Chapter 9 Net Present Value and Other Investment Criteria
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
A. -$3,945.45
Projects A and B are mutually exclusive. Project A has cash flows of -$10,000, $5,100, $3,400, and $4,500 for years 0 to 3, respectively. Project B has cash flows of -$10,000, $4,500, $3,400, and $5,100 for years 0 to 3, respectively. What is the crossover rate for these two projects? A. 0 percent B. 5.48 percent C. 6.71 percent D. 2.75 percent
A. 0 percent
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
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
A. 2.88 years
A firm evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of -$27,048, $16,850, $15,700, and $4,300 for years 0 to 3, respectively. The required return is 19 percent. What is the project IRR? Should the project be accepted or rejected? A. 21.08 percent; accept B. 16.05 percent; accept C. 16.05 percent; reject D. 18.30 percent; accept
A. 21.08 percent; accept
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
A. 21.29 percent
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? A. Accept Project A and reject Project B. B. Reject Project A and accept Project B. C. Accept both Projects A and B. D. Reject both Projects A and B.
A. Accept Project A and reject Project B.
Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in year 2. Project B costs $59,200 with cash inflows of $21,900 in year 1 and $59,200 in year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects? A. Accept both projects. B. Reject both projects C. Accept Project A and reject Project B. D. Accept Project B and reject Project A.
A. Accept both projects
Auto Art sells original works of art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are $9,500 and -$10,300 for years 0 and 1, respectively. Based on the internal rate of return should this project be accepted if the required return is 12 percent? A. Accept the project B. Reject the project C. The IRR cannot be used to evaluate this type of project. D. The firm should be indifferent to either accepting or rejecting this project.
A. Accept the project
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,
A. Easy availability of information needed for the computation
Net present value A. Is the best method of analyzing mutually exclusive projects B. Is less useful than the internal rate of return when comparing different sized projects C. Is the easiest method of evaluation for non financial managers to use D. Cannot be applied when comparing mutually exclusive projects
A. 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? A. Net Present Value B. Internal Return C. Payback Value D. Probability Index
A. Net Present Value
Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? A. Net present value B. Discounted Payback C. Internal rate of return D. Profitability index
A. Net present value
Which one of the following indicates an accept decision for an independent project with conventional cash flows? A. PI greater than 1.0. B. AAR lower than the required rate. C. NPV equal to the initial cash outflow. D. Required discount rate greater than the IRR.
A. PI greater than 1.0.
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? A. Project A only B. Project B only C. Both A & B D. Neither A nor B
A. Project A only
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.
A. Some positive net present value projects to be rejected.
Crystal Industries is considering an expansion project with cash flows of -$325,000, $167,500, $216,100, $104,500, and -$92,700 for years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not? A. Yes; The MIRR is 14.45 percent. B. No; The MIRR is 14.45 percent. C. Yes; The MIRR is 11.23 percent. D. No; The MIRR is 11.23 percent.
