Homework 5

What is the minimum number of years in which an investment costing $210,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment? A)8.69 years B)7.51 years C)4.46 years D)5.37 years

C

What is the payback period on a project with the cash flows in the table? Initial Cost:-$26,000 End of Year 1:$9,000 End of Year 2:$12,000 End of Year 3:-$3,000 End of Year 4:$8,000 End of Year 5:$2,000 End of Year 6:$1,500 A)4.2 years. B)5.0 years C)4.0 years D)3.8 years

C

What is the profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12%? A)0.861 B)0.500 C)0.139 D)0.320

C

When capital rationing exists, projects should be evaluated by: A)the internal rate of return. B)the payback period. C)the profitability index. D)the net present value.

C

When managers cannot determine whether to invest now or wait until costs decrease later, the rule is to: A)postpone until the opportunity cost reaches its lowest level. B)postpone until costs reach their lowest level. C)invest at the date that provides the highest NPV today. D)invest now to maximize the NPV.

C

Which of the following investment decision rules tends to improperly reject long-lived projects? A)net present value (NPV) B)profitability index (PI) C)payback period (PP) D)internal rate of return (IRR)

C

Which one of the following best illustrates the problem imposed by capital rationing? A)accepting projects with low initial costs B)accepting projects with low IRRs C)bypassing projects with positive NPVs D)bypassing projects with the shortest payback period

C

Which one of the following changes will increase the NPV of a project? A)decreasing the number of cash inflows B)decreasing the size of the cash inflows C)decreasing the discount rate D)increasing the initial cost of the project

C

Which one of the following statements is correct for a project with a positive NPV? A)its profitability index will be 1 B)accepting the project has an indeterminate effect on shareholders. C)its IRR must be greater than 0 D)its discount rate exceeds its cost of capital

C

Based on the previous information. What is the total net present value (NPV) provided to the firm by your recommendations? A)$90,208.29 B)$104,909.67 C)$86,007.90 D)$71,306.51

D

Given an opportunity cost of capital of 12%, which of the following projects would be the safest to accept? A)"A" has a small, but negative, NPV. B)"B" has a positive NPV when discounted at 10%. C)"C" has a cost of capital that exceeds its rate of return. D)"D" has a zero NPV when discounted at 14%

D

If a project has a cost of $50,000 and a profitability index of 2, then: A)it has a negative NPV. B)its NPV could be positive or negative depending on the cost of capital. C)its cash flow is $100,000. D)it has a positive NPV

D

The investment timing decision is aimed at analyzing whether the:A)cash flows occur at the beginning or end of each time period.B)payback period or NPV analysis should be used.C)project is a borrowing or lending project.D)investment should occur now or at some future point

D

The profitability index selects projects based on the: A)highest internal rate of return. B)largest dollar investment per rate of return. C)highest net discounted value at time zero. D)largest return per dollar invested

D

The project in the table results in a negative NPV and should be rejected. If a cash inflow could be added at the end of year 4, what is the minimum amount it would need to be in order to produce a positve NPV? Assume a cost of capital of 12.5%. Initial Cost-$50,000 End of Year 1$10,000 End of Year 2$20,000 End of Year 3$30,000 A)$8,436.29 B)$5,666.67 C)$12,842.75 D)$6,789.56

D

What is the NPV for the following project cash flows at a discount rate of 15%?Initial Cost:-$1,000 End of Year 1$700 End of Year 2$700 A)$308.70B) ($138.00) C)($308.70) D)$138.00

D

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $35,000annually for 6 years? Assume a 9% cost of capital. A)$189,200.15 B)$210,000.00 C)$101,251.79 D)$157,007.15

D

When two projects offer the same positive NPV, they must: A)have the same return. B)have the same initial cost. C)have the same project life. D)add the same amount of value to the firm

D

Which of the following capital budgeting methods take the time value of money into consideration? A)internal rate of return (IRR) and net present value (NPV) only B)profitability index (PI) and net present value (NPV) only C)net present value (NPV) only D)profitability index (PI), internal rate of return (IRR), and net present value (NPV)

D

Which of the following statements is true for a project with a $38,000 initial cost, cash inflows of $11,000 per year for 6 years, and a discount rate of 15%? A)its NPV is $3,635. B)its IRR is 18.53%. C)its profitability index is 0.0959. D)its payback occurs in year 4.

D

A project can have as many different internal rates of return as it has: A)changes in the sign of the cash flows. B)cash outflows. C)cash inflows. D)periods of cash flow

A

A project has an initial cost of $127,682 and annual cash inflows at the end of each year of $29,018. What is the project's payback period? A)4.40 B)3.83 C)4.26 D)3.96

A

Based on the previous information. What is the aggregate profitability index of your recommendations? A)1.1142 B)1.1086 C)1.0957 D)1.1535

A

Todd and Margo plan to retire 3 years from today, sell their home for $580,000 (future price), and move to the beach. Today, they found a beach house for $615,000. They also found a tenant that will rent it for $4,200 per month for the next 3 years with the first rent payment starting one month from today. If Todd and Margo have a cost of capital is 6%, should they buy the beach house today? A)Yes, because the net present value is $7,732.32 B)No, because the internal rate of return exceeds the cost of capital C)Yes, because the increase in value is $116,200.00 D)No, because the net present value is -$8,980.58

A

What is the IRR for a project that costs $100,000 and provides annual cash inflows of $30,000 for 6 years starting one year from today? A)19.91% B)15.84% C)22.09% D)16.67%

A

What is the equivalent annual cost for a project that requires a $40,000 investment at time zero, and a $10,000annual expense at the end of each of the next 4 years? Assume an opportunity cost of capital of 10%? A)$22,618.83 B)$20,000.00 C)$21,356.95 D)$25,237.66

A

When a project generates multiple internal rates of return, the decision rule is to: A)evaluate the project using the NPV method. B)select the highest IRR to maximize the benefits. C)use any or all of the IRRs for comparison to discount rate. D)use the lowest IRR to be conservative

A

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by3 years of $1,500 annually? A)Project A B)Project B C)you are indifferent since the NPVs are equal. D)neither project should be selected.

