Ch. 8 HW - Finance Test 2 (Ch. 6-10)

The Nifty Fifty is considering opening a new store at a start-up cost of $628,000. The initial investment will be depreciated straight-line to zero over the 15-year life of the project. What is the average accounting rate of return given the following net income projections?

16.35 percent AAR = {[($58,000 ×5) + ($52,000 ×5) + ($44,000 ×5)]/15}/[($628,000 + 0)/2] = .1635, or 16.35 percent

What is the payback period for a $16,700 investment with the following cash flows?

3.12 years Payback period = 3 + ($16,700 -2,100 -6,800 -6,900) / $7,300 = 3.12 years

Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent. The payback for Project A is ____ while the payback for Project B is ____. The NPV for Project A is _____ while the NPV for Project B is ____. Which project, if any, should the company accept?

3.96 years; 3.42 years; -$19,764.06; -$10,566.02; reject both projects Payback A = 3 + ($75,000 -6,200 -9,400 -28,100)/$32,600 = 3.96 years Payback B = 3 + ($85,000 -27,700 -26,500 -24,200)/$15,600 = 3.42 years

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, which project(s), if either, should it accept?

Accept both Projects A and B

Generally speaking, payback is best used to evaluate which type of projects?

Low-cost, short-term

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? Group of answer choices

Net present value

Which one of the following methods of analysis has the greatest bias toward short-term projects?

Payback

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

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

The payback period ignores the time value of money.

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not?

Yes, because the IRR is 12.74 percent Using the CF Worksheet on your calculator, enter the following Cash Flows: CF0: -1,460,000 CF1: 223,000 CF2: 600,000 CF3: 600,000 CF4: 600,000 Solve for IRR to get IRR = 12.74 percent The project should be accepted because the IRR is greater than the required rate.