Deck 9: Net Present Value and Other Investment Criteria

Question 1

A project has a discounted payback period that is equal to the required payback period. Given this, the project: 

A) will not be acceptable under the payback rule. 
B) must have a profitability index that is equal to or greater than 1.0. 
C) must have a zero net present value. 
D) must have an internal rate of return equal to the required return. 
E) will still be acceptable if the discount rate is increased.  

Answer 1

must have a profitability index that is equal to or greater than 1.0. 

Question 2

Which one of these statements related to discounted payback is correct? 

A) Payback is a better method of analysis than discounted payback. 
B) Discounted payback is used more frequently in business than payback. 
C) Discounted payback does not require a cutoff point. 
D) Discounted payback is biased towards short-term projects. 
E) The discounted payback period increases as the discount rate decreases. 

Answer 2

Discounted payback is biased towards short-term projects. 

Question 3

The net present value of a project will increase if: 

A) the required rate of return increases. 
B) the initial capital requirement increases. 
C) some of the cash inflows are deferred until a later year. 
D) the aftertax salvage value of the fixed assets increases. 
E) the final cash inflow decreases. 

Answer 3

the aftertax salvage value of the fixed assets increases. 

Question 4

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? 

A) Net present value 
B) Discounted payback 
C) Internal rate of return
D) Profitability index 
E) Payback 

Question 5

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? 

A) Project A only 
B) Project B only 
C) Both A and B 
D) Neither A nor B 
E) Either, but not both projects 

Question 6

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

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

Question 7

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

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

Question 8

Net present value: 

A) is the best method of analyzing mutually exclusive projects. 
B) is less useful than the internal rate of return when comparing different-sized projects.
C) is the easiest method of evaluation for nonfinancial managers. 
D) cannot be applied when comparing mutually exclusive projects. 
E) is very similar in its methodology to the average accounting return. 

Question 9

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called? 

A) Net present value 
B) Accounting return 
C) Payback value 
D) Profitability index 
E) Discounted payback 

Question 10

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? 

A) Reduction in the cash outflow at Time 0 
B) Cash inflow in the final year of the project 
C) Cash inflow for the year following the final year of the project
D) Cash inflow prorated over the life of the project 
E) Excluded from the net present value calculation

Question 11

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: 

A) net present value period. 
B) internal return period. 
C) payback period. 
D) discounted profitability period. 
E) discounted payback period. 

Question 12

A project has a net present value of zero. Which one of the following best describes this project?

A) The project has a zero percent rate of return. 
B) The project requires no initial cash investment. 
C) The project has no cash flows. 
D) The summation of all of the project's cash flows is zero. 
E) The project's cash inflows equal its cash outflows in current dollar terms. 

Question 13

Which of the following are advantages of the payback method of project analysis? 

A) Considers time value of money, liquidity bias 
B) Liquidity bias, arbitrary cutoff point 
C) Liquidity bias, ease of use 
D) Ignores time value of money, ease of use
E) Ease of use, arbitrary cutoff point  

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? 

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 3 is ignored. 
C) The project's cash flow in Year 3 is discounted by a factor of (1 + R)³.
D) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. 
E) The project is acceptable whenever the payback period exceeds three years. 

Question 15

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? 

A) Constant dividend growth model 
B) Discounted cash flow valuation 
C) Average accounting return 
D) Expected earnings model 
E) Internal rate of return 

Question 16

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

A) Increasing the value of each of the project's discounted cash inflows 
B) Moving each cash inflow forward one time period, such as from Year 3 to Year 2 
C) Decreasing the required discount rate 
D)  Increasing the project's initial cost at time zero
E) Increasing the amount of the final cash inflow 

Question 17

Why is payback often used as the sole method of analyzing a proposed small project? 

A) Payback considers the time value of money. 
B) All relevant cash flows are included in the payback analysis. 
C) The benefits of payback analysis usually outweigh the costs of the analysis. 
D) Payback is the most desirable of the various financial methods of analysis. 
E) Payback is focused on the long-term impact of a project. 

Question 18

Applying the discounted payback decision rule to all projects may cause: 

A) some positive net present value projects to be rejected. 
B) the most liquid projects to be rejected in favor of the less liquid projects. 
C) projects to be incorrectly accepted due to ignoring the time value of money. 
D) a firm to become more long-term focused. 
E) some projects to be accepted which would otherwise be rejected under the payback rule. 

