EXAM 2 CHAPTER 5

Roy's Welding projects cash flows of $13,500, $20,400, and $32,900 for Years 1 to 3 for a project with an initial cost of $45,000. What is the profitability index given an assigned discount rate of 15 percent? A. .92 B. .97 C. 1.03 D. 1.08 E. 1.14

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A $218,000 project has equal annual cash flows over its 7-year life. If the discounted payback period is seven years and the discount rate is 0%, what is the amount of the cash flow in each of the seven years? A. $31,142.86 per year for each of the seven years B. $0 for Years 1 to 6 and $218,000 in Year 7 C. Any amount between $0 and $218,000 for any one year, provided the sum of the seven cash flows totals $218,000. D. $218,000 for Year 1 and $0 for Years 2 through 7. E. $30,421.14 per year for each of the seven years

A. $31,142.86 per year for each of the seven years

What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent. A. $86.87 B. $270.16 C. $68.20 D. $249.65 E. $371.02

A. $86.87

An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years. At what discount rate will the project's IRR equal its discount rate? A. 15.24% B. 27.22% C. 0% D. 16.67% E. 21.08%

A. 15.24%

Wilson's Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why? A. Project A; because its NPV is positive while Project B's NPV is negative B. Project A; because it has the higher required rate of return C. Project B; because it has the largest total cash inflow D. Project B; because it has a negative NPV which indicates acceptance E. neither project; because neither has an NPV equal to or greater than its initial cost

A. Project A; because its NPV is positive while Project B's NPV is negative

Which one of the following statements is true? A. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate. B. You must have a discount rate to compute, NPV, IRR, PI, and discounted payback. C. Payback uses the same discount rate as that applied in the NPV calculation. D. Financing projects can only ever have one IRR. E. Discounted payback is a better method than payback and is more frequently used in practice.

A. You must know the discount rate to compute the NPV but you can compute the IRR without having a discount rate.

The discounted payback method: A. considers the time value of money. B. discounts the cutoff point. C. discounts the initial cost. D. is preferred to the NPV method. E. ignores project risks.

A. considers the time value of money.

The internal rate of return for an investment project is best defined as the: A. discount rate that causes the NPV to equal zero. B. difference between the market rate of interest and the discount rate. C. market rate of interest less the risk-free rate. D. minimum project acceptance rate set by management. E. maximum rate that can be earned for a project to be accepted.

A. discount rate that causes the NPV to equal zero.

The internal rate of return tends to be: A. easier for managers to comprehend than the net present value. B. extremely accurate even when cash flow estimates are faulty. C. ignored by most financial managers. D. used primarily to differentiate between mutually exclusive projects. E. utilized in project analysis only when multiple net present values apply.

A. easier for managers to comprehend than the net present value.

An independent investment is acceptable if the profitability index (PI) of the investment is: A. greater than one. B. less than one. C. greater than the internal rate of return. D. less than the internal rate of return. E. greater than a pre-specified rate of return.

A. greater than one.

An investment is acceptable if the payback period: A. is less than some pre-specified period of time. B. exceeds the life of the investment. C. is negative. D. is equal to or greater than some pre-specified period of time. E. is equal to, and only if it is equal to, the investment's life.

A. is less than some pre-specified period of time.

The difference between the present value of an investment's future cash flows and its initial cost is the: A. net present value. B. internal rate of return. C. payback period. D. profitability index. E. discounted payback period.

A. net present value.

No matter how many forms of investment analysis you employ: A. the actual results from a project may vary significantly from the expected results. B. the internal rate of return will always produce the most reliable results. C. a project will never be accepted unless the payback period is met. D. the initial costs will generally vary considerably from the estimated costs. E. only the first three years of a project ever affect its final outcome.

A. the actual results from a project may vary significantly from the expected results.

The internal rate of return for a project will increase if: A. the initial cost of the project can be reduced. B. the total amount of the cash inflows is reduced. C. each cash inflow is moved such that it occurs one year later than originally projected. D. the required rate of return is reduced. E. the discount rate is increased.

A. the initial cost of the project can be reduced.

If a project is assigned a required rate of return of zero, then: A. the timing of the project's cash flows has no bearing on the value of the project. B. the project will always be accepted. C. the project will always be rejected. D. whether the project is accepted or rejected will depend on the timing of the cash flows. E. the project can never add value for the shareholders.

