Question 1

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

Accepted Answer

A) internal return period. 
B) payback period. 
C) profitability period. 
D) discounted cash period. 
E) valuation period. 
A) internal return period. 
B) payback period. 
C) profitability period. 
D) discounted cash period. 
E) valuation period. B

Question 2

An investment project costs $21,500 and has annual cash flows of $6,500 for 6 years.If the discount rate is 15 percent,what is the discounted payback period?

Accepted Answer

A) 4.41 years 
B) 4.91 years 
C) 5.12 years 
D) 5.40 years 
E) never 
A) 4.41 years 
B) 4.91 years 
C) 5.12 years 
D) 5.40 years 
E) never B

Question 3

Which one of the following increases the net present value of a project?

Accepted Answer

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 later year 
D) an increase in the aftertax salvage value of the fixed assets 
E) a reduction in the final cash inflow 
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 later year 
D) an increase in the aftertax salvage value of the fixed assets 
E) a reduction in the final cash inflow D

Question 4

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Accepted Answer

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 
E) cash inflows which are equal in amount 
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 
E) cash inflows which are equal in amount

Question 5

Which of the following are advantages of the payback method of project analysis?
I.works well for research and development projects
II.liquidity bias
III.ease of use
IV.arbitrary cutoff point

Accepted Answer

A) I and II only 
B) I and III only 
C) II and III only 
D) II and IV only 
E) II, III, and IV only 
A) I and II only 
B) I and III only 
C) II and III only 
D) II and IV only 
E) II, III, and IV only

Question 6

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?

Accepted Answer

A) profitability index 
B) internal rate of return 
C) payback 
D) net present value 
E) accounting rate of return 
A) profitability index 
B) internal rate of return 
C) payback 
D) net present value 
E) accounting rate of return

Question 7

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

Accepted Answer

A) 0.94 
B) 0.98 
C) 1.02 
D) 1.06 
E) 1.11 
A) 0.94 
B) 0.98 
C) 1.02 
D) 1.06 
E) 1.11

Question 8

The Taxi Co.is evaluating a project with the following cash flows:   The company uses an 8 percent interest rate on all of its projects.What is the MIRR using the discounted approach?

Accepted Answer

A) 13.25 percent 
B) 14.08 percent 
C) 15.40 percent 
D) 16.13 percent 
E) 19.23 percent 
A) 13.25 percent 
B) 14.08 percent 
C) 15.40 percent 
D) 16.13 percent 
E) 19.23 percent

Question 9

The internal rate of return is:

Accepted Answer

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. 
E) a better methodology than net present value when dealing with unconventional cash flows. 
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. 
E) a better methodology than net present value when dealing with unconventional cash flows.

Question 10

You are analyzing a project and have gathered the following data:   Based on the internal rate of return of _____ percent for this project,you should _____ the project.

Accepted Answer

A) 14.67; accept 
B) 17.91; accept 
C) 14.67; reject 
D) 17.91; reject 
E) 18.46; reject 
A) 14.67; accept 
B) 17.91; accept 
C) 14.67; reject 
D) 17.91; reject 
E) 18.46; reject

Question 11

Home Décor & More is considering a proposed project with the following cash flows.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?

Accepted Answer

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. 
E) No; The MIRR is 17.42 percent. 
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. 
E) No; The MIRR is 17.42 percent.

Question 12

Boston Chicken is considering two mutually exclusive projects with the following cash flows.What is the crossover rate? If the required rate of return is lower than the crossover rate,which project should be accepted?

Accepted Answer

A) 14.72 percent; A 
B) 14.72 percent; B 
C) 15.99 percent; A 
D) 15.99 percent; B 
E) 16.08 percent; B 
A) 14.72 percent; A 
B) 14.72 percent; B 
C) 15.99 percent; A 
D) 15.99 percent; B 
E) 16.08 percent; B

Question 13

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives.   Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

Accepted Answer

A) both projects. 
B) project B because it has the shortest payback period. 
C) project B and reject project A based on their net present values. 
D) project A and reject project B based on their average accounting returns. 
E) neither project. 
A) both projects. 
B) project B because it has the shortest payback period. 
C) project B and reject project A based on their net present values. 
D) project A and reject project B based on their average accounting returns. 
E) neither project.

Question 14

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?