Question 19

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

A) the total of the cash inflows must equal the initial cost of the project. 
B) the project earns a return exactly equal to the discount rate. 
C) a decrease in the project's initial cost will cause the project to have a negative NPV. 
D) any delay in receiving the projected cash inflows will cause the project to have a positive NPV. 
E) the project's PI must also be equal to zero. 

Question 20

The average accounting rate of return (AAR): 

A) considers the time value of money. 
B) measures net income as a percentage of the sales generated by a project. 
C) is the best method of financially analyzing mutually exclusive projects. 
D) is the primary methodology used in analyzing independent projects. 
E) is similar to the return on assets ratio. 

Question 21

Assume a project is independent with financing cash flows. Which one of these statements is correct? 

A) The IRR cannot be used to determine the acceptability of the project. 
B) The project is acceptable if the required return exceeds the IRR. 
C) The project is acceptable only if the NPV is zero or negative. 
D) The project's required rate of return will always be negative. 
E) The project is acceptable if the internal rate of return is negative. 

Question 22

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? 

A) Profitability index 
B) Internal rate of return 
C) Payback 
D) Net present value 
E) Accounting rate of return 

Question 23

The internal rate of return is defined as the: 

A) maximum rate of return a firm expects to earn on a project. 
B) rate of return a project will generate if the project is financed solely with internal funds. 
C) discount rate that equates the net cash inflows of a project to zero. 
D) discount rate which causes the net present value of a project to equal zero. 
E) discount rate that causes the profitability index for a project to equal zero. 

Question 24

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

A) independent.
B) interdependent.
C) mutually exclusive.
D) economically scaled.
E) operationally distinct.

Question 25

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

A) Conventional cash flows 
B) Cash flows that extend beyond the acceptable payback period 
C) One year or more in the middle of a project where the cash flows are equal to zero 
D) A cash inflow at Time 0 
E) Cash inflows that are equal in amount 

Question 26

The internal rate of return: 

A) may produce multiple rates of return when cash flows are conventional. 
B) is best used when comparing mutually exclusive projects. 
C) is rarely used in the business world today. 
D) is principally used to evaluate small dollar projects. 
E) is easy to understand. 

Question 27

An advantage of the average accounting return method of analysis is its: 

A) use of easily obtained information. 
B) inclusion of time value of money considerations. 
C) use of a cutoff rate as a benchmark. 
D) use of pretax income in its computation. 
E) use of real, versus nominal, average income. 

Question 28

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

A) ignores the issue of taxes. 
B) uses a cutoff rate. 
C) considers the time value of money. 
D) is easy to calculate. 
E) is based on accounting values. 

Question 29

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? 

A) Project tract 
B) Projected risk profile 
C) NPV profile 
D) NPV route 
E) Present value sequence 

Question 30

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

A) required return. 
B) zero-sum rate. 
C) present value rate. 
D) break-even rate. 
E) crossover rate. 

Question 31

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent. Given this you know that: 

A) neither project will be accepted if the discount rate is less than 11.7 percent. 
B) both projects have a negative NPV at discount rates greater than 11.7 percent. 
C) both projects provide an internal rate of return of 11.7 percent. 
D) both projects have a zero NPV at a discount rate of 11.7 percent. 
E) the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent. 

Question 32

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

A) Building a furniture store beside a clothing outlet in the same shopping mall 
B) Producing both plastic forks and spoons on the same assembly line 
C) Using an empty warehouse to store both raw materials and finished goods 
D) Promoting two products during the same television commercial 
E) Waiting until a machine finishes molding Product A before being able to mold Product B 

Question 33

 There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: 

A) have two net present value profiles. 
B) have operational ambiguity. 
C) create a mutually exclusive investment decision.
D) produce multiple economies of scale. 
E) have multiple rates of return.

Question 34

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: 

A) always accept Project A. 
B) be indifferent to the projects at any discount rate above 13.1 percent. 
C) always accept Project A if the required return exceeds the crossover rate. 
D) accept Project B only when the required return is equal to the crossover rate. 
E) accept Project B if the required return is less than 13.1 percent. 

Question 35

The internal rate of return is: 

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 36

Which one of the following characteristics is most associated with financing type projects? 

A) Long payback period 
B) Multiple internal rates of return 
C) Cash inflows that equal cash outflows when ignoring the time value of money 
D) Prepaid services 
E) Conventional cash flows 

Question 37

Graphing the crossover point helps explain: 

A) why one project is always superior to another project. 
B) how decisions concerning mutually exclusive projects are derived. 
C) how the duration of a project affects the decision as to which project to accept. 
D) how the net present value and the initial cash outflow of a project are related. 
E) how the profitability index and the net present value are related. 

