Chapter 9 HW

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.

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 methods predicts the amount by which the value of a firm will change if a project is accepted? A) Net present value B) Discounted payback C) Internal rate of return D) Profitability index E) Payback

A) Net present value

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.

saac 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? A) Accept both projects because both NPVs are positive B) Accept Project A because it has the shortest payback period C) Accept Project B and reject Project A based on the NPVs D) Accept Project A and reject Project B based on their AARs E) Accept Project A because it has the lower required return

C) Accept Project B and reject Project A based on the NPVs

Which of the following are advantages of the payback method of project analysis? A) Considers time value of money, liquidity bias B) Liquidity bias, arbitrary cutoff point C) Liquidity bias, ease of use D) Ignores time value of money, ease of use E) Ease of use, arbitrary cutoff point

C) Liquidity bias, ease of use

Which one of the following statements related to the internal rate of return (IRR) is correct? A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. C) The IRR is equal to the required return when the net present value is equal to zero. D) Financing type projects should be accepted if the IRR exceeds the required return. E) The average accounting return is a better method of analysis than the IRR from a financial point of view.

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

An investment costs $152,000 and has projected cash inflows 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? A) Yes; The IRR exceeds the required return. B) Yes; The IRR is less than the required return. C) No; The IRR is less than the required return. D) No; The IRR exceeds the required return. E) You should not apply the IRR rule in this case

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

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

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 mutually exclusive projects based on IRR analysis? A) Accept Project A and reject Project B B) Reject Project A and accept Project B Incorrect C) Accept both projects D) Reject both projects E) You should not use IRR; use a different method of analysis.

E) You should not use IRR; use a different method of analysis. Because these are mutually exclusive projects of differing sizes you should not apply the IRR rule.