FIN 3080 Exam 2

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 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? -both a and b -b only -neither a or b -a only -either, but not both projects

a only

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. The projects are mutually exclusive. Which project(s) should you accept if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? -accept b at 11.7% and a at 13.5% -accept as it always has the higher NPV -accept a at 11.7% and neither at 13.5% -accept 1 at 11.7% and b at 13.5% -accept b as it always has the higher NPV

accept a at 11.7% and neither at 13.5%

the IRR is defined as: -discount rate that causes the profitability index for a project to equal zero -discount rate that equates the net cash inflow of a project to zero -rate of return a project will generate if the project in financed solely with internal funds -maximum rate of return a firm expects to earn on a project -discount rate which causes the NPV of a project o equal zero

discount rate which cause the NPV of a project to equal zero

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: -operationally distinct -mutually exclusive -economically scaled -independent -interdependent

mutually exclusive

You estimate that a project will cost $27,700 and will provide cash inflows of $11,800 in year 1 and $24,600 in year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14 percent? Why or why not? -yes; PI is 0.97 -yes; PI is 0.84 -yes; PI is 1.06 -no; PI is 1.06 -no; PI is 0.97

no; PI is 0.97

The length of time a firm must wait to recoup the money it has invested in a project is called the: -payback period -discounted payback period -internal return period -profitability period -valuation period

payback period

which of the following statements related to the IRR is correct? - the average accounting return is a better method of analysis than the IRR from a financial point of view -the IRR yields the same accept and reject decisions a 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 -financing type projects should be accepted if the IRR exceeds the required return -the IRR is equal to the required return when the NPV is equal to zero

the IRR is equal to the required return when the NPV is equal to zero

a project has a net present value of zero. which one of the following best described this project? -the project has no cash flow -the project's cash inflows equal its cash outflows in current dollar terms -the summation of all of the project's cash flow is zero -the project has a zero percent rate of return -the project requires no initial cash investment

the project's cash inflows equal its cash outflows in current dollar terms

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for years 1 through 3, respectively. The required rate of return is 16.8%. based on IRR, should this project be accepted? Why or why not? -yes; the IRR is less than the required return by 0.58% -yes; the IRR exceeds the required return by about 1.03% -yes; the IRR exceeds the required return by 0.58% -no; the IRR is less than the required return by 1.03% -no; the IRR exceeds the required return by 0.58%

yes; the IRR exceeds the required return by 0.58%

NPV: -Is very similar in its methodology to the average accounting return. -Cannot be applied when comparing mutually exclusive projects. -Is the easiest method of evaluation for nonfinancial managers to use. -Is less useful than the internal rate of return when comparing different sized projects. -Is the best method of analyzing mutually exclusive projects.

Is the best method of analyzing mutually exclusive projects.

a project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? -NPV -profitability index -payback value -discounted payback -internal return

NPV

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: -Accepted because the profitability index is negative. -Accepted because the payback period is less than the required time period. -Rejected because the internal rate of return is negative. -Accepted because the profitability index is greater than 1. -Rejected because the net present value is positive.

Accepted because the profitability index is greater than 1.

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? -The discounted payback period must be greater than 2.98 years. -The discount rate used in computing the net present value was less than 11.63 percent. -The AAR is equal to the IRR / PI. -The break-even discount rate must be less than 11.63 percent. -The project should be rejected based on its PI value.

The discount rate used in computing the net present value was less than 11.63 percent.

You are considering two mutually exclusive projects. Both projects have an initial cost of $52,000. 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 14.2 percent for Project A and 13.9 percent for Project B. Which project should you accept and why? -project a; because it has the higher required rate of return -project a; because is has the larger NPV -project b; because it has the larger NPV -project b; because it has the largest cash inflow in year 1 -project b; because it has the lower required rate of return

project a; because it has the larger NPV