A

Based on the information CashFlow ProjectA ProjectB ProjectC ProjectD Initial Cost-$37,000-$45,000-$51,000-$27,000 End of Year 1$19,000$23,000$26,000$14,000 End of Year 2$19,000$23,000$26,000$14,000 End of Year 3$19,000$23,000$26,000$14,000 End of Year 4$19,000$23,000$26,000$14,000 End of Year 5$19,000$23,000$26,000$14,000 Which projects should be selected? A)A and B B)A and D C)B and C D)C and D

B

Evaluate the following project using the IRR method. The opportunity cost is 10% Initial Cost:-$600,000 End of Year 1:$330,000 End of Year 2:$360,000 A)Accept; because the IRR exceeds the opportunity cost B)Reject; because the opportunity cost exceeds the IRR C)Accept; because the opportunity cost exceeds the IRR D)Reject; because the IRR exceeds the opportunity cost

B

Old McDonald needs a new combine harvester for his farm and is considering the 2 following options: Initial Cost Annual Cost Useful Life Machine1$165,000 $1,800 9 years Machine2$225,000$2,40015 years The annual cost of machine 1 will increase each year by 7% starting 2 years from today.The annual cost of machine 2 will increase each year by $100 starting 2 years from today.Annual costs begin at the end of year 1. If the discount rate is 6%, which machine should Old McDonald buy? A)buy machine 1 and save $73,192.24 in net present value B)buy machine 2 and save $433.08 in equivalent annual cost C)buy machine 1 because it has a higher profitability index D)buy machine 2 and save $10,760.89 in equivalent annual cost

B

The decision rule for net present value is to: A)reject all projects with rates of return exceeding the opportunity cost of capital B)accept all projects with positive net present values C)accept all projects with cash inflows exceeding the initial cost D)reject all projects lasting longer than 10 years

B

When mutually exclusive projects have different lives, the project that should be selected will have the: A)longest life. B)lowest equivalent annual cost. C)highest NPV, discounted at the opportunity cost of capital. D)highest IRR.

B

When projects are mutually exclusive, you should choose the project with the: A)largest initial size. B)highest NPV. C)highest IRR. D)longest life.

B

You are considering replacing an old machine in your manufacturing plant. The old machine costs $8,000 peryear to maintain. You can purchase a new machine for $25,000 today that will last for 10 years. In addition, it will cost $3,500 in annual maintenance. If the cost of capital is 14.5%, what should you do? A)buy the new machine and save $4,500 in equivalent annual costs. B)keep the old machine and save $386.72 in equivalent annual costs. C)buy the new machine and save $2,000 in equivalent annual costs. D)keep the old machine and save $488.35 in equivalent annual costs.

B

An industrial polisher costs $110,000 and will cost $20,000 at the end of each year to operate and maintain. If the discount rate is 9% and the polisher will last for 15 years, what is its equivalent annual cost? A)$17,474.77 B)$19,163.04 C)$33,646.48 D)$22,187.84

C

Based on the previous information. Assuming the uninvested balance of the capital ration is not otherwise utilized over the next 5 years, what will be its future value 5 years from today if it is invested today at the opportunity cost of capital? A)$25,245.93 B)$5,610.21 C)$50,491.86 D)$30,856.14

C

Based on the previous information. Based on your recommendations, what is the total initial investment? A)$82,000 B)$96,000 C)$64,000 D)$78,000

C

Firms that make investment decisions based on the payback rule may erroneously reject projects with: A)late cash inflows. B)short lives. C)long lives. D)high internal rates of return.

C

If the IRR for a project is 15%, then the project's NPV would be: A)positive at a discount rate of 20%. B)positive at a discount rate of 15%. C)negative at a discount rate of 20%. D)negative at a discount rate of 10%.

C

The marketing department is asking for $2 million today to promote a new product that is expected to return $600,000 one year from today and then grow at an annual rate of 5% for each of the next 4 years. If the firm's cost of capital is 14%, should marketing be given the money? A)No, because the internal rate of return is greater than the cost of capital B)Yes, because it will bring in $762,815.63 over the initial $2 million C)No, because the net present value is -$131,181.85 D)Yes, because the net present value is $423,522.48

C

What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%? A)$13,397.57 B)$33,748.58 C)$16,081.60 D)$14,473.44

C

You want to restore your 1970 Plymouth Roadrunner. You are not in any hurry, so you receive 3 pricingoptions to begin the project today, one year from today, or two years from today as indicated in the tablebelow. The project will take one year to complete regardless of when you start. ProjectStartOption DownPaymentdueatStart BalancedueuponCompletion Option 1: Today $20,000 $20,000 Option 2: 1 Year from Today $22,000 $22,000 Option 3: 2 Years from Today $24,000 $24,000 Assuming your cost of capital is 10%, when should you start the restoration project? A)Option 1 B)Option 2 C)Option 3 D)it does not matter because the net present value is identical for each option

C

A project has an initial cost of $10 million. If the cost of capital exceeds the project IRR, then the project has: A)a positive profitability index. B)a positive NPV. C)an acceptable payback period. D)a negative NPV

D