FINACE 301

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period.

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

present value.

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

Which one of the following is an example of a sunk cost?

$2,000 paid last year to rent equipment

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

Accept Project B and reject Project A based on the NPVs

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future value

Caroline is going to receive a award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Caroline's award is worth more than Jiexin's.

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

All of the following cash flows are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead 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?

Net present value

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?

Project X only

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60:

Sophia will have more money than Mallory.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost?

Sunk

Which one of the following types of costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following statements related to the internal rate of return (IRR) is correct?

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

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

Net working capital:

can create either an initial cash inflow or outflow.

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding.

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate

The internal rate of return is defined as the:

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

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

Net present value:

is the best method of analyzing mutually exclusive projects.

A project's cash flow is equal to the project's operating cash flow:

minus both the project's change in net working capital and capital spending.

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

Pro forma financial statements can best be described as financial statements:

that state projected values for future time periods.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.