Question 38

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

A) The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. 
B) A project with an IRR equal to the required return would reduce the value of a firm if accepted. 
C) The IRR is equal to the required return when the net present value is equal to zero. 
D) Financing type projects should be accepted if the IRR exceeds the required return. 
E) The average accounting return is a better method of analysis than the IRR from a financial point of view. 

Question 39

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? 

A) Decreasing the required discount rate 
B) Increasing the initial investment in fixed assets 
C) Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows 
D) Eliminating the salvage value 
E) Decreasing the amount of the final cash inflow 

Question 40

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? 

A) Profitability index that is less than 1.0 
B) Project's internal rate of return that is less than the required return 
C) Discounted payback period that is greater than the required return 
D) Average accounting return that is less than the internal rate of return 
E) Modified internal rate of return that exceeds the required return 

Question 41

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: 

A) accepted because the payback period is less than the required time period. 
B) accepted because the profitability index is greater than 1. 
C) accepted because the profitability index is negative. 
D) rejected because the internal rate of return is negative. 
E) rejected because the net present value is positive. 

Question 42

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

A) Project A, because it has the higher required rate of return.
B) Project A, because it has the larger NPV.
C) Project B, because it has the largest cash inflow in Year 1.
D) Project B, because it has the higher required rate of return.
E) Project B, because it has the larger NPV

Question 43

In actual practice, managers most frequently use which two types of investment criteria? 

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

Question 44

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

A) The discounted payback period must be greater than 2.98 years.
B) The break-even discount rate must be less than 11.63 percent.
C) The discount rate used in computing the net present value was less than 11.63 percent.
D) The AAR is equal to the IRR/PI.
E) The project should be rejected based on its PI value.

Question 45

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? 

A) Net present value 
B) Payback 
C) Internal rate of return 
D) Average accounting return
E) Profitability index 

Question 46

The profitability index is most closely related to which one of the following? 

A) Payback 
B) Discounted payback 
C) Average accounting return 
D) Net present value 
E) Modified internal rate of return 

Question 47

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? 

A) Initial cost of each project 
B) Timing of the cash inflows 
C) Total cash inflows of each project 
D) Net present value 
E) Length of each project's life 

Question 48

A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent?

A) −$311.02
B) $505.92
C) −$165.11
D) $218.98
E) $668.02

Question 49

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

A) Accept A at both discount rates
B) Accept A at 11.7 percent and neither at 13.5 percent
C) Accept B at both discount rates
D) Accept both at 11.7 percent and neither at 13.5 percent
E) Accept B at 11.7 percent and neither at 13.5 percent

Question 50

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

A) PI greater than 1.0
B) AAR lower than the required rate
C) Payback period that exceeds the requirement
D) Required discount rate greater than the IRR
E) Discounted payback period less than the payback period

Question 51

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? 

A) Conflicts with the results of the net present value decision rule 
B) Assumes the firm has sufficient funds to undertake both projects 
C) Agrees with the decision that would also apply if the projects were mutually exclusive 
D) Bases the accept/reject decision on the same variables as the average accounting return 
E) Fails to provide useful information as the firm must reject at least one of the projects

Question 52

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

A) −$11,748.69
B) −$10,933.52
C) −$11,208.62
D) −$10,457.09
E) −$12,006.13

Question 53

Which two methods of project analysis are the most biased towards short-term projects?

A) Net present value and internal rate of return
B) Internal rate of return and profitability index 
C) Payback and discounted payback
D) Net present value and discounted payback 
E) Discounted payback and profitability index

Question 54

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

A) The internal rate of return decision may contradict the net present value decision. 
B) Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. 
C) The payback decision rule could override the net present value decision rule should cash availability be limited. 
D) The profitability index rule cannot be applied in this situation. 
E) The projects cannot be accepted unless the average accounting return decision ruling is positive. 

Question 55

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

A) $186.95
B) -$108.19
C) $219.41
D) $229.09
E) $311.16

Question 56

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? 

A) Accept both projects because both NPVs are positive 
B) Accept Project A because it has the shortest payback period 
C) Accept Project B and reject Project A based on the NPVs 
D) Accept Project A and reject Project B based on their AARs 
E) Accept Project A because it has the lower required return 

Question 57

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?

