Module 12

24. Curtis is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 11 percent. What is the net present value of this project if it the start up cost is $2,100? A. $20.98B. $46.48C. $52.14D. $74.22E. $80.81

A. $20.98

27. A project has the following cash flows. What is the internal rate of return? A. 9.75 percentB. 10.28 percentC. 10.60 percentD. 10.67 percentE. 9.07 percent

A. 9.75 percent

18. Which one of the following is most closely related to the net present value profile? A. Internal rate of returnB. Average accounting returnC. Profitability indexD. PaybackE. Discounted payback

A. Internal rate of return

20. Which one of the following indicates that a project is definitely acceptable? A. Profitability index greater than 1.0B. Negative net present valueC. Modified internal rate return that is lower than the requirementD. Zero internal rate of returnE. Positive average accounting return

A. Profitability index greater than 1.0

2. 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. is directly related to the discount rate.E. is unaffected by the timing of an investment's cash flows.

A. decreases as the required rate of return increases.

14. The profitability index reflects the value created per dollar: A. invested.B. of sales.C. of net income.D. of taxable income.E. of shareholders' equity.

A. invested.

6. What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent? A. $4,518.47; $628.30B. $4,518.47; -$321.76C. $4,518.47; -$525.13D. $4,722.09; $504.21E. $4,722.09; -$418.05

B. $4,518.47; -$321.76

5. What is the net present value of a project with the following cash flows if the discount rate is 17 percent? A. -$8,406.11B. -$7,231.71C. -$3,089.16D. $1,407.92E. $3,508.01

B. -$7,231.71

31. A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)? A. 12,750 increaseB. 12,750 decreaseC. 122,650 increase D. No changeE. 135,400 decrease

B. 12,750 decrease

29. T.L.C., Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return? A. 9.27 percentB. 9.98 percentC. 10.62 percentD. 10.79 percentE. 11.58 percent

B. 9.98 percent

3. Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money conceptB. Ease of useC. Research and development biasD. Arbitrary cutoff pointE. Long-term bias

B. Ease of use

25. Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of _____, but at the relevant discount rate of 17 percent the project's net present value is _____. A. $0; -$5,739B. $0; -$3,406C. $6,000; -$5,739D. $6,000; -$3,406E. $6,000; $1,897

C. $6,000; -$5,739

7. What is the payback period for a project with the following cash flows? A. 2.56 yearsB. 2.89 yearsC. 3.17 yearsD. 3.74 yearsE. never

C. 3.17 years

32. Generally, the simulation models for projects are developed using a: A. Pair of diceB. Roulette wheelC. ComputerD. Pack of cards E. Casino

C. Computer

13. Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of returnB. Profitability indexC. Net present valueD. Modified internal rate of returnE. Average accounting return

C. Net present value

15. Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0B. Payback period greater than the requirementC. Positive net present valueD. Positive average accounting rate of returnE. Internal rate of return that is less than the requirement

C. Positive net present value

12. Which one of the following statements is correct? A. If the IRR exceeds the required return, the profitability index will be less than 1.0.B. The profitability index will be greater than 1.0 when the net present value is negative.C. When the internal rate of return is greater than the required return, the net present value is positive.D. Projects with conventional cash flows have multiple internal rates of return.E. If two projects are mutually exclusive, you should select the project with the shortest payback period.

C. When the internal rate of return is greater than the required return, the net present value is positive.

16. If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive.B. greater than the project's initial investment.C. zero.D. equal to the project's net profit.E. less than, or equal to, zero.

C. zero

30. A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100 and finally in year five, $37,900. What is the profitability index if the discount rate is 11 percent? A. 0.92B. 0.98C. 1.02D. 1.07E. 1.12

D. 1.07

21. A project has the following cash flows. What is the internal rate of return? A. 12.21 percentB. 12.47 percentC. 13.46 percentD. 13.82 percentE. 14.19 percent

D. 13.82 percent

26. A project has the following cash flows. What is the payback period? A. 2.48 yearsB. 2.59 yearsC. 2.96 yearsD. 3.21 yearsE. 3.43 years

D. 3.21 years

8. What is the discounted payback period for a project with the following cash flows, if the interest rate is 5%? A. 2.56 yearsB. 2.89 yearsC. 3.17 yearsD. 3.74 yearsE. never

D. 3.74 years

22. You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not? A. Yes; because the IRR is 13.13 percentB. Yes; because the IRR is 13.65 percentC. Yes; because the IRR is 13.67 percentD. No; because the IRR is 13.13 percentE. No; because the IRR is 13.65 percent

D. No; because the IRR is 13.13 percent

17. Which one of the following methods of analysis ignores the time value of money? A. Net present valueB. Internal rate of returnC. Discounted cash flow analysisD. PaybackE. Profitability index

D. Payback

19. You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? A. Internal rate of returnB. Modified internal rate of returnC. Net present valueD. Profitability indexE. Payback

D. Profitability index

23. You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? A. Project A; because it pays back fasterB. Project A; because it has the higher internal rate of returnC. Project B; because it has the higher internal rate of returnD. Project A; because it has the higher net present valueE. Project B; because it has the higher net present value

D. Project A; because it has the higher net present value

11. The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A. One of the time periods within the investment period has a cash flow equal to zeroB. The initial cash flow is negativeC. The investment has cash inflows that occur after the required payback periodD. The investment is mutually exclusive with another investment under considerationE. The cash flows are conventional

D. The investment is mutually exclusive with another investment under consideration

28. A project has the following cash flows. What is the modified internal rate of return if interest rate is 8%? A. 9.75 percentB. 10.28 percentC. 10.60 percentD. 10.67 percentE. 9.07 percent

E. 9.07 percent

10. 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? A. PaybackB. Profitability indexC. Accounting rate of returnD. Internal rate of returnE. Net present value

E. Net present value

4. Which one of the following methods of analysis has the greatest bias towards short-term projects? A. Net present valueB. Internal rate of returnC. Average accounting returnD. Profitability indexE. Payback

E. Payback

9. Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? A. 3.97 yearsB. 4.18 yearsC. 4.46 yearsD. 4.70 yearsE. The project never pays back.

E. The project never pays back.

1. 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.