A. the timing of the project's cash flows has no bearing on the value of the project.

The primary reason that company projects with positive net present values are considered acceptable is that: A. they create value for the owners of the firm. B. the project's rate of return exceeds the rate of inflation. C. they return the initial cash outlay within three years or less. D. the required cash inflows exceed the actual cash inflows. E. the investment's cost exceeds the present value of the cash inflows.

A. they create value for the owners of the firm.

Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800, $16,400, and $21,700 for Years 1 to 3, respectively. Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not? A. yes; because the IRR exceeds the required return by .34 percent B. yes; because the IRR is less than the required return by .28 percent C. yes; because the IRR is exceeds the required return by .46 percent D. no; because the IRR exceeds the required return by .43 percent E. no; because the IRR is only 9.69 percent

A. yes; because the IRR exceeds the required return by .34 percent

Sun Lee's is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $79,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. What is the incremental IRR? A. −15.40% B. −11.23% C. 4.08% D. 7.83% E. 13.89%

A. −15.40%

A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent? A. $2,474.76 B. $2,903.19 C. $935.56 D. $3,011.40 E. $1,980.02

B. $2,903.19

Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years. Project B costs $60,000 and has cash flows of $25,000, $30,000, and $25,000 for Years 1 to 3, respectively. Projects A and B are mutually exclusive. The incremental IRR is _______ and if the required rate is higher than the crossover rate then Project _______ should be accepted. A. 13.94%; A B. 12.89%; B C. 12.89%; A D. 13.94%; B E. 15.86%; A

B. 12.89%; B

A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600, −$22,200, and −$18,000 for Years 1 to 3, respectively. The required rate of return is 13 percent. What is the internal rate of return? Should the project be accepted? A. 15.26%; accept B. 15.26%; reject C. 13.44%; reject D. 13.44%; accept E. 10.33%; accept

B. 15.26%; reject

Homer is considering a project with cash inflows of $950 a year for Years 1 to 4, respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100. What is the discounted payback period? A. 3.05 years B. 2.68 years C. 3.39 years D. 2.21 years E. never

B. 2.68 years

Consider an investment with an initial cost of $20,000 that expected to last for 5 years. The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500 each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is spread evenly over its respective year. What is the payback period? A. 3.18 years B. 3.82 years C. 4.00 years D. 4.55 years E. None of these

B. 3.82 years

Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of return? A. 10.00% B. 9.82% C. 10.04% D. 9.69% E. 9.97%

B. 9.82%

Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods. A. IRR and payback B. IRR and NPV C. NPV and PI D. IRR and modified IRR E. discounted payback and NPV

B. IRR and NPV

Comparing the NPV profile of an investment project to that of a financing project demonstrates why the: A. incremental IRR varies with changes in the market rate of interest. B. IRR decision rule for investment projects is the opposite of the rule for financing projects. C. life span of a project affects the decision as to which project to accept. D. NPV rule for financing projects is the opposite of the rule for investment projects. E. profitability index and the net present value are related.

B. IRR decision rule for investment projects is the opposite of the rule for financing projects.

You are considering two independent projects with the same discount rate of 11 percent. Project A costs $284,700 and has cash flows of $75,900, $106,400, and $159,800 for Years 1 to 3, respectively. Project B costs $115,000, and has a cash flow of $50,000 a year for Years 1 to 3. You have sufficient funds to finance any decision you make. Which project or projects, if either, should you accept and why? A. Project A; because it has the larger NPV B. Project B; because its IRR exceeds the discount rate C. both projects; because their NPVs are both positive D. Project A; because it is the larger-sized project with a positive IRR E. neither project; because their NPVs are less than their initial costs

B. Project B; because its IRR exceeds the discount rate

Leslie is charged with determining which small projects should be funded. Along with this assignment, she has been granted the use of $15,000 for a maximum of two years. She is considering three projects. Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3. Project B costs $8,000 and has cash flows of $3,000, $4,000, and $3,000 for Years 1 to 3, respectively. Project C costs $2,000 and has a cash inflow of $2,500 in Year 2. What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent? Explain why. A. accept either Projects A and C or Projects B and C, but not all three as there is insufficient financing B. accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years C. accept Projects A and C and reject Project B as they have the shortest discounted payback periods than fit within the $15,000 allocation D. accept Projects A and C and reject Project B as A and B payback within two years E. accept Projects B and C and reject Project A as this combination uses the most initial capital

B. accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years

A proposed new venture will cost $175,000 and should produce annual cash flows of $48,500, $85,000, $40,000, and $40,000 for Years 1 to 4, respectively. The required payback period and discounted payback period is 3 years. The discount rate is 9 percent. Which methods indicate project acceptance and which indicate project rejection? A. accept: NPV, IRR, PI, payback; reject: discounted payback B. accept: NPV, IRR, PI; reject: payback, discounted payback C. accept: payback, PI; reject: NPV, IRR, discounted payback D. accept: payback, discounted payback; reject: NPV, IRR, PI E. accept: NPV, IRR; reject: PI, payback, discounted payback

B. accept: NPV, IRR, PI; reject: payback, discounted payback

Which of the following methods of project analysis are biased towards short-term projects? A. profitability index and internal rate of return B. discounted payback and payback C. net present value and payback D. payback and profitability index E. profitability index and discounted payback

B. discounted payback and payback

Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is: A. equal to the discount rate. B. greater than the discount rate. C. less than the discount rate. D. negative. E. positive.

B. greater than the discount rate.

The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer.

B. internal rate of return.

Net present value: A. cannot be used when deciding between two mutually exclusive projects. B. is more useful than the internal rate of return when comparing different sized projects. C. is rarely used by small firms according to the Graham and Harvey survey. D. is not as widely used in practice as payback and discounted payback. E. ignores the risk of a project.

B. is more useful than the internal rate of return when comparing different sized projects.

For investment projects, the internal rate of return (IRR): A. rule indicates acceptance of an investment when the IRR is less than the discount rate. B. is the rate generated solely by the cash flows of the investment. C. is used primarily to rank projects of varying sizes. D. is the rate that causes the net present value of a project to equal the project's initial cost. E. can effectively be used to compare all types of projects.

B. is the rate generated solely by the cash flows of the investment.

The profitability index: A. rule often results in decisions that conflict with the decisions based on the net present value rule. B. is useful as a decision tool when investment funds are limited and all available funds are allocated. C. method is most commonly used when deciding between mutually exclusive projects of varying size. D. rule adjusts for a project's size when determining which one of two projects to accept. E. produces results which typically are difficult to comprehend.

B. is useful as a decision tool when investment funds are limited and all available funds are allocated.

An investment project has an initial cost of $260 and cash flows $75, $105, $100, and $50 for Years 1 to 4, respectively. The cost of capital is 12 percent. What is the discounted payback period? A. 3.76 years B. never C. 3.42 years D. 3.68 years E. 3.92 years

B. never

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are referred to as the: A. discount rate and scale problems. B. timing and scale problems. C. discount rate and timing problems. D. scale and reversing flow problems. E. timing and reversing flow problems.

B. timing and scale problems.

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent. A. −$287.22 B. −$1,195.12 C. −$1,350.49 D. $204.36 E. $797.22

B. −$1,195.12

A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years 1 to 4, respectively. Because of its high risk, the project has been assigned a discount rate of 16 percent. In dollars, how much will this project return in today's dollars for every $1 invested? A. $1.01 B. $.99 C. $1.05 D. $.97 E. $1.03

C. $1.05

Down Under Stores is considering an investment with an initial cost of $236,000. In Year 4, the project will require an additional investment and finally, the project will be shut down in Year 7. The annual cash flows for Years 1 to 7, respectively, are projected as $64,000, $87,000, $91,000, −$48,000, $122,000, $154,000, and −$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13 percent, what is the project's modified IRR? A. 15.44% B. 17.67% C. 18.54% D. 14.91% E. 22.08%

C. 18.54%

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years with each cash flow spread evenly over its respective year. At a discount rate of 10 percent, what is the discounted payback period? A. 3.00 years B. 3.21 years C. 3.75 years D. 3.89 years E. never

C. 3.75 years

An investment with an initial cost of $4,000 produces cash flows of $3,400, −$500, $2,800, −$100, and $6,000 for Years 1 to 5, respectively. How many IRR's does this project have? A. 4 B. 3 C. 5 D. 6 E. 2

C. 5

Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A. A financing project should be accepted if, and only if, the NPV is exactly equal to zero. B. An investment project should be accepted only if the NPV is equal to the initial cash flow. C. Any type of project should be accepted if the NPV is positive and rejected if it is negative. D. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. E. An investment project that has positive cash flows for every time period after the initial investment should be accepted.

C. Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Why do managers suggest that ignoring all cash flows following the assigned payback period is not a major flaw of the payback method of capital budgeting analysis? A. Payback is never used in real practice so it makes no difference how academics apply the method in their studies B. All cash flows after the first two years are highly inaccurate so including them lessens the reliability of the resulting decision. C. If the cash flows after the required payback period are significant, managers will use their discretion to override the payback rule. D. All cash flows after the assigned payback period are relatively worthless in today's dollars so ignoring them has no consequence. E. The results of including the cash flows after the required payback period rarely have any effect on the accept/reject decision.

C. If the cash flows after the required payback period are significant, managers will use their discretion to override the payback rule.

Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8 percent. He can afford to fund either project, but not both. Matt should accept: A. Project A because of its payback period. B. both projects as they both have positive NPVs. C. Project B based on its NPV. D. Project A because of its IRR. E. neither project based on their IRRs.

C. Project B based on its NPV.

Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3. Project Y costs $40,700 and has cash flows of $12,000, $25,000, and $10,000 in Years 1 to 3, respectively. The discount rate is 6 percent and the projects are mutually exclusive. Based on the individual project's IRRs you should accept Project _____; based on NPV you should accept Project ____; the final decision should be to accept Project ____. A. Y; Y; Y B. Y; X; X C. X; Y; Y D. X; X; X E. Y; X: Y

C. X; Y; Y

One characteristic of the payback method of project analysis is the: A. use of variable discount rates. B. standardized cutoff point for cash flow consideration. C. bias towards liquidity. D. consideration of the risk level of each project. E. discounting of all cash flows.

C. bias towards liquidity.

The internal rate of return is: A. more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. B. equivalent to the discount rate that makes the net present value equal to one. C. computed using a project's cash flows as the only source of inputs. D. dependent on the interest rates offered in the marketplace. E. a better methodology than net present value when dealing with unconventional cash flows.

C. computed using a project's cash flows as the only source of inputs.

Assume you use all available methods to evaluate projects. If there is a conflict in the indicated decision between two mutually exclusive projects due to the IRR-based indicator, you should: A. accept both projects since both are acceptable based on some method. B. combine both projects into one larger project. C. ignore the IRR and rely on the decision indicated by the NPV method. D. base the final decision on the payback method. E. reject both projects due to ambiguity in the decision making process.

C. ignore the IRR and rely on the decision indicated by the NPV method.

Payback is frequently used to analyze independent projects because: A. it considers the time value of money. B. all relevant cash flows are included in the analysis. C. it is easy and quick to calculate. D. it is the most desirable of all the available analytical methods from a financial perspective. E. it produces better decisions than those made using either NPV or IRR.

C. it is easy and quick to calculate.

A situation in which accepting one investment prevents the acceptance of another investment is called the: A. net present value profile. B. operational ambiguity decision. C. mutually exclusive investment decision. D. issues of scale problem. E. multiple rates of return decision.

C. mutually exclusive investment decision.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: A. cash period. B. net working capital period. C. payback period. D. profitability index. E. discounted payback period.

C. payback period.

Which one of the following is the best example of two mutually exclusive projects? A. planning to build a warehouse and a retail outlet side by side B. buying sufficient equipment to manufacture both desks and chairs simultaneously C. renting out a company warehouse or selling it outright D. using the company sales force to promote sales of both shoes and socks E. buying both inventory and fixed assets using funds from the same bank loan

C. renting out a company warehouse or selling it outright

The payback method: A. determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule. B. determines a cutoff point equal to the point where all initial capital investments have been fully depreciated. C. requires an arbitrary choice of a cutoff point. D. varies the cutoff point with the market rate of interest. E. is rarely used in actual practice.

