Question

1) Which of the following is NOT an advantage to using the average rate of return method?

It is easy to compute.

It includes the entire amount of income earned over the life of the proposal.

It emphasizes accounting income, which is often used by investors and creditors in evaluating management performance.

It directly considers the expected cash flows from the proposal.

2) The present value index is computed as the

total present value of net cash flow divided by amount to be invested.

cost divided by amount to be invested.

total future value of net cash flows divided by amount to be invested.

None of these choices are correct.

3) A method of evaluating an investment proposal that uses present value concepts to compute the rate of return based on the investment's expected net cash flows is called the

net present value method.

internal rate of return method (IRR).

payback period method.

None of these choices are correct.

4) A general increase in price levels is known as

inflation.

deflation.

stagflation.

None of these choices are correct.

Answer 1

1

It directly considers the expected cash flows from the proposal, is NOT an advantage to using the average rate of return method

Average rate of return method considers accounting income rather than expected cash flows

Option D is correct

2

The present value index is computed as the total present value of net cash flow divided by amount to be invested.

Option A is correct

3

Internal rate of return method (IRR) uses present value concepts to compute the rate of return based on the investment's expected net cash flows

Option B is correct

4

A general increase in price levels is known as inflation.

Option A is correct