FIN 125 EXAM 2

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis? Select one: Accept Project A and reject Project B Reject Project A and accept Project B Accept both Projects A and B Reject both Projects A and B You cannot apply the payback method to these projects.

Accept Project A and reject Project B

Isaac 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? Select one: Accept both projects because both NPVs are positive Accept Project A because it has the shortest payback period Accept Project B and reject Project A based on the NPVs Accept Project A and reject Project B based on their AARs Accept Project A because it has the lower required return

Accept Project B and reject Project A based on the NPVs

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? Select one: Yes; The IRR exceeds the required return. Yes; The IRR is less than the required return. No; The IRR is less than the required return. No; The IRR exceeds the required return. You should not apply the IRR rule in this case.

You should not apply the IRR rule in this case.

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? Select one: Accept Project A and reject Project B Reject Project A and accept Project B Accept both projects Reject both projects You should not use IRR; use a different method of analysis.

You should not use IRR; use a different method of analysis.

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 3.1 years with a net present value of $26,400. Project B has an expected payback period of 2.9 years and a net present value of $4,200. Which project(s) should be accepted based on the payback decision rule? Select one: a. Project B only b. Project A only c. Both A and B d. Neither A nor B e. Either, but not both projects

a. Project B only

You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should: Select one: accept both projects. accept Project A and reject Project B. accept Project B and reject Project A. reject both projects. accept either one of the projects, but not both.

accept Project A and reject Project B.

Net present value: Select one: is the best method of analyzing mutually exclusive projects. is less useful than the internal rate of return when comparing different-sized projects. is the easiest method of evaluation for nonfinancial managers. cannot be applied when comparing mutually exclusive projects. is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

A project has a discounted payback period that is equal to the required payback period. Given this, the project: Select one: will not be acceptable under the payback rule . must have a profitability index that is equal to or greater than 1.0. must have a zero net present value. must have an internal rate of return equal to the required return. will still be acceptable if the discount rate is increased.

must have a profitability index that is equal to or greater than 1.0.

Which of the following are advantages of the payback method of project analysis? Select one: Considers time value of money, liquidity bias Liquidity bias, arbitrary cutoff point Liquidity bias, ease of use Ignores time value of money, ease of use Ease of use, arbitrary cutoff point

Liquidity bias, ease of use

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? Select one: Net present value Discounted payback Internal rate of return Profitability index Payback

Net Present Value

Which one of the following methods of analysis provides the best information on the relationship of the benefit of project relative to the cost? Select one: Net present value Payback Internal rate of return Average accounting return Profitability index

Profitability index

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why? Select one: Project A, because it has the higher required rate of return. Project A, because it has the larger NPV. Project B, because it has the largest cash inflow in Year 1. Project B, because it has the higher required rate of return. Project B, because it has the larger NPV

Project A, because it has the larger NPV.

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years? Select one: Accept; The discounted payback period is 2.18 years. Accept; The discounted payback period is 2.32 years. Accept; The discounted payback period is 2.98 years. Reject; The discounted payback period is 3.87 years. Reject; The project never pays back on a discounted basis.

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

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

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