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CHAPTER 9
Net Present Value and Other Investment Criteria
I.
DEFINITIONS
NET PRESENT VALUE
a
1.
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.
DISCOUNTED CASH FLOW VALUATION
b
2.
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.
NET PRESENT VALUE RULE
c
3.
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.
PAYBACK
c
4.
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.
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View Full DocumentCHAPTER 9
PAYBACK RULE
a
5.
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.
DISCOUNTED PAYBACK
e
6.
The length of time required for a project’s 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.
DISCOUNTED PAYBACK RULE
d
7.
The discounted payback rule states that you should accept projects:
a.
which have a discounted payback period that is greater than some prespecified period
of time.
b.
if the discounted payback is positive and rejected if it is negative.
c.
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 Spring '10
 Hansen
 Finance, Net Present Value

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