A. Yes; The MIRR is 14.45 percent.
Assume an investment has cash flows of -$30,000, $21,750, $18,500, and $12,500 for years 0 to 3, respectively. What is the NPV if the required return is 13 percent? Should the project be accepted or rejected? A. $15,684.22; reject B. $12,399.13; accept C. $7,264.95; reject D. $9,616.93; accept
B. $12,399.13; accept
A project will produce cash inflows of $3,100 a year for 3 years with a final cash inflow of $4,400 in year 4. The project's initial cost is $10,400. What is the net present value if the required rate of return is 16 percent? A. -$311.02 B. -$1,007.66 C. $1,650.11 D. $2,188.98
B. -$1,007.66
The relevant discount rate is 14 percent for a project with cash flows of -$9,800, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index? A. .89 B. .93 C. .99 D. 1.03
B. .93
It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period? A. 1.48 years B. 1.67 years C. 1.82 years D. 1.95 years
B. 1.67 years
An investment project costs $10,500 and has annual cash flows of $6,500 for two years. If the discount rate is 13 percent, what is the discounted payback period? A. .61 years B. 1.93 years C. 1.61 years D. .92 years
B. 1.93 years
A project has an initial cost of $27,000 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,600, $2,200, and $1,700 a year for the next three years, respectively. What is the average accounting return? A. 6.79 percent B. 13.58 percent C. 7.35 percent D. 14.69 percent
B. 13.58 percent
A project has cash flows of -$152,000, $60,800, $62,300, and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. A. 14.67; accept B. 13.96; accept C. 14.67; reject D. 17.91; reject
B. 13.96; accept
Colin is analyzing a 3-year project that has an initial cost of $204,000. This cost will be depreciated straight line to zero over three years. The projected annual net income for the three years is $13,700, $14,900, and $18,200. If the discount rate is 12 percent, what is the average accounting rate of return? A. 16.94 percent B. 15.29 percent C. 15.66 percent D. 7.75 percent
B. 15.29 percent
The Dry Dock is considering a project with an initial cost of $118,400. The project's cash inflows for years 1 through 3 are $37,200, $54,600, and $46,900, respectively. What is the IRR of this project? A. 8.42 percent B. 8.04 percent C. 7.48 percent D. 8.22 percent
B. 8.04 percent
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: A. Accept both projects B. Accept Project A and reject Project B. C. Accept Project B and reject Project A. D. Reject both projects
B. Accept Project A and reject Project B.
A project has a discount rate of 14 percent, an initial cost of $99,200, an inflow of $56,400 in year 1 and an inflow of $75,900 in year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project? A. Accept the project because the PI is .90. B. Accept the project because the PI is 1.09. C. Accept the project because the PI is 1.11. D. Reject the project because the PI is .90.
B. Accept the project because the PI is 1.09.
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. Accepted because the payback period is less than the required time period. B. Accepted because the profitability index is greater than 1. C. Accepted because the profitability index is negative. D. Rejected because the internal rate of return is negative.
B. Accepted because the profitability index is greater than 1.
Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? A. Conflicts with the results of the net present value decision rule. B. Assumes the firm has sufficient funds to undertake both projects. C. Agrees with the decision that would also apply if the projects were mutually exclusive. D. Bases the accept/reject decision on the same variables as the average accounting return.
B. Assumes the firm has sufficient funds to undertake both projects.
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? A. Reduction in the cash outflow at time zero B. Cash inflow in the final year of the project C. Cash inflow for the year following the final year of the project D. Cash inflow prorated over the life of the project
B. Cash inflow in the final year of the project
A project's average net income divided by its average book value is referred to as the project's average: A. Net present value B. Internal rate of return C. Accounting return D. Profitability index
C. Accounting return
Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? A. Constant dividend growth model B. Discounted cash flow valuation C. Average accounting return D. Expected earnings model
B. Discounted cash flow valuation
Graphing the crossover point helps explain: A. Why one project is always superior to another project. B. How decisions concerning mutually exclusive projects are derived. C. How the duration of a project affects the decision as to which project to accept. D. How the net present value and the initial cash outflow of a project are related.
B. How decisions concerning mutually exclusive projects are derived.
The length of time a firm must wait to recoup the money it has invested in a project is called: A. Internal return period B. Payback Period C. Probability Period D. Discounted Cash Period
B. Payback Period
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? A. Project A; because it has the higher required rate of return. B. Project A; because it has the larger NPV. C. Project B; because it has the largest cash inflow in year 1. D. Project B; because it has the lower required rate of return.
