Principles of Finance Exam 3
Net present value: a. is the best method of analyzing mutually exclusive projects. b. is less useful than the internal rate of return when comparing different-sized projects. c. is the easiest method of evaluation for nonfinancial managers. d. cannot be applied when comparing mutually exclusive projects. e. is very similar in its methodology to the average accounting return.
a. is the best method of analyzing mutually exclusive projects.
An advantage of the average accounting return method of analysis is its: a. use of easily obtained information. b. inclusion of time value of money considerations. c. use of a cutoff rate as a benchmark. d. use of pretax income in its computation. e. use of real, versus nominal, average income.
a. use of easily obtained information.
Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? a. Degree of sensitivity b. Degree of operating leverage c. Accounting break-even d. Cash break-even e. Contribution margin
b. Degree of operating leverage
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? a. Decreasing the required discount rate b. Increasing the initial investment in fixed assets c. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows d. Eliminating the salvage value e. Decreasing the amount of the final cash inflow
c. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
Which one of the following is a project cash inflow? Ignore any tax effects. a. Decrease in accounts payable b. Increase in accounts receivable c. Decrease in inventory d. Depreciation expense e. Equipment acquisition
c. Decrease in inventory
Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. a. Decrease the sales price b. Increase the materials cost per unit c. Decrease the labor hours per unit produced d. Decrease the sales quantity e. Increase the amount of the initial investment in net working capital
c. Decrease the labor hours per unit produced
Given the following, which feature identifies the most desirable level of output for a project? a. Operating cash flow equal to the depreciation expense b. Payback period equal to the project's life c. Discounted payback period equal to the project's life d. Zero IRR e. Zero operating cash flow
c. Discounted payback period equal to the project's life
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? a. Internal rate of return b. Net present value c. Equivalent annual cost d. Depreciation tax shield e. Bottom-up operating cash flow
c. Equivalent annual cost
Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? a. IRR and OCF b. Net income and contribution margin c. IRR and net income d. OCF and NPV e. Net income and NPV
c. IRR and net income
The final decision on which one of two mutually exclusive projects 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
c. Net present value
The operating cash flow for a project should exclude which one of the following? a. Taxes b. Variable costs c. Fixed costs d. Interest expense e. Depreciation tax shield
d. Interest expense
By definition, which one of the following must equal zero at the accounting break-even point? a. Net present value b. Depreciation c. Contribution margin d. Net income e. Operating cash flow
d. Net income
The profitability index is most closely related to which one of the following? a. Payback b. Discounted payback c. Average accounting return d. Net present value e. Modified internal rate of return
d. Net present value
Net working capital: a. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. b. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. c. is rarely affected when a new product is introduced. d. can create either an initial cash inflow or outflow. e. is the only expenditure where at least a partial recovery can be made at the end of a project.
d. can create either an initial cash inflow or outflow.
The key means of defending against forecasting risk is to: a. rely primarily on the net present value method of analysis. b. increase the discount rate assigned to a project. c. shorten the life of a project. d. identify sources of value within a project. e. ignore any potential salvage value that might be realized.
d. identify sources of value within a project.
Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis. a. forecasting b. combined c. complex d. simulation e. break-even
d. simulation
Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? a. The steepness of the function relates to the project's degree of operating leverage. b. The steeper the function, the less sensitive the project is to changes in the sales quantity. c. The resulting function will be a hyperbole. d. The resulting function will include only positive values. e. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
e. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
The operating cash flow of a cost-cutting project: a. is equal to the depreciation tax shield. b. is equal to zero because there is no incremental sales. c. can only be analyzed by projecting the sales and costs for a firm's entire operations. d. includes any changes that occur in the current accounts. e. can be positive even though there are no sales.
e. can be positive even though there are no sales.
The internal rate of return: a. may produce multiple rates of return when cash flows are conventional. b. is best used when comparing mutually exclusive projects. c. is rarely used in the business world today. d. is principally used to evaluate small dollar projects. e. is easy to understand.
e. is easy to understand.
You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: a. longest life. b. highest annual operating cost. c. lowest annual operating cost. d. highest equivalent annual cost. e. lowest equivalent annual cost.
e. lowest equivalent annual cost.
