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web.groovymark@gmail.com
- December 17, 2024
Question 41
The payback decision rule could override the accept decision indicated by the net present value if:
a) A firm’s cash availability is limited.
b) The project has no initial investment.
c) The project has a high profitability index.
d) The project has a long life span.
Answer: a) A firm’s cash availability is limited.
Explanation: If a company is constrained by cash, it may prioritize projects with a shorter payback period, even if the NPV suggests otherwise.
Question 42
When the operating cash flow of a project is equal to zero, the project is:
a) At the financial break-even point.
b) At the cash break-even point.
c) Generating a positive NPV.
d) Experiencing negative cash flows.
Answer: b) At the cash break-even point.
Explanation: When operating cash flow is zero, the project is at its cash break-even point, meaning it is covering all its cash expenses but not generating a profit.
Question 43
When the present value of the cash inflows exceeds the initial cost of a project, the project should be:
a) Rejected.
b) Accepted because the NPV is positive.
c) Deemed too risky.
d) Deferred until costs decrease.
Answer: b) Accepted because the NPV is positive.
Explanation: A positive NPV indicates that the project is expected to generate more value than it costs, making it a worthwhile investment.
Question 44
Which of the following are advantages of the payback method of project analysis?
a) Time value of money and risk adjustment.
b) Liquidity bias and ease of use.
c) Consideration of all cash flows and precision.
d) Flexibility and accuracy.
Answer: b) Liquidity bias and ease of use.
Explanation: The payback method is simple to use and is biased toward projects that improve liquidity quickly by returning the investment sooner.
Question 45
Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
a) Negative NPV and high IRR.
b) Positive NPV and IRR greater than the required rate.
c) Payback period exceeding the project’s life.
d) IRR less than the discount rate.
Answer: b) Positive NPV and IRR greater than the required rate.
Explanation: A positive NPV and an IRR above the required return indicate that the project will add value to the firm and should be accepted.
Question 46
Which one of the following characteristics relates to the cash break-even point for a given project?
a) The NPV is positive.
b) The project always pays back.
c) The project never pays back.
d) The project generates excess cash flows.
Answer: c) The project never pays back.
Explanation: At the cash break-even point, the project only covers its cash expenses but does not generate any excess returns, so it does not pay back the initial investment.
Question 47
Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is zero?
a) Net income + Depreciation
b) Sales – Costs
c) Earnings before interest and taxes
d) Depreciation + Taxes
Answer: a) Net income + Depreciation
Explanation: The bottom-up approach to operating cash flow is calculated as net income plus non-cash charges like depreciation, assuming there is no interest expense.
Question 48
Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?
a) Internal rate of return less than the required return.
b) Modified internal rate of return that exceeds the required return.
c) Payback period longer than the project’s life.
d) Discounted payback period exceeding the project’s life.
Answer: b) Modified internal rate of return that exceeds the required return.
Explanation: A modified IRR that exceeds the required return indicates the project is expected to generate sufficient returns and should be accepted.
Question 49
Which one of the following is a project cash inflow?
a) An increase in accounts receivable.
b) A decrease in accounts receivable.
c) A decrease in accounts payable.
d) An increase in inventory.
Answer: b) A decrease in accounts receivable.
Explanation: A decrease in accounts receivable means that the company is collecting money faster, which increases cash inflows.
Question 50
Which one of the following is defined as the sales level that corresponds to a zero NPV?
a) Accounting break-even.
b) Financial break-even.
c) Cash break-even.
d) Operating break-even.
Answer: b) Financial break-even.
Explanation: The financial break-even point is the sales level at which the NPV of the project equals zero.