B. Project A; because it has the larger NPV.
You are considering two mutually exclusive projects. Project A has cash flows of -$87,000, $32,600, $35,900, and $43,400 for years 0 to 3, respectively. Project B has cash flows of -$85,000, $14,700, $21,200, and $89,800 for years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Which project(s), if either, should you accept based on net present value? A. Accept Project A and reject Project B B. Reject Project A and accept Project B C. Accept both projects D. Reject both projects
B. Reject Project A and accept Project B
Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for years 0 to 3, respectively. Both projects are independent and use straight-line depreciation to a zero balance over the project life. Neither project has any salvage value and both have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return? A. Accept Project A and reject Project B B. The AAR cannot be computed. C. Accept both projects D. Reject both projects
B. The AAR cannot be computed
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 projects initial cost will use the project to have a negative NPV D. The project's PI must also be equal to zero
B. The project earns a return exactly equal to the discount rate
Assume a project is independent with financing cash flows. Which one of these statements is correct? A. The IRR cannot be used to determine the acceptability of the project. B. The project is acceptable if the required return exceeds the IRR. C. The project is acceptable only if the NPV is zero or negative. D. The project's net present value profile is upsloping.
B. The project is acceptable if the required return exceeds the IRR.
A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? A. The project will not be acceptable under the payback rule. B. The project must have a profitability index that is equal to or greater than 1.0. C. The project must have a zero net present value. D. The project's internal rate of return must equal the required return.
B. The project must have a profitability index that is equal to or greater than 1.0.
Home & More is considering a project with cash flows of -$375,000, $133,500, -$35,600, $244,700, and $271,000 for years 0 to 4. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not? A. Yes; The MIRR is 14.78 percent. B. Yes; The MIRR is 17.42 percent. C. No; The MIRR is 12.91 percent. D. No; The MIRR is 14.78 percent.
B. Yes; The MIRR is 17.42 percent.
Drinkable Water Systems is analyzing a project with projected cash inflows of $137,400, $189,300, and -$25,000 for years 1 to 3, respectively. The project costs $236,000 and has been assigned a discount rate of 14 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not? A. Yes; The MIRR is 13.48 percent. B. Yes; The MIRR is 17.85 percent. C. Yes; The MIRR is 11.23 percent. D. No; The MIRR is 13.48 percent.
B. Yes; The MIRR is 17.85 percent.
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
C. $2,971.13
A project has cash flows of -$152,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value? A. .93; Accept B. 1.07; Accept C. 1.02; Accept D. .93; Reject
C. 1.02; Accept
Assume a project has cash flows of -$51,300, $18,200, $37,300, and $14,300 for years 0 to 3, respectively. What is the profitability index given a required return of 12.5 percent? A. .94 B. .98 C. 1.09 D. 1.06
C. 1.09
Project A has cash flows of -$50,000, $29,400, $27,200, and $24,500 for years 0 to 3, respectively. Project B has an initial cost of $50,000 and an annual cash inflow of $26,500 for three years. These are mutually exclusive projects. What is the crossover rate? A. 11.98 percent B. 14.72 percent C. 28.15 percent D. 15.99 percent
C. 28.15 percent
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
C. 3.04 years
Deep Six wants to set up a private cemetery business. The cemetery project will provide a net cash inflow of $57,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $679,380. The firm requires a 14 percent return on such undertakings. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant rate of growth would the company just break even? A. 4.48 percent B. 5.29 percent C. 5.61 percent D. 6.49 percent
C. 5.61 percent
An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period? A. 3.36 years B. 5.28 years C. 6.72 years D. 8.13 years
C. 6.72 years
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? A. Accept both projects because both NPVs are positive. B. Accept Project A because it has the shortest payback period. C. Accept Project B and reject Project A based on the NPVs. D. Accept Project A because it has the lower required return.
C. Accept Project B and reject Project A based on the NPVs.
A project has average net income of $6,250 a year over its 5-year life. The initial cost of the project is $107,400 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimum average accounting return of 11.5 percent. The firm should _____ the project because the AAR is _____ percent. A. Accept; 5.71 B. Accept; 9.90 C. Accept; 11.64 D. Reject; 9.90
C. Accept; 11.64
You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should: A. Always accept Project A B. Be indifferent to the projects at any discount rate above 13.1 percent. C. Always accept Project A if the required return exceeds the crossover rate. D. Accept Project B only when the required return is equal to the crossover rate.