C. requires an arbitrary choice of a cutoff point.

It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart? A. .83 years B. 1.14 years C. 1.83 years D. 2.14 years E. 2.83 years

D. 2.14 years

How should a profitability index of zero be interpreted? A. The present value of the cash flows subsequent to the initial cash flow is equal to (−1 × Initial cash flow). B. The project has an internal rate of return equal to the discount rate. C. The project produces a net income of zero for every year of its life. D. The project's cash flows subsequent to the initial cash flow have a present value of zero. E. The project also has a net present value of zero.

D. The project's cash flows subsequent to the initial cash flow have a present value of zero.

Anne is considering two independent projects with 2-year lives. Both projects have been assigned a discount rate of 13 percent. She has sufficient funds to finance one or both projects. Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2, respectively. Project B costs $41,000, and has cash flows of $25,000 and $22,000 for Years 1 and 2, respectively. Which project, or projects, if either, should you accept based on the profitability index method and what is the correct reason for that decision? A. You should accept both projects since both of their PIs are positive. B. You should accept Project A since it has the higher PI and you can only select one. C. You should accept both projects since both of their PIs are greater than 1. D. You should only accept project A since it has the largest PI and the PI exceeds one. E. Neither project is acceptable.

D. You should only accept project A since it has the largest PI and the PI exceeds one.

A mutually exclusive project is a project whose: A. acceptance or rejection has no effect on other projects. B. NPV is always negative. C. IRR is always negative. D. acceptance or rejection affects other projects. E. cash flow pattern exhibits more than one sign change.

D. acceptance or rejection affects other projects.

The discounted payback period of a project will decrease whenever the: A. discount rate applied to the project is increased. B. initial cash outlay of the project is increased. C. time period of the project is increased. D. amount of each project cash inflow is increased. E. costs of the fixed assets utilized in the project increase.

D. amount of each project cash inflow is increased.

If a project has a net present value equal to zero, then: A. the initial cost of the project exceeds the present value of the project's subsequent cash flows. B. the internal rate of return exceeds the discount rate. C. the project produces cash inflows that exceed the minimum required inflows. D. any delay in receiving the projected cash inflows will cause the project's NPV to be negative. E. the discount rate exceeds the internal rate of return.

D. any delay in receiving the projected cash inflows will cause the project's NPV to be negative.

The payback method: A. is the most frequently used method of capital budgeting analysis. B. is a more sophisticated method of analysis than the profitability index. C. considers the time value of money. D. applies mainly to projects where the actual results will be known relatively soon. E. generally results in decisions that conflict with the decision suggested by NPV analysis.

D. applies mainly to projects where the actual results will be known relatively soon.

A project will have more than one IRR if, any only if, the: A. primary IRR is positive. B. primary IRR is negative. C. NPV is zero. D. cash flow pattern exhibits more than one sign change. E. cash flow pattern exhibits exactly one sign change.

D. cash flow pattern exhibits more than one sign change.

All else equal, the payback period for a project will decrease whenever the: A. initial cost increases. B. required return for a project increases. C. assigned discount rate decreases. D. cash inflows are moved earlier in time. E. duration of a project is lengthened.

D. cash inflows are moved earlier in time.

The modified internal rate of return: A. is used as the discount rate for all NPV calculations. B. applies only to profitability calculations. C. is used to make accept/reject decisions when no discount rate can be assigned. D. is computed by combining cash flows until only one change in sign remains. E. assumes all projects are financing projects.

D. is computed by combining cash flows until only one change in sign remains.

The discounted payback rule states that you should accept an investment project if its discounted payback period: A. exceeds some pre-specified period of time. B. is positive and rejected if it is negative. C. is less than the payback period. D. is less than some pre-specified period of time. E. exceeds the life of the investment.

D. is less than some pre-specified period of time.

A $25 investment returns $27.50 at the end of one year with no risk. Given this, you know that the NPV: A. is zero at any given discount rate. B. is negative if the required return is less than 10 percent. C. equals 1.0 if the required return is 10 percent. D. is zero if the required return is equal to 10 percent. E. must be positive at any given discount rate.

D. is zero if the required return is equal to 10 percent.

A financing project is acceptable if its IRR is: A. exactly equal to its net present value (NPV). B. exactly equal to zero. C. greater than the discount rate. D. less than the discount rate. E. negative.

