Chapter 9 Test Bank

Chapter 9 Test Bank - CHAPTER 8 Net Present Value and Other...

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CHAPTER 8 Net Present Value and Other Investment Criteria I. DEFINITIONS Topic: NET PRESENT VALUE 1. The difference between the market 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. Answer: A Topic: DISCOUNTED CASH FLOW VALUATION 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. Answer: B Topic: NET PRESENT VALUE RULE 3. 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 its 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. Answer: C Topic: PAYBACK 4. 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.
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E) Discounted payback period. Answer: C
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Topic: PAYBACK RULE 5. 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. Answer: A Topic: AVERAGE ACCOUNTING RETURN 6. 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. Answer: C Topic: AVERAGE ACCOUNTING RETURN RULE 7. 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). Answer: B Topic: INTERNAL RATE OF RETURN 8. The discount rate that makes the net present value of an investment exactly equal to zero is the: A) Payback period. B)
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Chapter 9 Test Bank - CHAPTER 8 Net Present Value and Other...

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