FINC311 Lynch Review Problems

The Green Tomato purchased a parcel of land six years ago for $389,900. At that time, the firm invested $128,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $48,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $415,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land? $0 $389,900 $415,000 $229,000 $101,900

415,000

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? Opportunity cost Sunk cost Erosion Replicated flows Pirated flows

Erosion

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. Modified internal rate of return that is equal to zero Profitability index of zero Internal rate of return that exceeds the required return Payback period that exceeds the required period Negative average accounting return

Internal rate of return that exceeds the required return

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years. New tires that will be purchased this winter Costs of repairs needed so the truck can pass inspection next month Money spent last month repairing a damaged front fender Engine tune-up that is scheduled for this afternoon Cost for a truck driver for the remainder of the truck's useful life

Money spent last month repairing a damaged front fender

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Mutually exclusive Conventional Multiple choice Dual return Crosswise

Mutually Exclusive

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? Payback Profitability index Accounting rate of return Internal rate of return Net present value

NPV

Which one of the following indicates that a project is expected to create value for its owners? Profitability index less than 1.0 Payback period greater than the requirement Positive net present value Internal rate of return that is less than the requirement

Positive NPV

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? Erosion Book Sunk Market Opportunity

Sunk

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? The sum of the cash paid to date for both the lot and the improvements The original purchase price only The current market value of the land plus the cash paid for the improvements The current market value of the land Zero because the land and the improvements were previously purchased with cash

The current market value of the land plus the cash paid for the improvements

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? The internal rate of return exceeds the required rate of return. The investment never pays back. The net present value is equal to zero. The average accounting return is 1.0. The net present value is greater than 1.0.

The net present value is equal to zero.

Which one of the following statements is correct? Longer payback period is preferred over a shorter payback period. The payback rule states that you should accept a project if the payback period is less than one year. The payback period ignores the time value of money. The payback rule is biased in favor of long-term projects. The payback period considers the timing and amount of all of a project's cash flows.

The payback period ignores the time value of money.

The net present value of an investment represents the difference between the investment's: cash inflows and outflows. cost and its net profit. cost and its market value. cash flows and its profits. assets and liabilities.

cost and its market value.

The internal rate of return is the: discount rate that causes a project's after-tax income to equal zero. discount rate that results in a zero net present value for the project. discount rate that results in a net present value equal to the project's initial cost. rate of return required by the project's investors. project's current market rate of return.

discount rate that results in a zero net present value for the project.