186 days
e. 210 days
Feedback
The correct answer is: 186 days

Question 37
Question text
The total asset turnover ratio is measured as:
Select one:
a. sales minus total assets.
b. sales divided by total assets.
c. sales times total assets.
d. total assets divided by sales.
e. total assets plus sales.
Feedback
The correct answer is: sales divided by total assets.

Question 38
Question text
A firm has total debt of $1,200 and a debt-equity ratio of .40. What is the value of the total
assets?
Select one:
a. $1,680
b. $3,000
c. $3,520
d. $4,200
e. $5,300
Feedback
The correct answer is: $4,200

Question 39
Question text
Which two of the following are most apt to cause a firm to have a higher price-earnings
ratio? I. slow industry outlook; II. high prospect of firm growth; III. very low current earnings;
IV. investors with a low opinion of the firm
Select one:
a. I and II only
b. II and III only
c. II and IV only
d. I and III only
e. III and IV only
Feedback
The correct answer is: II and III only

Question 40
Question text
The financial ratio measured as total assets minus total equity, divided by total assets, is the:
Select one:
a. total debt ratio.
b. equity multiplier.
c. debt-equity ratio.
d. current ratio.
e. times interest earned ratio.

CHAPTER 5
Question 1
Given that the net present value (NPV) is generally considered to be the best
method of analysis, why should you still use the other methods?
Select one:
a. The other methods help validate whether or not the results from the net
present value analysis are reliable.
b. You need to use the other methods since conventional practice dictates that
you only accept projects after you have generated three accept indicators.
 c. You need to use other methods because the net present value method is
unreliable when a project has unconventional cash flows.
d. The internal rate of return must always indicate acceptance since this is the
best method from a financial perspective.
e. The discounted payback method must always be computed to determine if a
project returns a positive cash flow since NPV does not measure this aspect of a
project.
Feedback
The correct answer is: The other methods help validate whether or not the
results from the net present value analysis are reliable.

Question 2
The discount rate that makes the net present value of an investment exactly
equal to zero is called the:
Select one:
a. external rate of return.
b. internal rate of return.
c. average accounting return.
d. profitability index.
e. equalizer.
Feedback
The correct answer is: internal rate of return.

Question 3
Which one of the following statements is correct concerning the payback
period?
Select one:
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.
Feedback
The correct answer is: An investment is acceptable if its calculated payback
period is less than some pre-specified period of time.

Question 4
The payback period rule is a convenient and useful tool because:
Select one:
a. it provides a quick estimate of how rapidly the initial investment will be
recouped.
b. results of a short payback rule decision will be quickly seen.
c. it does not have to take into account time value of money.
d. All of the above.
e. None of the above.
Feedback
The correct answer is: All of the above.

Question 5
The internal rate of return (IRR): I. rule states that a typical investment project
with an IRR that is less than the required rate should be accepted. II. is the rate
generated solely by the cash flows of an investment. III. is the rate that causes
the net present value of a project to exactly equal zero. IV. can effectively be
used to analyze all investment scenarios.
Select one:
a. I and IV only
b. II and III only
c. I, II, and III only
d. II, III, and IV only
e. I, II, III, and IV
Feedback
The correct answer is: II and III only

Question 6
If there is a conflict between mutually exclusive projects due to the IRR, one
should:
Select one:
a. drop the two projects immediately.
b. spend more money on gathering information.
c. depend on the NPV as it will always provide the most value.
d. depend on the payback because it does not suffer from these same problems.
e. None of the above.
Feedback
The correct answer is: depend on the NPV as it will always provide the most
value.

Question 7
Accepting positive NPV projects benefits the stockholders because:
Select one:
a. it is the most easily understood valuation process.
b. the present value of the expected cash flows are equal to the cost.
c. the present value of the expected cash flows are greater than the cost.
d. it is the most easily calculated.
e. None of the above.
Feedback
The correct answer is: the present value of the expected cash flows are greater
than the cost.

Question 8
Analysis using the profitability index:
Select one:
a. frequently conflicts with the accept and reject decisions generated by the
application of the net present value rule.
b. is useful as a decision tool when investment funds are limited.
c. cannot be used to aid capital rationing.
d. utilizes the same basic variables as those used in the average accounting
return.
e. produces results which typically are difficult to comprehend or apply.
Feedback
The correct answer is: is useful as a decision tool when investment funds are
limited.

Question 9
The present value of an investment's future cash flows divided by the initial cost
of the investment is called the:
Select one:
a. net present value.
b. internal rate of return.
c. average accounting return.
d. profitability index.
e. profile period.
Feedback
The correct answer is: profitability index.
Question 10
A situation in which accepting one investment prevents the acceptance of
another investment is called the:
Select one:
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.
Feedback
The correct answer is: mutually exclusive investment decision.

Question 11
The profitability index is closely related to:
Select one:
a. payback.
b. discounted payback.
c. average accounting return.
d. net present value.
e. internal rate of return.
Feedback
The correct answer is: net present value.

