CH 8 Fin

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? Year/Cash Flow 0/-48100 1/15600 2/28900 3/15200 A. -$2,687.98 B. -$1,618.48 C. $1,044.16 D. $1,035.24 E. $9,593.19

A. -$2,687.98 NPV = - $48,100 + $15,600 / 1.15 + $28,900 / 1.152 + $15,200 / 1.153 NPV = -$2,687.98

The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.

A. decreases as the required rate of return increases.

Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias

B. Ease of use

The internal rate of return is the: A. discount rate that causes a project?s aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.

B. discount rate that results in a zero net present value for the project.

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? A. $798.48 B. $1,240.23 C. $1,992.43 D. $2,111.41 E. $2,470.01

C. $1,992.43 NPV = -$42,700 + $9,250 ×{1 - [1 / (1 + .1465)9]} / .1465 NPV = $1,992.43

13. A project has the following cash flows. What is the payback period? Year/Cash Flow 0/-28000 1/11600 2/11600 3/6500 4/6500 A. 2.38 years B. 2.49 years C. 2.74 years D. 3.01 years E. 3.33 years

C. 2.74 years Payback = 2 + ($28,000 -11,600 -11,600)/$6,500 = 2.74 years

Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Payback C. Average accounting return D. Modified internal rate of return E. Internal rate of return

C. Average accounting return

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A. Payback and net present value B. Payback and internal rate of return C. Internal rate of return and net present value D. Net present value and profitability index E. Profitability index and internal rate of return

C. Internal rate of return and net present value

Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows.

C. The payback period ignores the time value of money.

The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 18 percent? Year/Cash Flow 0/-49000 1/9500 2/26200 3/38700 A. Yes; because the project's rate of return is 7.78 percent B. Yes; because the project's rate of return is 16.08 percent C. Yes; because the project's rate of return is 19.47 percent D. No; because the project's rate of return is 19.47 percent E. No; because the project's rate of return is 16.08 percent

C. Yes; because the project's rate of return is 19.47 percent NPV = 0 = -$49,000 + $9,500 / (1 + IRR) + $26,200 / (1 + IRR)2 + $38,700 / (1 + IRR)3 IRR = 19.47 percent The project should be accepted because its IRR is greater than the required return.

A project has the following cash flows. What is the internal rate of return? Year/Cash Flow 0/-89300 1/32900 2/64200 3/5800 A. 11.21 percent B. 10.47 percent C. 10.72 percent D. 8.57 percent E. 9.19 percent

D. 8.57 percent NPV = 0 = -$89,300 + $32,900 / (1 + IRR) + $64,200 / (1 + IRR)2 + $5,800 / (1 + IRR)3 IRR = 8.57%

Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

D. If the internal rate of return equals the required return, the net present value will equal zero.

Which one of the following methods of analysis ignores the time value of money? A. Net present value B. Internal rate of return C. Discounted cash flow analysis D. Payback E. Profitability index

D. Payback

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return

D. Profitability index less than 1.0

Auto Detailers is buying some new equipment at a cost of $188,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years. What is the average accounting rate of return? A. 15.48 percent B. 17.76 percent C. 18.09 percent D. 22.68 percent E. 18.53 percent

E. 18.53 percent AAR = {[(4 ×$11,000) + (4 ×$24,000)] / 8}/{($188,900 + 0)/2} = .1853, or 18.53 percent

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.

E. recoup its initial cost.