Test 4 Finance

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 operating cash flow for a project should exclude which one of the following?

Interest expense

A strength of the average accounting return (AAR) method of project analysis is the fact that AAR

It is easy to calculate

Change in the net working capital requirements

can affect the cash flows of a project every year of the project's life.

The internal rate of return is defined as the

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

Graphing the crossover point helps explain

how decisions concerning mutually exclusive projects are derived.

Pro forma statements for a proposed project should generally do all of the following except:

included interest expense

The internal rate of return

is easy to understand

Which one of the following statements is correct concerning bid prices?

A firm can submit a bid that is higher than the computed bid price and still break even.

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?

Accept Project B and reject Project A based on the NPVs

A project's average net income divided by its average book value is referred to as the project's average

Accounting Return

Which one of the following will increase a bid price?

An increase in the required rate of return

If the discount rate is infinite, the NPV will?

Equal the cash flow at time 0

Decreasing which one of the following will increase the acceptability of a project?

Equivalent annual cost

The top-down approach to computing the operating cash flow:

Ignores non-cash expenses

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

Increasing the projects initial cost at time zero

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

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?

NPV profile

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?

Net present value

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?

Payback

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 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Project A only

The Square Box is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, 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?

Project A should be rejected and Project B should be accepted.

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?

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

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers

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

Showing projected values for future time periods

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

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

Sunk

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?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

The bid price always assumes which one of the following?

The net present value the project is zero

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

The payback decision rule could override the net present value decision rule should cash availability be limited.

Which one of the following is the best example of two mutually exclusive projects?

Waiting until a machine finishes molding Product A before being able to mold Product B

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:

Will have a greater depreciation tax shield in year 2 than in year 1

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:

always accept Project A if the required return exceeds the crossover rate

Mutually exclusive projects are best defined as competing projects that

both require the total use of the same limited resource

The average accounting rate of return (AAR)

is similar to the return on assets ratio

Which one of the following statements is correct? 1. A bid price maximizes profits on a project for the bidding firm. 2. Project analysis should only include the cash flows that affect the income statement. 3. A project can create a positive operating cash flow without affecting sales. 4. Interest expense should always be included when analyzing cost-cutting projects. 5. The depreciation tax shield creates a cash outflow for a project.

project can create a positive operating cash flow without affecting sales

The bottom-up approach to computing the operating cash flow applies only when:

the interest expense is equal to zero