Finance Final (9, 12, 13, 14)

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

$1048.75

An investment project has an installed cost of $518,297. The cash flows over the 4-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is zero percent?

$169,193

The relevant discount rate for the following set of cash flows is 14 percent. What is the profitability index?

0.93

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

1.02

Colin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project.

13.88 percent

A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year life, respectively. The initial cost of the project is $675,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent?

15.89 percent

You are analyzing a project and have gathered the following data: Based on the payback period of _____ years for this project, you should _____ the project.

2.79; reject

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return?

21.39 percent

Day Interiors is considering a project with the following cash flows. What is the IRR of this project?

7.03 percent

Consider the following two mutually exclusive projects: What is the crossover rate for these two projects?

8.22 percent

The Square Box is considering two projects, both of which have an initial cost of $35,000 and total cash inflows of $50,000. The cash inflows of project A are $5,000, $10,000, $15,000, and $20,000 over the next four years, respectively. The cash inflows for project B are $20,000, $15,000, $10,000, and $5,000 over the next four years, respectively. Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years?

Project A should be rejected and project B should be accepted.

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only. The required return is 8 percent. Rosa has estimated the cash flows for one gown as follows. Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR)?

The gown must be sold for a minimum price of $159,259 if Rosa is to earn her required return.

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

The payback decision rule could override the accept decision indicated by the net present value.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms

Home Décor & More is considering a proposed project with the following cash flows. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not?

Yes; The MIRR is 17.42 percent.

Blue Water Systems is analyzing a project with the following cash flows. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 14 percent? Why or why not?

Yes; The MIRR is 17.85 percent.

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

required rate of return

the internal rate of return is

tedious to compute without the use of either a financial calculator or a computer

Which one of the following is the best example of two mutually exclusive projects?

waiting until a machine finishes molding Product A before being able to mold Project B

A project has average net income of $5,900 a year over its 6-year life. The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimum average accounting return of 11.5 percent. The firm should _____ the project because the AAR is _____ percent.

accept; 12.04

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

always accept project A if the required return exceeds the crossover rate

Which one of the following increases the net present value of a project?

an increase in the aftertax salvage value of the fixed assets

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

cash inflow at time zero

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

cash inflow in the final year of the project

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows

Which one of the following is an advantage of the average accounting return method of analysis?

easy availability of information needed for the computation

Graphing the crossover point helps explain:

how decisions concerning mutually exclusive projects are derived

Which one of the following will decrease the net present value of a project?

increasing the projects initial cost at time zero

Which two methods of project analysis were the most widely used by CEO's as of 1999?

internal rate of return and net present value

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

net present value

Which one of the following correctly applies to the average accounting rate of return?

It can be compared to the return on assets ratio

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

Net present value

Consider the following two mutually exclusive projects: The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct?

Only NPV implies accepting Project A.

Which one of the following statements related to payback and discounted payback is correct?

Payback is used more frequently even though discounted payback is a better method

Which two methods of project analysis are the most biased towards short-term projects?

payback and discounted payback

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:

project B and reject project A based on their net present values

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?

Project A only

You are analyzing a project and have gathered the following data: Based on the net present value of _____, you should _____ the project.

$4,109.37; accept

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent?

$5904.65

A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.

$7,264.95; accept

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

-$3383.25

You are analyzing a project and have gathered the following data: Based on the profitability index of _____ for this project, you should _____ the project.

1.10; accept

It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period?

1.67 years

A project has an initial cost of $32,000 and a 3-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,200, $2,300, and $1,800 a year for the next 3 years, respectively. What is the average accounting return?

11.04 percent

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

14.60 percent

Boston Chicken is considering two mutually exclusive projects with the following cash flows. What is the crossover rate? If the required rate of return is lower than the crossover rate, which project should be accepted?

15.99 percent; A

A firm evaluates all of its projects by applying the IRR rule. The required return for the following project is 21 percent. The IRR is _____ percent and the firm should ______ the project.

16.05 percent; reject

The Taxi Co. is evaluating a project with the following cash flows: The company uses an 8 percent interest rate on all of its projects. What is the MIRR using the discounted approach?

16.13 percent

A project that provides annual cash flows of $12,600 for 12 years costs $65,000 today. At what rate would you be indifferent between accepting the project and rejecting it?

16.18 percent

You are analyzing a project and have gathered the following data: Based on the internal rate of return of _____ percent for this project, you should _____ the project.

17.91; accept

Hungry Hoagie's has identified the following two mutually exclusive projects: At what rate would you be indifferent between these two projects?

19.69 percent

A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and $4,100 over the next four years, respectively. What is the payback period?

2.94 years

You are considering a project with an initial cost of $7,500. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively?

3.21 years

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period?

