Week 6

The discount rate that causes the net present value of a project to equal zero is called the: a) yield to maturity. b) required return. c) market rate. d) internal rate of return. e) average accounting return

d) internal rate of return.

A proposed project will increase a firm's accounts receivables. This increase: a) is a cash inflow at time zero. b) is an initial cash outflow only. c) is a source of cash at the start of the project and a use of cash at the end of the project. d) is a cash outflow at time zero and a cash inflow at the end of the project. e) is a sunk cost and should be ignored.

d) is a cash outflow at time zero and a cash inflow at the end of the project.

Which of the following investment decision rules can choose among mutually exclusive investments? a) payback period. b) net present value. c) profitability index. d) internal rate of return.

b) net present value.

Payback ignores the: a) initial cash flow of a project. b) arbitrary cutoff point. c) time value of money. d) project's cost. e) timing of a cash flow.

c) time value of money.

You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project? a) $20,000.38 b) $38,020.13 c) $45,200.80 d) $33,869.93 e) $24,918.55

a) $20,000.38

The most valuable alternative that is forfeited if a particular investment is undertaken is called: a) an opportunity cost. b) erosion. c) a side effect. d) a marginal cost. e) a sunk cost.

a) an opportunity cost.

The NPV rule states that you should accept an investment if the NPV: a) is positive. b) is less than the investment's initial cost. c) is negative. d) is less than or equal to zero. e) exceeds the investment's initial cost.

a) is positive.

Fun Land is considering adding a miniature golf course to its facility. The course would cost $68,000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $48,000 a year with $7,500 of that amount being variable cost. The fixed cost would be $8,600. In addition, the firm anticipates an additional $12,000 in revenue from its existing facilities if the course is added. The project will require $4,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 8 percent and a tax rate of 25 percent? a) $35,673.96 b) $54,068.43 c) $57,440.01 d) $27,062.94 e) $43,013.41

b) $54,068.43

A sunk cost is: a) the value of an asset currently owned by a firm. b) a cost that has already been incurred and cannot be recouped. c) another name for a fixed cost. d) a cost for which there is no alternative option. e) a form of erosion.

b) a cost that has already been incurred and cannot be recouped.

What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%? a) $20,000.00 b) $25,237.66 c) $22,618.83 d) $21,356.95

c) $22,618.83

Junior's has a new project in mind that will increase accounts receivable by $50,000, increase accounts payable by $14,000, increase fixed assets by $25,000, and decrease inventory by $9,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project? a) $50,000 b) $18,000 c) $27,000 d) $17,500 e) $30,000

c) $27,000

A 5-year project is expected to generate revenues of $100000, variable costs of $24000, and fixed costs of $16500. The annual depreciation is $12000 and the tax rate is 35 percent. What is the annual operating cash flow? a) $43,275 b) $43,000 c) $42,875 d) $40,875 e) $44,500

c) $42,875

Which one of the following indicates a project has a required return that exceeds its internal (or actual) rate of return? a) a payback period that exceeds the required period b) a positive NPV c) A negative NPV d) a negative accounting rate of return e) a PI more than 1.0

c) A negative NPV

The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows. a) deviated b) direct c) incremental d) residual e) eroded

c) incremental

A net present value of zero implies that an investment: a) should be rejected even if the discount rate is lowered. b) has an expected return that is less than the required return. c) is earning a return that exactly matches the requirement. d) has no initial cost. e) never pays back its initial cost.

c) is earning a return that exactly matches the requirement.

What is the net present value of a project with the following cash flows if the discount rate is 9 percent? (Numbers in parentheses are negative.) Year 0: ($4,400) Year 1: $1,350 Year 2: $2,100 Year 3: $3,500 Year 4: $0 a) $5,708.70 b) $1,473.38 c) $4,069.25 d) $2,550.00 e) $1,308.70

e) $1,308.70

Woven Goods is considering adding a new line of baskets to its product line-up. Which of the following are relevant cash flows for this project? I. increased revenue from existing goods if these baskets are added to the lineup II. revenue from the new line of baskets III. money spent to date investigating the availability of woven baskets IV. cost of expanding the showroom to make space for the new baskets a) II and III only b) II and IV only c) I and IV only d) II, III, and IV only e) I, II, and IV only

e) I, II, and IV only

The IRR decision rule states that a project should be accepted if its IRR: a) exceeds the IRRs of all other potential projects. b) is greater than the AAR. c) is equal to or greater than 1.0. d) is equal to zero. e) exceeds the required rate.

e) exceeds the required rate.

The payback period is the period of time it takes an investment to generate sufficient cash flows to: a) earn the required rate of return. b) have a cash inflow, rather than an outflow, for the year. c) produce the required net income. d) produce a yield equal to or greater than the market rate on similar investments. e) recover the investment's initial cost.

e) recover the investment's initial cost.