FIN 325 CH 9 HW

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 per year over the next four years, respectively. What is the payback period? A. 2.70 years B. 3.28 years C. 3.36 years D. 3.70 years E. 2.28 years

A. 2.70 years Explanation: Payback = 2 + ($7,900 − 2,100 − 3,140)/$3,800 Payback = 2.70 years

A project that costs $21,000 today will generate cash flows of $7,300 per year for seven years. What is the project's payback period? A. 2.40 years B. 2.88 years C. 3.00 years D. 0.35 years E. 2.30 years

B. 2.88 years Explanation: Payback period = $21,000/$7,300 Payback period = 2.88 years

The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period B. Payback period C. Profitability period D. Discounted cash period E. Valuation period

B. Payback period

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? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted B. The cash flow in Year 3 is ignored C. The project's cash flow in Year 3 is discounted by a factor of (1+r)^3 D. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1 E. The project is acceptable whenever the payback period exceeds three years

D. The cash flow in Year 2 is valued just as highly as the cash flow in Year 1

Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $35,700, $62,070, $62,450, $60,260, and $43,300, respectively. The project has an initial cost of $158,080 and the required return is 8.3 percent. What is the project's NPV? A. $23,740.27 B. $15,080.81 C. $49,836.08 D. $16,588.89 E. $18,661.57

C. $49,836.08 Explanation: NPV = −$158,080 + $35,700/(1 + .083) + $62,070/(1 + .083)^2 + $62,450/(1 + .083)^3 + $60,260/(1 + .083)^4 + $43,300/(1 + .083)^5 NPV = $49,836.08

Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent? A. 0.946 B. 0.98 C. 1.02 D. 1.06 E. 1.00

C. 1.02 Explanation: PVInflows = $18,200/1.126 + $37,300/1.1262 + $14,300/1.1263 PVInflows = $55,599.30 PI = $55,599.30/$54,300 PI = 1.02

Mutually exclusive projects are best defined as competing projects that: A. Would need to commence on the same day B. Have the same initial start-up costs C. Both require the total use of the same limited resource D. Both have negative cash outflows at time zero E. Have the same life span

C. Both require the total use of the same limited resource

Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects B. A project with an IRR equal to the required return would reduce the value of a firm if accepted C. The IRR is equal to the required return when the net present value is equal to zero D. Financing type projects should be accepted if the IRR exceeds the required return E. The average accounting return is a better method of analysis than the IRR from a financial point of view

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

Why is payback often used as the sole method of analyzing a proposed small project? A. Payback considers the time value of money B. All relevant cash flows are included in the payback analysis C. The benefits of payback analysis usually outweigh the costs of the analysis D. Payback is the most desirable of the various financial methods of analysis E. Payback is focused on the long-term impact of a project

C. The benefits of payback analysis usually outweigh the costs of the analysis

A company has a project available with the following cash flows: Year Cash Flow 0 -$35,750 1 12,600 2 14,740 3 19,730 4 11,060 If the required return for the project is 8 percent, what is the project's NPV? A. $4,216.15 B. $14,109.24 C. $11,316.78 D. $12,345.58 E. $22,380.00

D. 12,345.58 Explanation: NPV = −$35,750 + $12,600/(1 + .08) + $14,740/(1 + .08)^2 + $19,730/(1 + .08)^3 + $11,060/(1 + .08)^4 NPV = $12,345.58

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A has annual cash flows for Years 1 to 3 of $28,300, $31,500, and $22,300, respectively. Project B has annual cash flows for Year 1 of $36,900 and $40,500 for Year 2. What is the crossover rate? A. 17.17% B. 16.13% C. 17.32% D. 16.99% E. 15.20%

D. 16.99% Explanation: Year 0 difference = −$78,000 − (−$78,000) = $0 Year 1 difference = $28,300 − 36,900 = −$8,600 Year 2 difference = $31,500 − 40,500 = −$9,000 Year 3 difference = $22,300 − 0 = $22,300 NPV = 0 = $0 −$8,600/(1 + IRR) − $9,000/(1 + IRR)^2 + $22,300/(1 + IRR)^3 IRR = .1699, or 16.99%

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent? A. 2.31 years B. 2.45 years C. 2.55 years D. 2.87 years E. Never

D. 2.87 years Explanation: DPB = 2 + [$18,400 − ($7,200/1.112) − ($8,900/1.1122)]/($7,500/1.1123) DPB = 2.87 years

Filter Corporation has a project available with the following cash flows: Year Cash Flow 0 -$14,200 1 7,200 2 8,400 3 3,100 4 2,700 What is the project's IRR? A. 25.40% B. 26.67% C. 23.81% D. 22.86% E. 24.77%

D. 22.86% Explanation: 0 = −$14,200 + $7,100/(1 + IRR) + $8,400/(1 + IRR)2 + $3,100/(1 + IRR)3 + $2,700/(1 + IRR)4 IRR = .2286, or 22.86%

There is a project with the following cash flows: Year Cash Flow 0 -$25,500 1 7,000 2 8,500 3 7,300 4 7,900 5 7,000 What is the payback period? A. 3.55 years B. 2.68 years C. 4.00 years D. 3.29 years E. 3.87 years

D. 3.29 years Explanation: Amount short after 3 years = $25,500 − 7,400 − 8,500 − 7,300 Amount short after 3 years = $2,300 Payback period = 3 + $2,300/$7,900 Payback period = 3.29 years

The internal rate of return is defined as the: A. Maximum rate of return a firm expects to earn on a project B. Rate of return a project will generate if the project is financed solely with internal funds C. Discount rate that equates the net cash inflows of a project to zero D. Discount rate which causes the net present value of a project to equal zero E. Discount rate that causes the profitability index for a project to equal zero

D. Discount rate which causes the net present value of a project to equal zero

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following? A. Initial cost of each project B. Timing of the cash inflows C. Total cash inflows of each project D. Net present value E. Length of each project's life

D. Net present value

Your company has a project available with the following cash flows: Year Cash Flow 0 -$81,900 1 21,100 2 24,200 3 30,000 4 25,600 5 19,000 If the required return is 13 percent, should the project be accepted based on the IRR? A. No, because the IRR is 15.44 percent B. Yes, because the IRR is 15.44 percent C. No, because the IRR is 14.26 percent D. Yes, because the IRR is 14.85 percent E. Yes, because the IRR is 14.26 percent

E. Yes, because the IRR is 14.26 percent Explanation: 0 = −$81,900 + $21,100/(1 + IRR) + $24,200/(1 + IRR)^2 + $30,000/(1 + IRR)^3 + $25,600/(1 + IRR)^4 + $19,000/(1 + IRR)^5 IRR = .1426, or 14.26% Because the IRR is greater than the required return, accept the project.

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two value called? A. Net present value B. Accounting return C. Payback value D. Profitability index E. Discounted payback

A. Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? A. Net present value B. Discounted payback C. Internal rate of return D. Profitability index E. Payback

A. Net present value

A project has a net present value of zero. Given this information: A. The project has a zero percent rate of return B. The project requires no initial cash investment C. The project has no cash flows D. The summation of all the project's cash flows is zero E. The project's cash inflows equal its cash outflows in current dollar terms

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