Financial Management Of The Firm Chapter 9
Assume an investment has cash flows of -$30,000, $21,750, $18,500, and $12,500 for years 0 to 3, respectively. What is the NPV if the required return is 13 percent? Should the project be accepted or rejected?
$12,399.13; accept
A project has an initial cash outflow of $39,800 and produces cash inflows of $18,304, $19,516, and $14,280 for years 1 through 3, respectively. What is the NPV at a discount rate of 11 percent?
$2,971.13
A project will produce cash inflows of $3,100 a year for 3 years with a final cash inflow of $4,400 in year 4. The project's initial cost is $10,400. What is the net present value if the required rate of return is 16 percent?
-$1,007.66
What is the net present value of a project that has an initial cash outflow of $36,300 and cash inflows of $11,500, $21,700, $0, and $10,400 in Years 1 through 4, respectively? The required return is 15 percent.
-$3,945.45
A project has cash flows of -$119,000, $52,800, $60,200, and $33,100 for years 0 to 3, respectively. The required rate of return is 12 percent. Based on the net present value of _____, you should _____ the project.
-$306.15; reject
An investment project has an installed cost of $518,297. The cash flows over the four-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 infinite?
-$518,297
The relevant discount rate is 14 percent for a project with cash flows of -$9,800, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index?
.93
Projects A and B are mutually exclusive. Project A has cash flows of -$10,000, $5,100, $3,400, and $4,500 for years 0 to 3, respectively. Project B has cash flows of -$10,000, $4,500, $3,400, and $5,100 for years 0 to 3, respectively. What is the crossover rate for these two projects?
0 percent
A project has cash flows of -$152,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?
1.02; accept
Assume a project has cash flows of -$51,300, $18,200, $37,300, and $14,300 for years 0 to 3, respectively. What is the profitability index given a required return of 12.5 percent?
1.09
Scott is considering a project that will produce cash inflows of $5,100 a year for 3 years. The project has required rate of return of 14 percent and an initial cost of $6,000. What is the discounted payback period?
1.39 years
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
An investment project costs $10,500 and has annual cash flows of $6,500 for two years. If the discount rate is 13 percent, what is the discounted payback period?
1.93 years
A project has an initial cost of $27,000 and a three-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 $1,600, $2,200, and $1,700 a year for the next three years, respectively. What is the average accounting return?
13.58 percent
A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project.
13.96; accept
TL Lumber is evaluating a project with cash flows of -$12,800, $7,400, $11,600, and -$3,200 for years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach?
14.36 percent
Colin is analyzing a 3-year project that has an initial cost of $204,000. This cost will be depreciated straight line to zero over three years. The projected annual net income for the three years is $13,700, $14,900, and $18,200. If the discount rate is 12 percent, what is the average accounting rate of return?
15.29 percent
A project has cash flows of -$128,000, $52,800, $60,200, and $183,100 for years 0 to 3, respectively. The required payback period is two years. Based on the payback period of _____ for this project, you should _____ the project.
2.08; reject
You are considering a project with an initial cost of $8,600. What is the payback period for this project if the cash inflows are $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively?
2.88 years
A project has an initial cost of $18,400 and is expected to produce cash inflows of $7,200, $8,900, and $7,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 12 percent?
2.91 years
A firm evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of -$27,048, $16,850, $15,700, and $4,300 for years 0 to 3, respectively. The required return is 19 percent. What is the project IRR? Should the project be accepted or rejected?
21.08 percent; accept
A project produces annual net income of $18,200, $21,800, and $22,900 over its three-year life, respectively. The initial cost is $197,000, which 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?
21.29 percent
You're trying to determine whether or not you should expand your business at a fixed asset cost of $4.3 million. The firm uses straight-line depreciation to zero over the project life. The projected annual net income is $595,000, $502,000, $486,000, and $324,000 over these four years. What is the average accounting return?
22.17 percent
Project A has cash flows of -$50,000, $29,400, $27,200, and $24,500 for years 0 to 3, respectively. Project B has an initial cost of $50,000 and an annual cash inflow of $26,500 for three years. These are mutually exclusive projects. What is the crossover rate?