A) The net present value indicates accept while the internal rate of return indicates reject. 
B) Payback indicates acceptance. 
C) The payback decision rule could override the accept decision indicated by the net present value. 
D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. 
E) The net present value decision rule is the only rule that matters when making the final decision. 

Question 58

Mutually exclusive projects are best defined as competing projects that: 

A) would need to commence on the same day. 
B) have the same initial start-up costs. 
C) both require the total use of the same limited resource. 
D) both have negative cash outflows at time zero. 
E) have the same life span. 

Question 59

The present value of an investment's future cash flows divided by the initial cost of the investment is called the: 

A) net present value. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) profile period. 

Question 60

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?

A) Discounted payback 
B) Profitability index
C) Internal rate of return
D) Payback 
E) Average accounting return

Question 61

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?

A) 1.82 years
B) 2.67 years
C) 2.82 years
D) 1.67 years
E) 1.79 years

Question 62

A project has an initial cost of $31,300 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return?

A) 12.79 percent
B) 11.82 percent
C) 10.35 percent
D) 11.69 percent
E) 10.14 percent

Question 63

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?

A) Both projects should be accepted.
B) Both projects should be rejected.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) You should be indifferent to accepting either or both projects.

Question 64

The Green Fiddle is considering a project with sales of $86,800 a year for the next four years. The profit margin is 6 percent, the project cost is $97,500, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 10.8 percent. This project should be ________ because the AAR is ________ percent.

A) rejected; 11.03
B) accepted; 10.68
C) rejected; 11.16
D) accepted; 11.03
E) rejected; 10.68

Question 65

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent?

A) 2.31 years
B) 2.45 years
C) 2.55 years
D) 2.87 years
E) Never

Question 66

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) Accept either one, but not both

Question 67

An investment project costs $10,200 and has annual cash flows of $6,500 for 3 years. If the discount rate is 13 percent, what is the discounted payback period?

A) 2.87 years
B) 1.87 years
C) 1.61 years
D) 2.61 years
E) Never

Question 68

A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-year life. The initial cost is $198,900, which 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?

A) 15.72 percent
B) 16.67 percent
C) 18.98 percent
D) 17.25 percent
E) 16.84 percent

Question 69

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively. What is the payback period?

A) 2.70 years
B) 3.28 years
C) 3.36 years
D) 3.70 years
E) 2.28 years

Question 70

An investment project provides cash flows of $1,562 per year for 10 years. If the initial cost is $8,720, what is the payback period?

A) 7.36 years
B) 5.28 years
C) 5.58 years
D) 8.13 years
E) Never

Question 71

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?

A) Accept; The discounted payback period is 2.18 years.
B) Accept; The discounted payback period is 2.32 years.
C) Accept; The discounted payback period is 2.98 years.
D) Reject; The discounted payback period is 3.87 years.
E) Reject; The project never pays back on a discounted basis.

Question 72

A project has average net income of $6,250 a year over its 6-year life. The initial cost of the project is $98,400 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm set a minimum average accounting return of 12.5 percent. The firm should ________ the project because the AAR is ________ percent.

A) accept; 12.52
B) accept; 12.46
C) accept; 12.70
D) reject; 12.46
E) reject; 12.70

Question 73

A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite?

A) $384,200
B) −$93,290
C) $93,290
D) $128,415
E) −$384,200

Question 74

Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted payback period?

A) Never
B) .91 years
C) .26 years
D) 1.28 years
E) 1.39 years

Question 75

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?

A) 3.73 years 
B) 2.51 years
C) 3.13 years 
D) 3.51 years
E) 3.94 years

Question 76

Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for Years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for Years 0 to 3, respectively. Both projects are independent, have multiple noncash expenses, and use straight-line depreciation to a zero balance over the project's life. Neither project has any salvage value. Both projects have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return?

A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) The AAR cannot be computed.

Question 77

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why not?

A) No; The payback period is 3.94 years.
B) No; The payback period is 2.94 years.
C) Yes; The payback period is 3.94 years.
D) Yes; The payback period is 3.09 years.
E) Yes; The payback period is 2.94 years.

Question 78

Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the project be accepted or rejected?

A) $1,684.22; reject
B) $2,764.89; accept
C) $2,264.95; reject
D) $1,684.22; accept
E) $2,764.89; reject

Question 79

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of ________ years for this project, you should ________ the project.

A) 1.98; accept
B) 1.79; accept
C) 2.46; accept
D) 2.02; reject
E) 2.29; reject

Question 80

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both Projects A and B
D) Reject both Projects A and B
E) You cannot apply the payback method to these projects.