C. Always accept Project A if the required return exceeds the crossover rate.
Mutually exclusive projects are best defined as competing projects that: A. Would need to commence on the same day. B. Have the same initial start-up costs. C. Both require the total use of the same limited resource. D. Have the same life span.
C. Both require the total use of the same limited resource.
Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? A. Decreasing the required discount rate. B. Increasing the initial investment in fixed assets. C. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows. D. Eliminating the salvage value
C. Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows.
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
C. IRR and NPV
Why is payback often used as the sole method of analyzing a proposed small project? A. Payback considers the time value of money. B. All relevant cash flows are included in the payback analysis. C. It is the only method where the benefits of the analysis outweigh the costs of that analysis. D. Payback is the most desirable of the various financial methods of analysis.
C. It is the only method where the benefits of the analysis outweigh the costs of that analysis.
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.
C. Liquidity bias, ease of use.
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: A. Independent B. Interdependent C. Mutually exclusive D. Economically scaled
C. Mutually exclusive
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph? A. Project tract B. Projected risk profile C. NPV profile D. NPV route
C. NPV Profile
A project has projected cash flows of -$148,500, $32,800, $64,200, -$7,500 and $87,300 for years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not? A. Yes; The MIRR is 8.81 percent. B. Yes; The MIRR is 9.23 percent. C. No; The MIRR is 8.81 percent. D. No; The MIRR is 9.06 percent.
C. No; The MIRR is 8.81 percent.
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
C. Payback and discounted payback.
Which one of the following characteristics is most associated with financing type projects? A. Long payback period B. Multiple internal rates of return C. Prepaid services D. Conventional cash flows
C. Prepaid services
The internal rate of return is: A. The discount rate that makes the net present value of a project equal to the initial cash outlay. B. Equivalent to the discount rate that makes the net present value equal to one. C. Tedious to compute without the use of either a financial calculator or a computer. D. Highly dependent upon the current interest rates offered in the marketplace.
C. Tedious to compute without the use of either a financial calculator or a computer.
Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B. A project with an IRR equal to the required return would reduce the value of a firm if accepted. C. The IRR is equal to the required return when the net present value is equal to zero. D. Financing type projects should be accepted if the IRR exceeds the required return.
C. The IRR is equal to the required return when the net present value is equal to zero.
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? A. The discounted payback period must be greater than 2.98 years. B. The break-even discount rate must be less than 11.63 percent. C. The discount rate used in computing the net present value was less than 11.63 percent. D. The AAR is equal to the IRR / PI.
C. The discount rate used in computing the net present value was less than 11.63 percent.
Lenora's creates exquisite gowns for special occasions on a prepaid basis only. The required return is 12.5 percent. The estimate for one gown order has cash flows of $165,000 in year 0 and -$188,000 in year 1. Which of these statements correctly applies to this order? A. The gown should not be sold for $165,000. B. As long as the selling price is $164,819 or higher, the gown should be sold. C. The gown must be sold for a minimum price of $167,111 to earn the required return. D. The IRR decision rule cannot be applied to this project.
C. The gown must be sold for a minimum price of $167,111 to earn the required return.
Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? A. The net present value indicates accept while the internal rate of return indicates reject. B. Payback indicates acceptance C. The payback decision rule could override the accept decision indicated by the net present value. D. The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
C. The payback decision rule could override the accept decision indicated by the net present value.
Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows? A. The internal rate of return decision may contradict the net present value decision. B. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. C. The payback decision rule could override the net present value decision rule should cash availability be limited. D. The profitability index rule cannot be applied in this situation.
C. The payback decision rule could override the net present value decision rule should cash availability be limited.
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 percent. Based on IRR, should this project be accepted? Why or why not? A. No; The IRR exceeds the required return by .58 percent. B. No; The IRR is less than the required return by 1.03 percent. C. Yes; The IRR exceeds the required return by .58 percent. D. Yes; The IRR exceeds the required return by about 1.03 percent.
C. Yes; The IRR exceeds the required return by .58 percent.
A project has cash flows of -$119,000, $52,800, $60,200, and $33,100 for years 0 to 3, respectively. The required rate of return is 12 percent. Based on the net present value of _____, you should _____ the project. A. $230.75; accept B. -$1,995.84; reject C. $283.60; accept D. -$306.15; reject
D. -$306.15; reject
An investment project has an installed cost of $518,297. The cash flows over the four-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is infinite? A. -$169,193 B. -$72,418 C. $91,110 D. -$518,297
D. -$518,297
TL Lumber is evaluating a project with cash flows of -$12,800, $7,400, $11,600, and -$3,200 for years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach? A. 13.25 percent B. 14.09 percent C. 15.40 percent D. 14.36 percent
D. 14.36 percent
A project has cash flows of -$128,000, $52,800, $60,200, and $183,100 for years 0 to 3, respectively. The required payback period is two years. Based on the payback period of _____ for this project, you should _____ the project. A. 2.79; accept B. 1.79; accept C. 2.46; accept D. 2.08; reject
D. 2.08; reject
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
D. 2.91 years
You're trying to determine whether or not you should expand your business at a fixed asset cost of $4.3 million. The firm uses straight-line depreciation to zero over the project life. The projected annual net income is $595,000, $502,000, $486,000, and $324,000 over these four years. What is the average accounting return? A. 44.35 percent B. 15.63 percent C. 18.87 percent D. 22.17 percent
D. 22.17 percent
Projects A and B are mutually exclusive and both have an initial cost of $78,000. Project A has annual cash flows for three years of $28,300, $31,500, and $42,300, respectively. Project B has annual cash flows for three years of $26,900, $30,500, and $44,900. What is the crossover rate? A. 9.17 percent B. 3.33 percent C. 14.32 percent D. 5.16 percent
D. 5.16 percent
HH Companies has identified two mutually exclusive projects. Project A has cash flows of -$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $40,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects? A. 16.34 percent B. 12.72 percent C. 9.41 percent D. 5.70 percent
D. 5.70 percent
An investment that provides annual cash flows of $9,600 for 12 years costs $75,000 today. At what rate would you be indifferent between accepting the investment and rejecting it? A. 7.60 percent B. 5.90 percent C. 5.51 percent D. 7.31 percent
D. 7.31 percent
A project with financing type cash flows is typified by a project that has which one of the following characteristics? A. Conventional cash flows. B. Cash flows that extend beyond the acceptable payback period. C. A year or more in the middle of a project where the cash flows are equal to zero. D. A cash inflow at time zero
D. A cash inflow at time zero
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? 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 A at 11.7 percent and neither at 13.5 percent.
D. Accept A at 11.7 percent and neither at 13.5 percent.
Which one of the following increases the net present value of a project? A. An increase in the required rate of return B. An increase in the initial capital requirement C. A deferment of some cash inflows until a year later D. An increase in the after tax salvage value of the fixed assets
D. An increase in the after tax salvage value of the fixed assets
Which one of these is a strength of the average accounting return method of project analysis? A. Ignores the issue of taxes B. Uses a cutoff rate C. Considers the time value of money D. Based on easily obtainable information
D. Based on easily obtainable information
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: A. Required return B. Zero-sum rate C. Present value rate D. Crossover rate
D. Crossover rate
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 is 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
D. Discount rate which causes the net present value of a project to equal zero
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 payback period
D. Discounted payback period
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: A. Have two net present value profiles B. Have operational ambiguity C. Create a mutually exclusive investment decision D. Have multiple rate of returns
D. Have multiple rates of returns
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 projects initial cost at time zero
D. Increasing the projects initial cost at time zero
The internal rate of return: A. May produce multiple rates of return when cash flows are conventional. B. Is best used when comparing mutually exclusive projects. C. Is rarely used in the business world today. D. Is easy to understand
D. Is easy to understand
Which one of the following correctly applies to the average accounting rate of return? A. It considers the time value of money. B. It measures net income as a percentage of the sales generated by a project. C. It is the best method of analyzing mutually exclusive projects from a financial point of view. D. It can be compared to the return on assets ratio.