D. less than the discount rate.

Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis. A. profitability index B. internal rate of return C. payback D. net present value E. discounted payback

D. net present value

If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis. A. internal rate of return B. net present value C. modified internal rate of return D. payback E. profitability index

D. payback

The present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period.

D. profitability index.

You are considering two independent projects that have differing requirements. Project A has a required return of 12 percent compared to Project B's required return of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3, respectively. Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively. Given this information, you should: A. accept both Project A and Project B. B. accept Project A and reject Project B. C. accept Project B and reject Project A. D. reject both Project A and Project B. E. accept whichever one you want but not both.

D. reject both Project A and Project B.

All else constant, the net present value of a typical investment project increases when: A. the discount rate increases. B. each cash inflow is delayed by one year. C. the initial cost of a project increases. D. the rate of return decreases. E. all cash inflows occur during the last year instead of periodically throughout a project's life.

D. the rate of return decreases.

Blue Bird Café is considering a project with an initial cost of $46,800, and cash flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have? A. 0 B. 1 C. 4 D. 3 E. 2

E. 2

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1 to 4, respectively? A. 2.04 years B. 2.36 years C. 2.89 years D. 3.04 years E. 3.36 years

E. 3.36 years

Flo's Flowers has a project costing $40,000 and cash flows of $8,500, $15,600, and $22,700 for Years 1 to 3, respectively. Based on the profitability index rule, should the project be accepted if the discount rate is 9.5 percent? Why or why not? A. Yes; because the PI is 1.03 B. Yes; because the PI is .95 C. Yes; because the PI is negative D. No; because the PI is 1.03 E. No; because the PI is .95

E. No; because the PI is .95

You are considering a project with the following data: Internal rate of return 8.7% Profitability ratio .98 Net present value −$393 Payback period 2.44 years Required return 9.5% Which one of the following is correct given this information? A. The discount rate used in computing the net present value must have been less than 8.7%. B. The discounted payback period will have to be less than 2.44 years. C. The discount rate used to compute the profitability ratio was equal to the internal rate of return. D. This project should be accepted based on the profitability ratio. E. This project should be rejected based on the internal rate of return.

E. This project should be rejected based on the internal rate of return.

Juan is considering two independent projects. Project A costs $74,600 and cash flows of $18,700, $46,300, and $12,200 for Years 1 to 3, respectively. Project B costs $70,000 and has cash flows of $10,600, $15,800, and $67,900 for Years 1 to 3, respectively. Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B. Which project or projects, if either, should he accept based on the profitability index rule? A. accept both projects B. accept Project A and reject Project B. C. accept either A or B, but not both D. reject both projects E. accept Project B and reject Project A

E. accept Project B and reject Project A

The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the: A. net present value. B. discounted net present value. C. payback period. D. discounted profitability index. E. discounted payback period.

E. discounted payback period.

The two fatal flaws of the internal rate of return decision rule are the: A. arbitrary determination of a discount rate and the failure to consider initial expenditures. B. arbitrary determination of a discount rate and the failure to correctly analyze mutually exclusive investment projects. C. arbitrary determination of a discount rate and the multiple rate of return problem. D. failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects. E. failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

E. failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

The payback method of analysis: A. discounts cash flows. B. ignores the initial cost. C. always uses all project cash flows. D. applies an industry-standard recoupment period. E. has a timing bias.

E. has a timing bias.

You are trying to determine whether to accept Project A or Project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining the: A. internal rate of return for the cash flows of each project. B. net present value of each project using the internal rate of return as the discount rate. C. discount rate that equates the discounted payback periods for each project. D. discount rate that makes the net present value of each project equal to one. E. internal rate of return for the differences in the cash flows of the two projects.

E. internal rate of return for the differences in the cash flows of the two projects.

Accepting a positive net present value (NPV) project: A. indicates the project will pay back within the required period of time. B. means the present value of the expected cash flows is equal to the project's cost. C. ignores the inherent risks within the project. D. guarantees all cash flow assumptions will be realized. E. is expected to increase the stockholders' value by the amount of the NPV.

E. is expected to increase the stockholders' value by the amount of the NPV.

The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as: A. net present value profiling. B. operational ambiguity. C. the mutually exclusive investment decision. D. issues of scale. E. multiple rates of return.