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even
c. sensitivity
Which one of the following characteristics best describes a project that has a low degree of operating leverage? a. High variable costs relative to the fixed costs b. Relatively high initial cash outlay c. OCF that is highly sensitive to the d. sales quantity d. High level of forecasting risk e. High depreciation expense
a. High variable costs relative to the fixed costs
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 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? a. Project A only b. Project B only c. Both A and B d. Neither A nor B e. Either, but not both projects
a. Project A only
A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. a. Sales price per unit b. Management salaries c. Variable labor costs per unit d. Initial fixed asset purchases e. Fixed costs
a. Sales price per unit
A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? a. Sensitivity analysis; to identify the key variable that affects a project's profitability b. Scenario analysis; to guarantee each project will be profitable c. Cash breakeven; to ensure the firm recoups its initial investment d. Accounting breakeven; to ensure each project earns its required rate of return e. Financial breakeven; to ensure each project has a positive NPV
a. Sensitivity analysis; to identify the key variable that affects a project's profitability
Changes in the net working capital requirements: a. can affect the cash flows of a project every year of the project's life. b. only affect the initial cash flows of a project. c. only affect the initial and final cash flows of a project. d. are generally excluded from project analysis due to their irrelevance to the total project. e. are excluded from project analysis as long as they are recovered when the project ends.
a. can affect the cash flows of a project every year of the project's life.
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: a. incremental cash flows. b. internal cash flows. c. external cash flows. d. erosion effects. e. financing cash flows.
a. incremental cash flows.
The change in variable costs that occurs when production is increased by one unit is referred to as the: a. marginal cost. b. average cost. c. total cost. d. scenario cost. e. net cost.
a. marginal cost.
The change in revenue that occurs when one more unit of output is sold is referred to as: a. marginal revenue. b. average revenue. c. total revenue. d. erosion. e. scenario revenue.
a. marginal revenue.
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? a. Conflicts with the results of the net present value decision rule b. Assumes the firm has sufficient funds to undertake both projects c. Agrees with the decision that would also apply if the projects were mutually exclusive d. Bases the accept/reject decision on the same variables as the average accounting return e. Fails to provide useful information as the firm must reject at least one of the projects
b. Assumes the firm has sufficient funds to undertake both projects
Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? a. Differing costs with no replacement at end of life b. Differing lives and planned replacement at end of life c. Differing lives with no replacement at end of life d. Differing manufacturers and differing operating costs e. Differing required returns with no replacement at end of life
b. Differing lives and planned replacement at end of life
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? a. Constant dividend growth model b. Discounted cash flow valuation c. Average accounting return d. Expected earnings model e. Internal rate of return
b. Discounted cash flow valuation
Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? a. Hiring additional employees rather than using temporary outside contractors b. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house c. Buying equipment rather than leasing it short-term d. Lowering the projected selling price per unit e. Changing the proposed labor-intensive production method to a more capital intensive method
b. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? a. Depreciation tax shield b. Tax due on the current salvage value of that asset c. Current year's operating cash flow d. Change in net working capital e. MACRS depreciation for the current year
b. Tax due on the current salvage value of that asset
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: a. accepted because the payback period is less than the required time period. b. accepted because the profitability index is greater than 1. c. accepted because the profitability index is negative. d. rejected because the internal rate of return is negative. e. rejected because the net present value is positive.
b. accepted because the profitability index is greater than 1.
Operating leverage is the degree of dependence a firm places on its: a. variable costs. b. fixed costs. c. sales. d. operating cash flows. e. depreciation tax shield.
b. fixed costs.
Graphing the crossover point helps explain: a. why one project is always superior to another project. b. how decisions concerning mutually exclusive projects are derived. c. how the duration of a project affects the decision as to which project to accept. d. how the net present value and the initial cash outflow of a project are related. e. how the profitability index and the net present value are related.
b. how decisions concerning mutually exclusive projects are derived.
A project's cash flow is equal to the project's operating cash flow: a. plus the project's depreciation expense minus both the project's taxes and capital spending. b. minus both the project's change in net working capital and capital spending. c. minus the project's change in net working capital plus all of the depreciation expenses. d. plus the project's depreciation expenses minus the project's taxes. e. minus the project's taxes.
b. minus both the project's change in net working capital and capital spending.
A project has a discounted payback period that is equal to the required payback period. Given this, the project: a. will not be acceptable under the payback rule. b. must have a profitability index that is equal to or greater than 1.0. c. must have a zero net present value. d. must have an internal rate of return equal to the required return. e. will still be acceptable if the discount rate is increased.
b. must have a profitability index that is equal to or greater than 1.0.
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.
The bottom-up approach to computing the operating cash flow applies only when: a. both the depreciation expense and the interest expense are equal to zero. b. the interest expense is equal to zero. c. the project is a cost-cutting project. d. no fixed assets are required for a project. e. both taxes and the interest expense are equal to zero.
b. the interest expense is equal to zero.
If a project has a net present value equal to zero, then: a. the total of the cash inflows must equal the initial cost of the project. b. the project earns a return exactly equal to the discount rate. c. a decrease in the project's initial cost will cause the project to have a negative NPV. d. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. e. the project's PI must also be equal to zero.
b. the project earns a return exactly equal to the discount rate.