Accepted Answer

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. 
E) The project is acceptable whenever the payback period exceeds three years. 
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. 
E) The project is acceptable whenever the payback period exceeds three years.

Question 15

Alicia is considering adding toys to her gift shop.She estimates that the cost of inventory will be $7,500.The remodeling expenses and shelving costs are estimated at $1,800.Toy sales are expected to produce net cash inflows of $2,300,$2,900,$3,200,and $3,400 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?

Accepted Answer

A) No; The payback period is 2.93 years. 
B) No; The payback period is 3.26 years. 
C) Yes; The payback period is 2.93 years. 
D) Yes; The payback period is 3.01 years. 
E) Yes; The payback period is 3.26 years. 
A) No; The payback period is 2.93 years. 
B) No; The payback period is 3.26 years. 
C) Yes; The payback period is 2.93 years. 
D) Yes; The payback period is 3.01 years. 
E) Yes; The payback period is 3.26 years.

Question 16

A project that provides annual cash flows of $12,600 for 12 years costs $65,000 today.At what rate would you be indifferent between accepting the project and rejecting it?

Accepted Answer

A) 15.28 percent 
B) 15.40 percent 
C) 15.51 percent 
D) 16.18 percent 
E) 16.74 percent 
A) 15.28 percent 
B) 15.40 percent 
C) 15.51 percent 
D) 16.18 percent 
E) 16.74 percent

Question 17

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years.The project has a 12 percent required rate of return and an initial cost of $6,000.What is the discounted payback period?

Accepted Answer

A) 3.72 years 
B) 3.91 years 
C) 4.26 years 
D) 4.38 years 
E) never 
A) 3.72 years 
B) 3.91 years 
C) 4.26 years 
D) 4.38 years 
E) never

Question 18

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?

Accepted Answer

A) -$311.02 
B) $1,048.75 
C) $4,650.11 
D) $9,188.98 
E) $11,168.02 
A) -$311.02 
B) $1,048.75 
C) $4,650.11 
D) $9,188.98 
E) $11,168.02

Question 19

You're trying to determine whether to expand your business by building a new manufacturing plant.The plant has an installation cost of $12 million,which will be depreciated straight-line to zero over its 4-year life.The plant has projected net income of $1,095,000,$902,000,$1,412,000,and $1,724,000 over these 4 years.What is the average accounting return?

Accepted Answer

A) 10.70 percent 
B) 15.63 percent 
C) 18.87 percent 
D) 21.39 percent 
E) 23.05 percent 
A) 10.70 percent 
B) 15.63 percent 
C) 18.87 percent 
D) 21.39 percent 
E) 23.05 percent

Question 20

A project produces annual net income of $46,200,$51,800,and $62,900 over its 3-year life,respectively.The initial cost of the project is $675,000.This cost 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?

Accepted Answer

A) 15.89 percent 
B) 16.67 percent 
C) 18.98 percent 
D) 20.25 percent 
E) 23.84 percent 
A) 15.89 percent 
B) 16.67 percent 
C) 18.98 percent 
D) 20.25 percent 
E) 23.84 percent

Exam 9: Net Present Value and Other Investment Criteria

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

An investment project costs $21,500 and has annual cash flows of $6,500 for 6 years.If the discount rate is 15 percent,what is the discounted payback period?

Which one of the following increases the net present value of a project?

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Which of the following are advantages of the payback method of project analysis? I.works well for research and development projects II.liquidity bias III.ease of use IV.arbitrary cutoff point

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

The Taxi Co.is evaluating a project with the following cash flows: The company uses an 8 percent interest rate on all of its projects.What is the MIRR using the discounted approach?

The internal rate of return is:

You are analyzing a project and have gathered the following data: Based on the internal rate of return of _____ percent for this project,you should _____ the project.

Home Décor & More is considering a proposed project with the following cash flows.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?

Boston Chicken is considering two mutually exclusive projects with the following cash flows.What is the crossover rate? If the required rate of return is lower than the crossover rate,which project should be accepted?

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

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 project that provides annual cash flows of $12,600 for 12 years costs $65,000 today.At what rate would you be indifferent between accepting the project and rejecting it?

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years.The project has a 12 percent required rate of return and an initial cost of $6,000.What is the discounted payback period?

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

You are analyzing a project and have gathered the following data: Based on the internal rate of return of _ percent for this project,you should _ the project.