FIN 310 EXAM 2 CHAPTER 8

Consider the following two mutually exclusive projects. The appropriate requried return on each investment is 13 percent. YearCash Flow (A)Cash Flow (B)0-$415,000 -$35,000 149,000 19,400 257,000 14,300 374,000 13,600 4530,000 10,400 HintsProject AProject BPayback3.44 years? NPV$ 49,346.83 ? IRR16.80 % 26.59 % PI1.119 ? Required:(a) What is the payback period for each project? Project A: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B Project B: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B (b) What is the NPV for each project? Project A: $ 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B Project B: $ 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B (c) What is the IRR for each project? Project A: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B% Project B: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B% (d) What is the profitability index for each project? Project A: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B Project B: 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B (e)Based on your answers in (a) through (d), which project will you finally choose? 1.1191.2622.103.4416.8026.599174.1449346.83Project AProject B

3.44 2.10 49346.83 9174.14 16.80 26.59 1.119 1.262 Project B

Consider the following two mutually exclusive projects: YearProject AProject BCash Flows0-$54,000-$23,000 112,70011,600 223,20011,200 327,60012,500 446,5006,000Payback 2.66 years?NPV $21,152.94?IRR 28.50%30.94%PI 1.39? Whichever project you choose, if any, you require a 14 percent return on your investment. If you apply the payback criterion, you will choose investment _____. If you apply the NPV criterion, you will choose investment _____. If you apply the IRR criterion, you will choose investment ____. If you choose the profitability index criterion, you will choose investment ____. Based on your first four answers, which project will you finally choose? A; A; B; B; B B; A; B; B; A A; B; A; A; B A; A; B; B; A B; A; B; A; A

B, A, B, A, A

Which one of the following defines the internal rate of return for a project? Discount rate that creates a zero cash flow from assets Discount rate which results in a zero net present value for the project Discount rate which results in a net present value equal to the project's initial cost Rate of return required by the project's investors The project's current market rate of return

Discount rate which results in a zero net present value for the project

Which one of the following statements is correct? The internal rate of return is the most reliable method of analysis for any type of investment decision. The payback method is biased towards short-term projects. The modified internal rate of return is most useful when projects are mutually exclusive. The average accounting return is the most difficult method of analysis to compute. The net present value method is only applicable if a project has conventional cash flows

The payback method is biased towards short-term projects

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $19.4 million, which will be depreciated straight-line to zero over its four-year life. Required: If the plant has projected net income of $1,855,000, $2,066,844, $2,074,000, and $1,346,000 over these four years, what is the project's average accounting return (AAR)? (Do not include the percent sign (%).Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

18.92

An investment has an installed cost of $561,382. The cash flows over the four-year life of the investment are projected to be $190,584, $234,318, $182,674, and $150,313. Hint: The IRR for these cash flows is 13.85 percent. Requirement 1: If the discount rate is zero, what is the NPV? $ 176,507196,507-561,382561,38213.8512.85 Requirement 2: If the discount rate is infinite, what is the NPV? $ 176,507196,507-561,382561,38213.8512.85 Requirement 3: At what discount rate is the NPV just equal to zero? 176,507196,507-561,382561,38213.8512.85%

196,507 -561,382 13.85%

Which one of the following is the primary advantage of payback analysis? Incorporation of the time value Ease of use Research and development bias Arbitrary cutoff point Long-term bias

Ease of use

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? Payback Profitability index Accounting rate of return Internal rate of return Net present value

Net present value

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

Positive net present value

Which one of the following indicates that a project is definitely acceptable? Profitability index greater than 1.0 Negative net present value Modified internal rate return that is lower than the requirement Zero internal rate of return

Profitability index greater than 1.0

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The internal rate of return exceeds the required rate of return. The investment never pays back. The net present value is equal to zero. The average accounting return is 1.0. The net present value is greater than 1.0.

The net present value is equal to zero.

The profitability index reflects the value created per dollar: invested. of sales. of net income. of taxable income. of shareholders' equity.

invested

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three year cutoff for projects. The required return is 14 percent. Year Project F Project G0-$138,000 -$208,000 1 58,500 38,500 2 51,500 53,500 3 61,500 91,500 4 56,500 121,500 5 51,500 136,500 Required: (a) Calculate the payback period for both projects. Project F: 2.463.2071,529.9154,654.14Project GProject F years Project G: 2.463.2071,529.9154,654.14Project GProject F years (b) Calculate the NPV for both projects. Project F: $ 2.463.2071,529.9154,654.14Project GProject F Project G: $ 2.463.2071,529.9154,654.14Project GProject F (c)Which project should the company accept? 2.463.2071,529.9154,654.14Project GProject F

2.46 3.20 54,654.14 71,529.91 Project G

A project that provides annual cash flows of $2,500 for nine years costs $10,300 today. Requirement 1: At a required return of 10 percent, what is the NPV of the project? 19.3218.50-1,885.86-2421.044,097.563153.45 Requirement 2: At a required return of 26 percent, what is the NPV of the project? 19.3218.50-1,885.86-2421.044,097.563153.45 Requirement 3: At what discount rate would you be indifferent between accepting the project and rejecting it? 19.3218.50-1,885.86-2421.044,097.563153.45

4097.56 -1,885.86 19.32

Which one of the following methods of analysis ignores cash flows? Profitability index Net present value Average accounting return Modified internal rate of return Internal rate of return

Average accounting return

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? Internal rate of return Profitability index Average accounting return Net present value Payback

Average accounting return