Question 1

The payback period may be more appropriate to use for companies experiencing capital rationing.

Accepted Answer

A) True 
 B)False

Question 2

If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of free cash flow over its five year useful life,then Project A will have a shorter payback period than Project B,assuming both projects require the same initial investment.

Accepted Answer

A) True 
 B)False

Question 3

Kingston Corp.is considering a new machine that requires an initial investment of $480,000 installed,and has a useful life of 8 years.The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter.
a.Calculate the net present value of the machine if the required rate of return is 11 percent.
b.Calculate the IRR of this project.
c.Should Kingston accept the project (assume that it is independent and not subject to any capital rationing constraint)? Explain your answer.

Accepted Answer

a.NPV = ($21,995)From Excel Spreadsheet

Question 4

Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years.Project X is expected to produce an after-tax cash flow of $180,000 each year.Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5.The discount rate is 14 percent.
a.Calculate the net present value for each project.
b.Calculate the IRR for each project.
c.What decision should you make regarding these projects?

Accepted Answer

a. NPV of A = $17,955 NPV of B

Question 5

A significant disadvantage of the internal rate of return is that it

Accepted Answer

A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  may have an unrealistic reinvestment assumption. 
D)  is expressed as a percentage. 
A)  does not fully consider the time value of money. 
B)  does not give proper weight to all cash flows. 
C)  may have an unrealistic reinvestment assumption. 
D)  is expressed as a percentage.

Question 6

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

Accepted Answer

A) True 
 B)False

Question 7

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

Accepted Answer

A)  3.33 years 
B)  3.16 years 
C)  2.67 years 
D)  2.33 years 
A)  3.33 years 
B)  3.16 years 
C)  2.67 years 
D)  2.33 years

Question 8

The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.

Accepted Answer

A) True 
 B)False

Question 9

The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below.
   
The required rate of return on these projects is 14 percent.What decision should be made? As part of your answer,calculate the NPV assuming a replacement chain for Project S,and also calculate the equivalent annual annuity for each project.

Accepted Answer

Accept Project S because its replacement

Question 10

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's internal rate of return?

Accepted Answer

A)  27.28% 
B)  21.26% 
C)  20.53% 
D)  15.98% 
A)  27.28% 
B)  21.26% 
C)  20.53% 
D)  15.98%

Question 11

If a project's IRR is equal to its required return,then the project's NPV is equal to zero and its PI is equal to one.

Accepted Answer

A) True 
 B)False

Question 12

The Bolster Company is considering two mutually exclusive projects:
   
The required rate of return on these projects is 12 percent.
a.What is each project's payback period?
b.What is each project's discounted payback period?
c.What is each project's net present value?
d.What is each project's internal rate of return?
e.Fully explain the results of your analysis.Which project do you prefer,and why?

Accepted Answer

a.Payback of A = 3.2 years Payback of B

Question 13

Southeast Compositions,Inc.is considering a project with the following cash flows:
Initial Outlay = $126,000
 
Compute the net present value of this project if the company's discount rate is 14%.

Accepted Answer

A)  $1,193 
B)  $561 
C)  $209 
D)  $715 
A)  $1,193 
B)  $561 
C)  $209 
D)  $715

Question 14

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

Accepted Answer

A)  5.80 years 
B)  5.20 years 
C)  5.40 years 
D)  5.59 years 
A)  5.80 years 
B)  5.20 years 
C)  5.40 years 
D)  5.59 years

Question 15

An infinite-life replacement chain allows projects of different lengths to be compared.

Accepted Answer

A) True 
 B)False

Question 16

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

Accepted Answer

A) True 
 B)False

Question 17

If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return.

Accepted Answer

A)  must be less than 
B)  must be greater than 
C)  could be greater or less than 
D)  The project's IRR cannot be determined without actual cash flows. 
A)  must be less than 
B)  must be greater than 
C)  could be greater or less than 
D)  The project's IRR cannot be determined without actual cash flows.

Question 18

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

Accepted Answer

A) True 
 B)False

The payback period may be more appropriate to use for companies experiencing capital rationing.

If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of free cash flow over its five year useful life,then Project A will have a shorter payback period than Project B,assuming both projects require the same initial investment.

A significant disadvantage of the internal rate of return is that it

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.

If a project's IRR is equal to its required return,then the project's NPV is equal to zero and its PI is equal to one.

Southeast Compositions,Inc.is considering a project with the following cash flows: Initial Outlay = $126,000 Compute the net present value of this project if the company's discount rate is 14%.

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

An infinite-life replacement chain allows projects of different lengths to be compared.

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return.

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 10: Capital-Budgeting Techniques and Practice

The payback period may be more appropriate to use for companies experiencing capital rationing.

If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of free cash flow over its five year useful life,then Project A will have a shorter payback period than Project B,assuming both projects require the same initial investment.

A significant disadvantage of the internal rate of return is that it

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

Your firm is considering an investment that will cost $750,000 today.The investment will produce cash flows of $250,000 in year 1,$300,000 in years 2 through 4,and $100,000 in year 5.What is the investment's discounted payback period if the required rate of return is 10%?

The profitability index can be helpful when a financial manager encounters a situation where capital rationing is required.

If a project's IRR is equal to its required return,then the project's NPV is equal to zero and its PI is equal to one.

Southeast Compositions,Inc.is considering a project with the following cash flows: Initial Outlay = $126,000 Compute the net present value of this project if the company's discount rate is 14%.

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

An infinite-life replacement chain allows projects of different lengths to be compared.

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return.

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters