Chapter 9 Corporate Finance

Yes; The PI is 1.04

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? Year Cash Flow 0 -$26,200 1 11,800 2 0 3 24,900 (#71)

Yes; The MIRR is 17.85 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? Year Cash Flow 0 -$236,000 1 137,400 2 189,300 3 -25,000 (#66)

I and II only

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.

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

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

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

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?

never

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? (#78)

net present value

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?

10.10 percent

A project has an initial cost of $35,000 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? (#83)

2.94 years

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? (#76)

reject; 11.43

A project has average net income of $5,600 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. (#85)

15.89 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? (#84)

$2,168.02

A project will produce cash inflows of $3,200 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? (#59)

a cash inflow at time zero

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

accounting return

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

No; The payback period is 3.38 years

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 $1,500. Toy sales are expected to produce net cash inflows of $1,800, $2,700, $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? (#77)

Yes; The IRR exceeds the required return by about 0.06 percent.

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? Year Cash Flow 0 -$42,000 1 16,500 2 28,400 3 7,500 (#63)

some positive net present value projects to be rejected

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

No; The MIRR is 8.81 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? Year Cash Flow 0 -$148,500 1 32,800 2 64,200 3 -7,500 4 87,300 (#68)

mutually exclusive

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

the project earns a return exactly equal to the discount rate.

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

I, II, and IV only

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.

payback

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?

both require the total use of the same limited resource

Mutually exclusive projects are best defined as competing projects which:

is the best method of analyzing mutually exclusive projects

Net present value:

assumes the firm has sufficient funds to undertake both projects

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?

cash inflow in the final year of the project

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

Project A only

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?

No; The MIRR is 7.59 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? Year Cash Flow 0 -$387,500 1 67,500 2 238,900 3 164,500 4 -22,700 (#67)

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?

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

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?

accepted; 11.60

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. (#82)

required rate of return

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

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

The internal rate of return is defined as the:

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

The internal rate of return is:

is easy to understand

The internal rate of return:

payback period

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

discounted payback period

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:

profitability index

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

net present value

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

have multiple rates of return

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:

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

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?

-$3,383.25

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 Year Cash inflows 1 $12,500 2 19,700 3 0 4 10,400 (#58)

-$842.12

What is the net present value of a project with the following cash flows if the required rate of return is 12 percent? Year Cash Flow 0 -$42,398 1 13,407 2 21,219 3 17,800 (#57)

1.02

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return? Year Cash Flow 0 -$46,500 1 12,200 2 38,400 3 11,300 (#70)

accepted because the profitability index is greater than 1

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

II and III 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

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 and III 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, II, 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, III, and IV

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.

It can be compared to the return on assets ratio

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

an increase in the aftertax salvage value of the fixed assets

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

modified internal rate of return that exceeds the required return

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

easy availability of information needed for the computation

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

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

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

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?

profitability index

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

discounted cash flow valuation

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?

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

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

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

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

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

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

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

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

increasing the project's initial cost at time zero

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

payback and discounted payback

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

internal rate of return and net present value

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

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

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

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

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:

3.28 years

You are considering a project with an initial cost of $7,800. 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? (#75)

I, II, and IV only

You are considering a project with conventional cash flows and the following characteristics: Internal Rate of return: 11.63% Profitability ratio: 1.04 Net present value: $987 Payback period: 2.98 years 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 less 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.

You cannot apply the IRR rule in this case (Since the cash flow direction changes twice, there are two IRRs. Thus, the IRR rule cannot be used to determine acceptance or rejection)

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? Year Cash Flow 0 -$152,800 1 96,100 2 102,300 3 -4,900 (#65)

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

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? Year Project A Project B 0 -$50,000 -$50,000 1 24,800 41,000 2 36,200 20,000 3 21,000 10,000 (#60)

You should accept both projects

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? Project A Project B Year Cash Flow Year Cash Flow 0 -$46,000 0 -$50,000 1 32,000 1 18,000 2 27,000 2 54,000 (#72)

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

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? Year Project A Project B 0 -$125,000 -$135,000 1 46,000 50,000 2 79,000 30,000 3 51,000 110,000 (#64)

accept B at 8.5 percent and neither at 13 percent

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? Year Project A Project B 0 -$80,000 -$80,000 1 32,000 0 2 32,000 0 3 32,000 105,000 (#61)

NPV profile

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?

7.03 percent

Day Interiors is considering a project with the following cash flows. What is the IRR of this project? Year Cash Flow 0 -$114,600 1 35,900 2 50,800 3 45,000 (#62)

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

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?

how decisions concerning mutually exclusive projects are derived

Graphing the crossover point helps explain:

No; The MIRR is 15.64 percent

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? Year Cash Flow 0 -$375,000 1 104,500 2 -35,600 3 244,700 4 271,000 (#69)

accept the project because the PI is 1.11

You would like to invest in the following project Year Cash Flow 0 -$98,400 1 59,200 2 74,100 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: (#74)