Sample Questions

Sample Questions 

1- The process of valuing an investment by determining the present value of its future cash flows is called (the):

            A)     Constant dividend growth model.

            B)     Discounted cash flow valuation.

            C)     Average accounting valuation.

            D)     Expected earnings model.

            E)        Capital Asset Pricing Model

2- The net present value (NPV) rule can be best stated as:

            A)     An investment should be accepted if, and only if, the NPV is exactly equal to zero.

            B)     An investment should be rejected if the NPV is positive and accepted if it is negative.

            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)     None of the above.

3- The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the:

            A)     Net present value.

            B)     Internal rate of return.

            C)     Payback period.

            D)     Profitability index.

            E)     Discounted payback period.

4- The payback rule can be best stated as:

            A)     An investment is acceptable if its calculated payback period is less than some prespecified number of years.

            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 prespecified number of years.

            E)     None of the above.

5- An investment's average net income divided by its average book value is the:

            A)     Net present value.

            B)     Internal rate of return.

            C)     Average accounting return.

            D)     Profitability index.

            E)     Payback period.

6- The average accounting return (AAR) rule can be best stated as:

            A)     An investment is acceptable if its AAR is less than a target AAR.

            B)     An investment is acceptable if its AAR exceeds a target AAR.

            C)     An investment is acceptable if its AAR exceeds the firm's return on equity (ROE).

            D)     An investment is acceptable if its AAR is less than the firm's return on assets (ROA).

7- The discount rate that makes the net present value of investment exactly equal to zero is the:

            A)     Payback period.

            B)     Internal rate of return.

            C)     Average accounting return.

            D)     Profitability index.

            E)     Discounted payback period.

8- Complete the following decision rule: A project should be accepted if its ______ exceeds the firm's required rate of return.

            A)     IRR

            B)     NPV

            C)     payback

            D)     discounted payback

            E)     AAR

9- The possibility that more than one discount rate will make the NPV of an investment zero is called the ___________ problem.

            A)     net present value profiling

            B)     operational ambiguity

            C)     mutually exclusive investment decisions

            D)     issues of scale

            E)     multiple rates of return

10- A situation in which taking one investment prevents the taking of another is called:

            A)     Net present value profiling.

            B)     Operational ambiguity.

            C)     Mutually exclusive investment decisions.

            D)     Issues of scale.

            E)     Multiple rates of return.

11- The present value of an investment's future cash flows divided by its initial cost is the:

            A)     Net present value.

            B)     Internal rate of return.

            C)     Average accounting return.

            D)     Profitability index.

            E)     Payback period.

12- The profitability index (PI) rule can be best stated as:

            A)     An investment is acceptable if its PI is greater than one.

            B)     An investment is acceptable if its PI is less than one.

            C)     An investment is acceptable if its PI is greater than the internal rate of return (IRR).

            D)     An investment is acceptable if its PI is less than the net present value (NPV).

            E)     None of the above

13- Net present value can be defined as:

            A)     The rate of return that causes the present value of all cash flows associated with a project to equal zero.

            B)     The discount rate that causes the current value of cash inflows to exceed the current value of cash outflows.

            C)     A measure of the value created or added today by undertaking a project.

            D)     The cash outflows from a project subtracted from the cash inflows for the project.

            E)     The net costs of a project subtracted from the net income generated from the project.

14- The crossover point is defined as the discount rate that:

            A)     Causes the net present value of a project to equal zero.

            B)     Causes the IRR of one project to exceed the IRR of a second project.

            C)     Indicates the point where the IRR equals zero as IRR moves in a downward direction.

            D)     Makes the net present values of two projects equal.

            E)     Causes a project to move from a positive net present value to a negative net present value.

15- The principle that an investment should be accepted if the difference between the investment's market value and its cost is positive and rejected if the difference is negative is referred to as the:

            A)     Average accounting return rule.

            B)     Internal rate of return rule.

            C)     Profitability index rule.

            D)     Discounted payback rule.

            E)     Net present value rule.