E. multiple rates of return.

A project has an initial cost of $10,600 and produces cash inflows of $3,700, $4,900, and $2,500 for Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 7.5 percent? A. 2.65 years B. 2.78 years C. 2.94 years D. 2.88 years E. never

E. never

A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period? A. 2.97 years B. 2.84 years C. 3.98 years D. 3.92 years E. never

E. never

Jack is considering adding toys to his general store. He estimates the cost of toy inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to produce net annual cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years, respectively. Should Jack add toys to his merchandise if he requires a three-year payback period? Why or why not? A. yes; because the payback period is 2.94 years B. yes; because the payback period is 2.02 years C. yes; because the payback period is 3.80 years D. no; because the payback period is 2.02 years E. no; because the payback period is 3.80 years

E. no; because the payback period is 3.80 years

Ted, a project manager, wants to invest in a project with an initial cost of $58,500 and cash flows of $32,400 and $38,500 in Years 1 and 2. Rosita, his boss, requires a discount rate of 10 percent and also a return of $1.10 in today's dollars for every $1 invested. Will Ted get his project approved? Why or why not? A. yes; because the NPV is positive B. yes; because the PI is greater than 1 C. yes; because both criteria are met D. no; because the project does not meet either requirement E. no; while the project returns more than 10 percent it does meet $1.10 per $1 requirement.

E. no; while the project returns more than 10 percent it does meet $1.10 per $1 requirement.

The profitability index of an investment project is the ratio of the: A. average net income to the average investment. B. internal rate of return to the current market rate of interest. C. net present value of the project's cash outflows divided by the net present value of its inflows. D. net present value of every project cash flow to the initial cost. E. present value of the Time 1 and subsequent cash flows to the initial cost.

E. present value of the Time 1 and subsequent cash flows to the initial cost.

If you want to review a project from a benefit-cost perspective, you should use the _______ method of analysis. A. net present value B. payback C. internal rate of return D. discounted payback E. profitability index

E. profitability index

The net present value method of capital budgeting analysis does all of the following except: A. incorporate risk into the analysis. B. consider all relevant cash flow information. C. use all of a project's cash flows. D. discount all future cash flows. E. provide a specific anticipated rate of return.

E. provide a specific anticipated rate of return.

Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600 for Years 1 to 3, respectively. Project B costs $72,000 and has cash flows of $22,000, $38,000, and $26,500 for Years 1 to 3, respectively. Using the IRR, which project, or projects, if either, should be accepted? A. accept both projects B. select either project as there is no significant difference between them C. accept Project A and reject Project B. D. accept Project B and reject Project A. E. reject both projects

E. reject both projects

The discounted payback rule may cause: A. projects with discounted payback periods in excess of the project's life to be accepted. B. the most liquid projects to be rejected in favor of less liquid projects. C. projects to be incorrectly accepted due to ignoring the time value of money. D. some projects with negative net present values to be accepted. E. some positive net present value projects to be rejected.

E. some positive net present value projects to be rejected.

Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2, $36,000 in Year 3, and −$5,000 in Year 4. Ginny requires a rate of return of 8 percent and has a required discounted payback period of three years. Based on the discounted payback method should she make this investment? All things considered, do you agree with this decision? Why or why not? A. yes; because the NPV is positive and the project pays back on a discounted basis within the assigned time period B. yes; but only because the discounted payback requirement is met C. no; although the project earns more than 8 percent, there is no situation where the project can pay back on a discounted basis within three years D. no; because the discounted payback period is too short E. yes; discounted payback indicates acceptance but that is not a wise decision as the NPV is negative and the final cash outflow is ignored by payback

E. yes; discounted payback indicates acceptance but that is not a wise decision as the NPV is negative and the final cash outflow is ignored by payback

Project A costs $84,500 and has cash flows of $32,300, $36,400, and $30,000 for Years 1 to 3, respectively. Project B has an initial cost of $79,000 and has cash flows of $30,000, $36,000, and $29,000 for Years 1 to 3, respectively. What is the incremental IRR of these two mutually exclusive projects? A. 18.11% B. 13.01% C. −14.91% D. −16.75% E. −20.37%

E. −20.37%