Question 12
The elements that cause problems with the use of the IRR in projects that are
mutually exclusive are:
Select one:
a. the discount rate and scale problems.
b. timing and scale problems.
c. the discount rate and timing problems.
d. scale and reversing flow problems.
e. timing and reversing flow problems.
Feedback
The correct answer is: timing and scale problems.

Question 13
The internal rate of return tends to be:
Select one:
a. easier for managers to comprehend than the net present value.
b. extremely accurate even when cash flow estimates are faulty.
c. ignored by most financial analysts.
d. used primarily to differentiate between mutually exclusive projects.
e. utilized in project analysis only when multiple net present values apply.
Feedback
The correct answer is: easier for managers to comprehend than the net present
value.

Question 14
The discounted payback rule may cause:
Select one:
a. some positive net present value projects to be rejected.
b. the most liquid projects to be rejected in favor of less liquid projects.
c. projects to be incorrectly accepted due to ignoring the time value of money.
d. some projects with negative net present values to be accepted.
e. Both A and D.
Feedback
The correct answer is: Both A and D.

Question 15
The profitability index is the ratio of:
Select one:
a. average net income to average investment.
b. internal rate of return to current market interest rate.
c. net present value of cash flows to internal rate of return.
d. net present value of cash flows to return on equity.
e. present value of cash flows to initial investment cost.
Feedback
The correct answer is: present value of cash flows to initial investment cost.

Question 16
The possibility that more than one discount rate will make the NPV of an
investment equal to zero is called the _____ problem.
Select one:
a. net present value profiling
b. operational ambiguity
c. mutually exclusive investment decision
d. issues of scale
e. multiple rates of return
Feedback
The correct answer is: multiple rates of return

Question 17
Which of the following does not characterize NPV?
Select one:
a. NPV does not explicitly incorporate risk into the analysis.
b. NPV incorporates all relevant cash flow information.
c. NPV uses all of the project's cash flows.
d. NPV discounts all future cash flows.
e. Using NPV will lead to decisions that maximize shareholder wealth.
Feedback
The correct answer is: NPV does not explicitly incorporate risk into the
analysis.

Question 18
The length of time required for a project's discounted cash flows to equal the
initial cost of the project is called the:
Select one:
a. net present value.
b. internal rate of return.
c. payback period.
d. discounted profitability index.
e. discounted payback period.
Feedback
The correct answer is: discounted payback period.

Question 19
The Liberty Co. is considering two projects. Project A consists of building a
wholesale book outlet on lot #169 of the Englewood Retail Center. Project B
consists of building a sit-down restaurant on lot #169 of the Englewood Retail
Center. When trying to decide whether to build the book outlet or the restaurant,
management should rely most heavily on the analysis results from the _____
method of analysis.
Select one:
a. profitability index
b. internal rate of return
c. payback
d. net present value
e. accounting rate of return
Feedback
The correct answer is: net present value

Question 20
When two projects both require the total use of the same limited economic
resource, the projects are generally considered to be:
Select one:
a. independent.
b. marginally profitable.
c. mutually exclusive.
d. acceptable.
e. internally profitable.
Feedback
The correct answer is: mutually exclusive.

Question 1
The payback period rule:
Select one:
a. determines a cutoff point so that all projects accepted by the NPV rule will be
accepted by the payback period rule.
b. determines a cutoff point so that depreciation is just equal to positive cash
flows in the payback year.
c. requires an arbitrary choice of a cutoff point.
d. varies the cutoff point with the interest rate.
e. Both A and D.
Feedback
The correct answer is: requires an arbitrary choice of a cutoff point.

Question 2
Matt is analyzing two mutually exclusive projects of similar size and has
prepared the following data. Both projects have 5 year lives. Matt has been
asked for his best recommendation given this information. His recommendation
should be to accept:
Select one:
a. project B because it has the shortest payback period.
b. both projects as they both have positive net present values.
c. project A and reject project B based on their net present values.
d. project B and reject project A based on other criteria not mentioned in the
problem.
e. project B and reject project A based on both the payback period and the
average accounting return.
Feedback
The correct answer is: project A and reject project B based on their net present
values.

Question 3
The payback period rule:
Select one:
a. discounts cash flows.
b. ignores initial cost.
c. always uses all possible cash flows in its calculation.
d. Both A and C.
e. None of the above.
Feedback
The correct answer is: None of the above.

Question 4
The discounted payback period of a project will decrease whenever the:
Select one:
a. discount rate applied to the project is increased.
b. initial cash outlay of the project is increased.
c. time period of the project is increased.
d. amount of each project cash inflow is increased.
e. costs of the fixed assets utilized in the project increase.
Feedback
The correct answer is: amount of each project cash inflow is increased.

Question 5
Graphing the NPVs of mutually exclusive projects over different discount rates
helps demonstrate:
Select one:
a. how the incremental IRR varies with changes in the discount rate.
b. how decisions concerning mutually exclusive projects are derived.
c. how the duration of a project affects the decision as to which project to
accept.
d. how the payback period and the initial cash outflow of a project are related.
e. how the profitability index and the net present value are related.
Feedback
The correct answer is: how decisions concerning mutually exclusive projects are
derived.
Question 6
Which one of the following is the best example of two mutually exclusive
projects?
Select one:
a. planning to build a warehouse and a retail outlet side by side.
b. buying sufficient equipment to manufacture both desks and chairs
simultaneously.
c. using an empty warehouse for storage or renting it entirely out to another
firm.
d. using the company sales force to promote sales of both shoes and socks.
e. buying both inventory and fixed assets using funds from the same bond issue.
Feedback
The correct answer is: using an empty warehouse for storage or renting it
entirely out to another firm.