The degree of operating leverage is equal to: a. 1 + OCF/(FC + VC). b. 1 + OCF/FC. c. 1 + FC/OCF. d. 1 + VC/OCF. e. 1 − (FC + VC)/OCF.
c. 1 + FC/OCF.
Which two methods of project analysis are the most biased towards short-term projects? a. Net present value and internal rate of return b. Internal rate of return and profitability index c. Payback and discounted payback d. Net present value and discounted payback e. Discounted payback and profitability index
c. Payback and discounted payback
Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? a. Moving furniture to provide floor space for the appliances b. Paying the rent for the store c. Selling furniture to appliance customers d. Having the current store manager oversee appliance sales e. Using the store's billing system for appliance sales
c. Selling furniture to appliance customers
Which one of the following costs was incurred in the past and cannot be recouped? a. Incremental b. Side c. Sunk d. Opportunity e. Erosion
c. Sunk
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.
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? a. The discounted payback period must be greater than 2.98 years. b. The break-even discount rate must be less than 11.63 percent. c. The discount rate used in computing the net present value was less than 11.63 percent. d. The AAR is equal to the IRR/PI. e. The project should be rejected based on its PI value.
c. The discount rate used in computing the net present value was less than 11.63 percent.
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? a. The net present value indicates accept while the internal rate of return indicates reject. b. Payback indicates acceptance. c. The payback decision rule could override the accept decision indicated by the net present value. d. The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. e. The net present value decision rule is the only rule that matters when making the final decision.
c. 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? a. The internal rate of return decision may contradict the net present value decision. b. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. c. The payback decision rule could override the net present value decision rule should cash availability be limited. d. The profitability index rule cannot be applied in this situation. e. The projects cannot be accepted unless the average accounting return decision ruling is positive.
c. The payback decision rule could override the net present value decision rule should cash availability be limited.
A project's average net income divided by its average book value is referred to as the project's average: a. net present value. b. internal rate of return. c. accounting return. d. profitability index. e. payback period.
c. accounting 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: a. independent. b. interdependent. c. mutually exclusive. d. economically scaled. e. operationally distinct.
c. mutually exclusive.
A project that has a projected IRR of negative 100 percent will also have a(n): a. discounted payback period equal to the life of the project. b. operating cash flow that is positive and equal to the depreciation. c. net present value that is negative and equal to the initial investment. d. payback period that is exactly equal to the life of the project. e. net present value that is equal to zero.
c. net present value that is negative and equal to the initial investment.
The contribution margin per unit is equal to the: a. sales price per unit minus the total costs per unit. b. variable cost per unit minus the fixed cost per unit. c. sales price per unit minus the variable cost per unit. d. pretax profit per unit. d. aftertax profit per unit.
c. sales price per unit minus the variable cost per unit.
Pro forma financial statements can best be described as financial statements: a. expressed in a foreign currency. b. where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. c. showing projected values for future time periods. d. expressed in real dollars, given a stated base year. e. where all accounts are expressed as a percentage of last year's values.
c. showing projected values for future time periods.
The internal rate of return is: a. the discount rate that makes the net present value of a project equal to the initial cash outlay. b. equivalent to the discount rate that makes the net present value equal to one. c. tedious to compute without the use of either a financial calculator or a computer. d. highly dependent upon the current interest rates offered in the marketplace. e. a better methodology than net present value when dealing with unconventional cash flows.
c. tedious to compute without the use of either a financial calculator or a computer.
Which one of the following will decrease the net present value of a project? a. Increasing the value of each of the project's discounted cash inflows b. Moving each cash inflow forward one time period, such as from Year 3 to Year 2 c. Decreasing the required discount rate d. Increasing the project's initial cost at time zero e. Increasing the amount of the final cash inflow
d. Increasing the project's initial cost at time zero
Which one of the following should not be included in the analysis of a new product? a. Increase in accounts payable for inventory purchases of the new product b. Reduction in sales for a current product once the new product is introduced c. Market value of a machine owned by the firm which will be used to produce the new product d. Money already spent for research and development of the new product e. Increase in accounts receivable needed to finance sales of the new product
d. Money already spent for research and development of the new product
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? a. Salvage value b. Wasted value c. Sunk cost d. Opportunity cost e. Erosion
d. Opportunity cost
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? a. Discounted payback b. Profitability index c. Internal rate of return d. Payback e. Average accounting return
d. Payback
Which of the following variables will be forecast at their highest expected level under a best-case scenario? a. Fixed costs and units value b. Variable costs and sales price c. Fixed costs and sales price d. Salvage value and units sold e. Initial cost and variable costs
d. Salvage value and units sold
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? a. Scenario b. Simulation c. Break-even d. Sensitivity e. Cash flow
d. Sensitivity
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.
