Exam 2 Investments (Part 1)

What is the net present value of a project that has an initial cash outflow of $36,300 and cash inflows of $11,500, $21,700, $0, and $10,400 in Years 1 through 4, respectively? The required return is 15 percent. A. -$3,945.45 B. -$3,053.51 C. -$2,481.53 D. $2,311.08 E. $2,416.75

A. -$3,945.45

Scott is considering a project that will produce cash inflows of $5,100 a year for 3 years. The project has required rate of return of 14 percent and an initial cost of $6,000. What is the discounted payback period? A. 1.39 years B. .91 years C. 2.26 years D. 2.47 years E. never

A. 1.39 years

You are considering a project with an initial cost of $8,600. What is the payback period for this project if the cash inflows are $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively? A. 2.88 years B. 3.28 years C. 3.36 years D. 4.21 years E. 2.29 years

A. 2.88 years

A project produces annual net income of $18,200, $21,800, and $22,900 over its three-year life, respectively. The initial cost is $197,000, which 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? A. 21.29 percent B. 16.67 percent C. 18.98 percent D. 20.25 percent E. 23.84 percent

A. 21.29 percent

Which one of the following is an advantage of the average accounting return method of analysis? A. Easy availability of information needed for the computation B. Inclusion of time value of money considerations C. The use of a cutoff rate as a benchmark D. The use of pre-tax income in the computation E. Use of real, versus nominal, average income

A. Easy availability of information needed for the computation

Real rates are defined as nominal rates that have been adjusted for which of the following? A. Inflation. B. Default risk. C. Accrued interest. D. Interest rate risk. E. Both inflation and interest rate risk

A. Inflation.

Applying the discounted payback decision rule to all projects may cause: A. Some positive net present value projects to be rejected. B. The most liquid projects to be rejected in favor of the less liquid projects. C. Projects to be incorrectly accepted due to ignoring the time value of money. D. A firm to become more long-term focused. E. Some projects to be accepted which would otherwise be rejected under the payback rule.

A. Some positive net present value projects to be rejected.

Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $975.93 C. $996.48 D. $904.75 E. $923.78

B. $975.93

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Coupon. B. Face Value. C. Discount. D. Yield. E. Dirty price.

B. Face Value.

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.

A project has an initial cash outflow of $39,800 and produces cash inflows of $18,304, $19,516, and $14,280 for years 1 through 3, respectively. What is the NPV at a discount rate of 11 percent? A. $7,675.95 B. -$1,208.19 C. $2,971.13 D. $2,029.09 E. $1,311.16

C. $2,971.13

A project has an initial cost of $6,700. The cash inflows are $850, $2,400, $3,300, and $4,100 over the next four years, respectively. What is the payback period? A. 3.73 years B. 2.51 years C. 3.04 years D. 3.51 years E. 3.94 years

C. 3.04 years

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Call price. B. Current price. C. Face value. D. Clean price. E. Dirty price.

C. Face value.

In actual practice, managers most frequently use which two types of investment criteria? A. NPV and payback. B. AAR and IRR. C. IRR and NPV. D. IRR and payback. E. NPV and PI.

C. IRR and NPV.

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.

The current yield is defined as the annual interest on a bond divided by which one of the following? A. Coupon rate. B. Face value. C. Market price. D. Call price. E. Par value.

C. Market price.

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.

A project has an initial cost of $18,400 and is expected to produce cash inflows of $7,200, $8,900, and $7,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 12 percent? A. 2.31 years B. 2.45 years C. 2.55 years D. 2.91 years E. Never

D. 2.91 years

The internal rate of return is defined as the: A. Maximum rate of return a firm expects to earn on a project. B. Rate of return a project will generate if the project in financed solely with internal funds. C. Discount rate that equates the net cash inflows of a project to zero. D. Discount rate which causes the net present value of a project to equal zero. E. Discount rate that causes the profitability index for a project to equal zero.

D. Discount rate which causes the net present value of a project to equal zero.

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 of the cash inflows forward to a sooner time period. 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.

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? A. Profitability index. B. Internal rate of return. C. Payback. D. Net present value. E. Accounting rate of return.

D. Net present value.

The Fisher effect is defined as the relationship between which of the following variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates E. Real rates, interest rate risk premium, and nominal rates

D. Real rates, inflation rates, and nominal rates

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A. Coupon rate. B. Face rate. C. Call rate. D. Yield to maturity. E. Current yield.

D. Yield to maturity.

Project A has an initial cost of $80,000 and provides cash inflows of $34,000 a year for three years. Project B has an initial cost of $80,000 and produces a cash inflow of $114,000 in year 3. Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? A. Accept A as it always has the higher NPV. B. Accept B as it always has the higher NPV. C. Accept A at 11.7 percent and B at 13.5 percent. D. Accept B at .11.7 percent and A at 13.5 percent. E. Accept A at 11.7 percent and neither at 13.5 percent.

E. Accept A at 11.7 percent and neither at 13.5 percent.

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.

JJ's is reviewing a project with a cost of $318,000, and cash inflows of $0, $47,000, $198,000, and $226,000 for years 1 to 4, respectively. The required discount rate is 15.5 percent and the required discounted payback period is three years. Should the project be accepted? Why or why not? A. Accept; The discounted payback period is 2.18 years. B. Accept; The discounted payback period is 2.32 years. C. Accept; The discounted payback period is 2.98 years. D. Reject; The discounted payback period is 3.87 years. E. Reject; The project never pays back on a discounted basis.

E. Reject; The project never pays back on a discounted basis.

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next four years. The profit margin is 6 percent, the project cost is $96,000, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 11 percent. This project should be _____ because the AAR is _____ percent. A. Rejected; 10.03 B. Accepted; 10.88 C. Rejected; 11.60 D. Accepted; 10.03 E. Rejected; 10.88

E. Rejected; 10.88

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $1,300. Toy sales are expected to produce net cash inflows of $3,300, $4,900, $4,400, and $4,100 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? A. No; The payback period is 2.93 years. B. No; The payback period is 3.59 years. C. Yes; The payback period is 2.93 years. D. Yes; The payback period is 3.01 years. E. Yes; The payback period is 2.59 years.

E. Yes; The payback period is 2.59 years.

You are considering an investment that costs $152,000 and has projected cash flows 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 cannot apply the IRR rule in this case.

E. You cannot apply the IRR rule in this case.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Debenture. B. Convertible. C. Floating-rate. D. Junk. E. Zero coupon

E. Zero coupon