3.72 years

An investment project costs $21,500 and has annual cash flows of $6,500 for 6 years. If the discount rate is 15 percent, what is the discounted payback period?

4.91 years

The Chandler Group wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $759,000. The firm requires a 14 percent return on such undertakings. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant rate of growth would the company just break even?

6.49 percent

An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period?

6.72 years

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule. II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project's internal rate of return must equal the required return.

I and II only

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return

I and III only

Which of the following statements generally apply to the cash flows of a financing type project? I. nonconventional cash flows II. cash outflows exceed cash inflows prior to any time value adjustments III. cash for services rendered is received prior to the cash that is spent providing the services IV. the total of all cash flows must equal zero on an unadjusted basis

I, II and III only

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

I, II, III, and IV

In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis.

I, II, and IV only

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values

I, II, and IV only

You are considering a project with conventional cash flows and the following characteristics: Which of the following statements is correct given this information? I. The discount rate used in computing the net present value was less than 11.63 percent. II. The discounted payback period must be more than 2.98 years. III. The discount rate used in the computation of the profitability ratio was 11.63 percent. IV. This project should be accepted as the internal rate of return exceeds the required return.

I, II, and IV only

Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point

II and III only

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

An investment has the following cash flows and a required return of 13 percent. Based on IRR, should this project be accepted? Why or why not?

No; The IRR is less than the required return by about 1.53 percent.

Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

No; The MIRR is 8.67 percent.

Cool Water Drinks is considering a proposed project with the following cash flows. Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

No; The MIRR is 8.81 percent.

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

No; The PI is 0.80.

Alicia is considering adding toys to her gift shop. She estimates that the cost of inventory will be $7,500. The remodeling expenses and shelving costs are estimated at $1,800. Toy sales are expected to produce net cash inflows of $2,300, $2,900, $3,200, and $3,400 over the next four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?

No; The payback period is 3.26 years.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in year two is valued just as highly as the cash flow in year one.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

The payback decision rule could override the net present value decision rule should cash availability be limited.

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?

assumes the firm has sufficient funds to undertake both projects

Mutually exclusive projects are best defined as competing projects which:

both require the total use of the same limited resource

You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

accept B at 8.5 percent and neither at 13 percent

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on net present value analysis?

accept Project A and reject Project B

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on payback analysis?

accept Project A and reject Project B

You would like to invest in the following project. Sis, your boss, insists that only projects returning at least $1.06 in today's dollars for every $1 invested can be accepted. She also insists on applying a 14 percent discount rate to all cash flows. Based on these criteria, you should:

accept the project because the PI is 1.07.

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years. The profit margin is estimated at 6 percent. The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project. The firm has a required accounting return of 11 percent. This project should be _____ because the AAR is _____ percent.

accepted; 11.60

A project's average net income divided by its average book value is referred to as the project's average:

accounting return

The internal rate of return is defined as the

discount rate which causes the net present value of a project to equal zero

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows

discounted cash flow valuation

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

discounted payback period

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

have multiple rates of return

The internal rate of return

is easy to understand

Net present value

is the best method of analyzing mutually exclusive projects

Why is payback often used as the sole method of analyzing a proposed small project?

it is the only method where the benefits of the analysis outweigh the costs of that analysis

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

modified internal rate of return that exceeds the required return

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

net present value

The profitability index is most closely related to which one of the following?

net present value

A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and $7,500 over three years, respectively. What is the discounted payback period if the required rate of return is 16 percent?

never

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

payback

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

profitability index

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why?

project A; because its NPV is about $4,900 more than the NPV of project B

J&J Enterprises is considering an investment that will cost $318,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $47,000. This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently. The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years. Should the project be accepted? Why or why not?

reject; The project never pays back on a discounted basis.

Applying the discounted payback decision rule to all projects may cause:

some positive net present value projects to be rejected

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate

Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are estimated as follows. Based on the internal rate of return (IRR), should this project be accepted if the required return is 9 percent?

Accept the project.

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero

You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

You cannot apply the IRR rule in this case.

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct?

You cannot determine which project should be accepted given the information provided

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on IRR analysis?

You cannot make this decision based on internal rate of return analysis.

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on the average accounting return?

You cannot make this decision based on the information provided.

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Should you accept or reject these projects based on the profitability index?

You cannot make this decision based on the profitability index.

You are considering two independent projects with the following cash flows. The required return for both projects is 16 percent. Given this information, which one of the following statements is correct?

You should accept both projects based on both the NPV and IRR decision rules.

You are considering two independent projects both of which have been assigned a discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

You should accept both projects.

Which one of the following statements is correct in relation to independent projects?

a project with investing type cash flows is acceptable if its internal rate of return exceeds the required return