The depreciation tax shield is best defined as the: a. amount of tax that is saved when an asset is purchased. b. tax that is avoided when an asset is sold as salvage. c. amount of tax that is due when an asset is sold. d. amount of tax that is saved because of the depreciation expense. e. amount by which the aftertax depreciation expense lowers net income.
d. amount of tax that is saved because of the depreciation expense.
The net present value of a project will increase if: a. the required rate of return increases. b. the initial capital requirement increases. c. some of the cash inflows are deferred until a later year. d. the aftertax salvage value of the fixed assets increases. e. the final cash inflow decreases.
d. the aftertax salvage value of the fixed assets increases.
Simulation analysis is based on assigning a _____ and analyzing the results. a. narrow range of values to a single variable b. narrow range of values to multiple variables simultaneously c. wide range of values to a single variable d. wide range of values to multiple variables simultaneously e. single value to each of the variables
d. wide range of values to multiple variables simultaneously
When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as: a. best-case sensitivity analysis. b. worst-case sensitivity analysis. c. best-case scenario analysis. d. worst-case scenario analysis. e. base-case scenario analysis.
d. worst-case scenario analysis.
Which one of these is most associated with an IRR of negative 100 percent? a. Degree of operating leverage b. Accounting break-even point c. Contribution margin d. Simulation analysis e. Cash break-even point
e. Cash break-even point
Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow? a. Erosion effects b. Taxes c. Fixed expenses d. Salaries e. Depreciation expense
e. Depreciation expense
The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? a. Yearly incremental costs b. Sunk costs c. Opportunity costs d. Annuitized erosion cost e. Equivalent annual cost
e. Equivalent annual cost
Assume both the discount and tax rates are positive values. At the financial break-even point, the: a. payback period equals the project's life. b. NPV is negative. c. OCF is zero. d. contribution margin per unit equals the fixed costs per unit. e. IRR equals the required return.
e. IRR equals the required return.
Which one of these combinations must increase the contribution margin? a. Increasing both the sales price and the variable cost per unit b. Increasing the sales quantity and increasing the variable cost per unit c. Decreasing the sales price and increasing the sales quantity d. Decreasing both fixed costs and depreciation expense e. Increasing the sales price and decreasing the variable cost per unit
e. Increasing the sales price and decreasing the variable cost per unit
Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? a. Average variable cost b. Average total cost c. Average total revenue d. Marginal revenue e. Marginal cost
e. Marginal cost
Which one of the following methods of analysis provides the best information on the relationship of the benefit of project relative to the cost? a. Net present value b. Payback c. Internal rate of return d. Average accounting return e. Profitability index
e. Profitability index
Which one of the following types of analysis is the most complex to conduct? a. Scenario b. Break-even c. Sensitivity d. Degree of operating leverage e. Simulation
e. Simulation
A project has a net present value of zero. Which one of the following best describes this project? 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 of 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.
Which one of the following is the best example of two mutually exclusive projects? a. Building a furniture store beside a clothing outlet in the same shopping mall b. Producing both plastic forks and spoons on the same assembly line c. Using an empty warehouse to store both raw materials and finished goods d. Promoting two products during the same television commercial e. Waiting until a machine finishes molding Product A before being able to mold Product B
e. Waiting until a machine finishes molding Product A before being able to mold Product B
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: a. required return. b. zero-sum rate. c. present value rate. d. break-even rate. e. crossover rate.
e. crossover rate.
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: a. net present value period. b. internal return period. c. payback period. d. discounted profitability period. e. discounted payback period.
e. discounted payback period.
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: a. have two net present value profiles. b. have operational ambiguity. c. create a mutually exclusive investment decision. d. produce multiple economies of scale. e. have multiple rates of return.
e. have multiple rates of return.
The average accounting rate of return (AAR): a. considers the time value of money. b. measures net income as a percentage of the sales generated by a project. c. is the best method of financially analyzing mutually exclusive projects. d. is the primary methodology used in analyzing independent projects. e. is similar to the return on assets ratio.
e. is similar to the return on assets ratio.
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 and the required return for both projects is 9 percent. Given this you know that: a. neither project will be accepted if the discount rate is less than 11.7 percent. b. both projects have a negative NPV at discount rates greater than 11.7 percent. c. both projects provide an internal rate of return of 11.7 percent. d. both projects have a zero NPV at a discount rate of 11.7 percent. e. the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent.
e. the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent.
The equivalent annual cost method is useful in determining: a. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. b. the operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. c. the minimum price that should be bid to earn a specified rate of return. d. which one of two investments to accept when the investments have differing required rates of return, differing costs, and will not be replaced once they wear out. e. which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.
e. which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.