D. It can be compared to the return on assets ratio.
Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? A. Profitability index less than 1.0 B. Project's internal rate of return less than the required return C. Discounted payback period greater than requirement D. Modified internal rate of return that exceeds the required return
D. Modified internal rate of return that exceeds the required return
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
D. Net present value
The profitability index is most closely related to which one of the following? A. Payback B. Discounted payback C. Average accounting return D. Net present value
D. Net present value
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? A. Yes; The PI is .97. B. Yes; The PI is .84. C. Yes; The PI is 1.06. D. No; The PI is .97.
D. No; The PI is .97.
Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. Discounted payback B. Profitability Index C. Internal rate of return D. Payback
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
D. Profitability Index
Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? A. Net present value B. Payback C. Internal rate of return D. Profitability Index
D. Profitability Index
The Square Box is considering two independent projects, both of which have an initial cost of $18,000. The cash inflows of Project A are $3,000, $7,000, and $10,000 over the next three years, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 over the next three years, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted? A. Both projects should be accepted. B. Both projects should be rejected. C. Project A should be accepted and Project B should be rejected. D. Project A should be rejected and Project B should be accepted.
D. Project A should be rejected and Project B should be accepted.
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 project never pays back on a discounted basis.
D. 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. Rejected; 10.88
D. Rejected; 10.88
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? A. Initial cost of each project B. Timing of the cash inflows C. Total cash inflows of each project D. Required rate of return
D. Required rate of return
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B. The cash flow in year three is ignored. C. The project's cash flow in year three is discounted by a factor of (1 + R)3. D. The cash flow in year two is valued just as highly as the cash flow in year one.
D. The cash flow in year two is valued just as highly as the cash flow in year one.
Which one of these statements related to discounted payback is correct? A. Payback is a better method of analysis than is discounted payback. B. Discounted payback is used more frequently in business than is payback. C. Discounted payback does not require a cutoff point. D. The discounted payback period decreases as the discount rate decreases.
D. The discounted payback period decreases as the discount rate decreases.
Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that: A. Neither project will be accepted if the discount rate is less than 11.7 percent. B. Both projects have a negative NPV at discounts rates greater than 11.7 percent. C. Both projects have a zero NPV at a discount rate of 11.7 percent. D. The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.
D. The project that is preferred at a discount rate of 11 percent will be the opposite project of that preferred at a discount rate of 12 percent.
A project has a net present value of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return B. The project requires no initial cash investment C. The project has no cash flows D. The project's cash inflows equal its cash outflows in current dollar terms
D. The project's cash inflows equal its cash outflows in current dollar terms
Which one of the following is the best example of two mutually exclusive projects? A. Building a furniture store beside a clothing outlet in the same shopping mall. B. Producing both plastic forks and spoons on the same assembly line. C. Using an empty warehouse to store both raw materials and finished goods. D. Waiting until a machine finishes molding Product A before being able to mold Product B.
D. Waiting until a machine finishes molding Product A before being able to mold Product B.
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 3.01 years. D. Yes; The payback period is 2.59 years.
D. 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. You cannot apply the IRR rule in this case.
D. You cannot 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 projects based on IRR analysis? A. Accept Project A and reject Project B B. Reject Project A and accept Project B C. Accept both projects D. You should not use IRR; use a different method of analysis.
D. You should not use IRR; use a different method of analysis.
You are considering two mutually exclusive projects. Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for years 0 to 3, respectively. Both projects have a required return of 12.75 percent. Should you accept or reject these projects based on the profitability index? A. Accept Project A and reject Project B. B. Reject Project A and accept Project B. C. Accept both projects. D. You should not use PI; use a different method of analysis.
D. You should not use PI; use a different method of analysis.