Question 7
The primary reason that company projects with positive net present values are
considered acceptable is that:
Select one:
a. they create value for the owners of the firm.
b. the project's rate of return exceeds the rate of inflation.
c. they return the initial cash outlay within three years or less.
d. the required cash inflows exceed the actual cash inflows.
e. the investment's cost exceeds the present value of the cash inflows.
Feedback
The correct answer is: they create value for the owners of the firm.

Question 8
In actual practice, managers may use the: I. IRR because the results are easy to
communicate and understand. II. payback because of its simplicity. III. net
present value because it is considered by many to be the best method of
analysis.
Select one:
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
e. None of the above
Feedback
The correct answer is: I, II, and III

Question 9
The payback period rule accepts all investment projects in which the payback
period for the cash flows is:
Select one:
a. greater than one.
b. greater than the cutoff point.
c. less than the cutoff point.
d. positive.
e. None of the above.
Feedback
The correct answer is: less than the cutoff point.

Question 1
Graham and Harvey (2001) found that ___ and ___ were the two most popular
capital budgeting methods.
Select one:
a. Internal Rate of Return; Payback Period
b. Internal Rate of Return; Net Present Value
c. Net Present Value; Payback Period
d. Modified Internal Rate of Return; Internal Rate of Return
e. Modified Internal Rate of Return; Net Present Value
Feedback
The correct answer is: Internal Rate of Return; Net Present Value

Question 2
A project will have more than one IRR if:
Select one:
a. the IRR is positive.
b. the IRR is negative.
c. the NPV is zero.
d. the cash flow pattern exhibits more than one sign change.
e. the cash flow pattern exhibits exactly one sign change.
Feedback
The correct answer is: the cash flow pattern exhibits more than one sign change.

Question 3
The internal rate of return is:
Select one:
a. more reliable as a decision-making tool than net present value whenever you
are considering mutually exclusive projects.
b. equivalent to the discount rate that makes the net present value equal to one.
c. difficult to compute without the use of either a financial calculator or a
computer.
d. dependent upon the interest rates offered in the marketplace.
e. a better methodology than net present value when dealing with
unconventional cash flows.
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The correct answer is: difficult to compute without the use of either a financial
calculator or a computer.

Question 4
Which of the following methods of project analysis are biased towards short-
term projects? I. internal rate of return. II. net present value. III. Payback. IV.
discounted payback
Select one:
a. I and II only
b. III and IV only
c. II and III only
d. I and IV only
e. II and IV only
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The correct answer is: III and IV only

Question 5
The internal rate of return for a project will increase if:
Select one:
a. the initial cost of the project can be reduced.
b. the total amount of the cash inflows is reduced.
c. each cash inflow is moved such that it occurs one year later than originally
projected.
d. the required rate of return is reduced.
e. the salvage value of the project is omitted from the analysis.
Feedback
The correct answer is: the initial cost of the project can be reduced.

Question 6
The two fatal flaws of the internal rate of return rule are:
Select one:
a. arbitrary determination of a discount rate and failure to consider initial
expenditures.
b. arbitrary determination of a discount rate and failure to correctly analyze
mutually exclusive investment projects.
c. arbitrary determination of a discount rate and the multiple rate of return
problem.
d. failure to consider initial expenditures and failure to correctly analyze
mutually exclusive investment projects.
e. failure to correctly analyze mutually exclusive investment projects and the
multiple rate of return problem.
Feedback
The correct answer is: failure to correctly analyze mutually exclusive
investment projects and the multiple rate of return problem.

Question 7
Payback is frequently used to analyze independent projects because:
Select one:
a. it considers the time value of money.
b. all relevant cash flows are included in the analysis.
c. it is easy and quick to calculate.
d. it is the most desirable of all the available analytical methods from a financial
perspective.
e. it produces better decisions than those made using either NPV or IRR.
Feedback
The correct answer is: it is easy and quick to calculate.
Question 8
A mutually exclusive project is a project whose:
Select one:
a. acceptance or rejection has no effect on other projects.
b. NPV is always negative.
c. IRR is always negative.
d. acceptance or rejection affects other projects.
e. cash flow pattern exhibits more than one sign change.
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The correct answer is: acceptance or rejection affects other projects.

Question 9
Which of the following statement is true?
Select one:
a. One must know the discount rate to compute the NPV of a project but one
can compute the IRR without referring to the discount rate.
b. One must know the discount rate to compute the IRR of a project but one can
compute the NPV without referring to the discount rate.
c. Payback accounts for time value of money.
d. There will always be one IRR regardless of cash flows.
e. Return on equity is the ratio of total assets to total net income.
Feedback
The correct answer is: One must know the discount