28.15 percent
A project has an initial cost of $6,700. The cash inflows are $850, $2,400, $3,300, and $4,100 over the next four years, respectively. What is the payback period?
3.04 years
Projects A and B are mutually exclusive and both have an initial cost of $78,000. Project A has annual cash flows for three years of $28,300, $31,500, and $42,300, respectively. Project B has annual cash flows for three years of $26,900, $30,500, and $44,900. What is the crossover rate?
5.16 percent
Deep Six wants to set up a private cemetery business. 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 $679,380. 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?
5.61 percent
HH Companies has identified two mutually exclusive projects. Project A has cash flows of -$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $40,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects?
5.70 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
An investment that provides annual cash flows of $9,600 for 12 years costs $75,000 today. At what rate would you be indifferent between accepting the investment and rejecting it?
7.31 percent
The Dry Dock is considering a project with an initial cost of $118,400. The project's cash inflows for years 1 through 3 are $37,200, $54,600, and $46,900, respectively. What is the IRR of this project?
8.04 percent
A project with financing type cash flows is typified by a project that has which one of the following characteristics?
A cash inflow at time zero.
Project A has an initial cost of $80,000 and provides cash inflows of $34,000 a year for three years. Project B has an initial cost of $80,000 and produces a cash inflow of $114,000 in year 3. The projects are mutually exclusive. Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?
Accept A at 11.7 percent and neither at 13.5 percent.
You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:
Accept Project A and reject Project B.
You are considering two mutually exclusive projects. Project A has cash flows of -$72,000, $21,400, $22,900, and $56,300 for years 0 to 3, respectively. Project B has cash flows of -$81,000, $20,100, $22,200, and $74,800 for years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?
Accept Project A and reject Project B.
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs.
Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in year 2. Project B costs $59,200 with cash inflows of $21,900 in year 1 and $59,200 in year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?
Accept both projects.
A project has a discount rate of 14 percent, an initial cost of $99,200, an inflow of $56,400 in year 1 and an inflow of $75,900 in year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project?
Accept the project because the PI is 1.09.
Auto Art sells original works of art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are $9,500 and -$10,300 for years 0 and 1, respectively. Based on the internal rate of return should this project be accepted if the required return is 12 percent?
Accept the project.
A project has average net income of $6,250 a year over its 5-year life. The initial cost of the project is $107,400 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; 11.64
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.
A project's average net income divided by its average book value is referred to as the project's average:
Accounting return.
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.
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.
Which one of these is a strength of the average accounting return method of project analysis?
Based on easily obtainable information.
Mutually exclusive projects are best defined as competing projects that:
Both require the total use of the same limited resource.
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.
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?
Discounted cash flow valuation.
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.
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.
The internal rate of return is defined as the:
Discount rate which causes the net present value of a project to equal zero.
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
Discounted payback period.
Which one of the following is an advantage of the average accounting return method of analysis?
Easy availability of information needed for the computation,
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.
Graphing the crossover point helps explain:
How decisions concerning mutually exclusive projects are derived.
In actual practice, managers most frequently use which two types of investment criteria?
IRR and NPV
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero.
The internal rate of return:
Is easy to understand.
Net present value:
Is the best method of analyzing mutually exclusive projects.
Which one of the following correctly applies to the average accounting rate of return?
It can be compared to the return on assets ratio.
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 of the following are advantages of the payback method of project analysis?
Liquidity bias, ease of use.
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.
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.
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.
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.
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.
A project has projected cash flows of -$148,500, $32,800, $64,200, -$7,500 and $87,300 for years 0 to 4, respectively. 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 12.6 percent? Why or why not?
No; The MIRR is 8.81 percent.
You estimate that a project will cost $27,700 and will provide cash inflows of $11,800 in year 1 and $24,600 in year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14 percent? Why or why not?
No; The PI is .97.
Which one of the following indicates an accept decision for an independent project with conventional cash flows?
PI greater than 1.0.
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback.
The length of time a firm must wait to recoup the money it has invested in a project is called the:
Payback period.
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.
Which one of the following characteristics is most associated with financing type projects?
Prepaid services.
Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
Profitability index
The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
Profitability index.
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.
The Square Box is considering two independent projects, both of which have an initial cost of $18,000. The cash inflows of Project A are $3,000, $7,000, and $10,000 over the next three years, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 over the next three years, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?
Project A should be rejected and Project B should be accepted.
You are considering two mutually exclusive projects. Both projects have an initial cost of $52,000. Project A produces cash inflows of $25,300, $37,100, and $22,000 for years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for years 1 through 3, respectively. The required rate of return is 14.2 percent for Project A and 13.9 percent for Project B. Which project should you accept and why?
Project A; because it has the larger NPV.
You are considering two mutually exclusive projects. Project A has cash flows of -$87,000, $32,600, $35,900, and $43,400 for years 0 to 3, respectively. Project B has cash flows of -$85,000, $14,700, $21,200, and $89,800 for years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Which project(s), if either, should you accept based on net present value?
Reject Project A and accept Project B
JJ's is reviewing a project with a cost of $318,000, and cash inflows of $0, $47,000, $198,000, and $226,000 for years 1 to 4, respectively. The required discount rate is 15.5 percent and the required discounted payback period is three years. Should the project be accepted? Why or why not?
Reject; The project never pays back on a discounted basis.
The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next four years. The profit margin is 6 percent, the project cost is $96,000, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 11 percent. This project should be _____ because the AAR is _____ percent.
Rejected; 10.88
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.
Applying the discounted payback decision rule to all projects may cause:
Some positive net present value projects to be rejected.
The internal rate of return is:
Tedious to compute without the use of either a financial calculator or a computer.
Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for years 0 to 3, respectively. Both projects are independent and use straight-line depreciation to a zero balance over the project life. Neither project has any salvage value and both have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return?
The AAR cannot be computed.
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.
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.
You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?
The discount rate used in computing the net present value was less than 11.63 percent.
Which one of these statements related to discounted payback is correct?
The discounted payback period decreases as the discount rate decreases.
Lenora's creates exquisite gowns for special occasions on a prepaid basis only. The required return is 12.5 percent. The estimate for one gown order has cash flows of $165,000 in year 0 and -$188,000 in year 1. Which of these statements correctly applies to this order?
The gown must be sold for a minimum price of $167,111 to earn the 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.
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.
If a project has a net present value equal to zero, then:
The project earns a return exactly equal to the discount rate.
Assume a project is independent with financing cash flows. Which one of these statements is correct?
The project is acceptable if the required return exceeds the IRR.
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?
The project must have a profitability index that is equal to or greater than 1.0.
Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that:
The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.
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.
You are considering an investment that costs $152,000 and has projected cash flows of $71,800, $86,900, and -$11,200 for years 1 to 3, respectively. If the required rate of return 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.
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 Product B.
A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?
Yes; The IRR exceeds the required return by .58 percent.
Crystal Industries is considering an expansion project with cash flows of -$325,000, $167,500, $216,100, $104,500, and -$92,700 for years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?
Yes; The MIRR is 14.45 percent.
Home & More is considering a project with cash flows of -$375,000, $133,500, -$35,600, $244,700, and $271,000 for years 0 to 4. 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.
Drinkable Water Systems is analyzing a project with projected cash inflows of $137,400, $189,300, and -$25,000 for years 1 to 3, respectively. The project costs $236,000 and has been assigned a discount rate of 14 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not?
Yes; The MIRR is 17.85 percent.
Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $1,300. Toy sales are expected to produce net cash inflows of $3,300, $4,900, $4,400, and $4,100 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?
Yes; The payback period is 2.59 years.
You are considering two mutually exclusive projects. Project A has cash flows of -$125,000, $51,400, $52,900, and $63,300 for years 0 to 3, respectively. Project B has cash flows of -$85,000, $23,100, $28,200, and $69,800 for years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these projects based on IRR analysis?
You should not use IRR; use a different method of analysis
You are considering two mutually exclusive projects. Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for years 0 to 3, respectively. Both projects have a required return of 12.75 percent. Should you accept or reject these projects based on the profitability index?
You should not use PI; use a different method of analysis.
