Deck 7: Net Present Value and Other Investment Rules

Question 1

The net present value of a project is projected at $210.How should this amount be interpreted?

A)The project's cash inflows exceed its outflows by $210.
B)The project will return an accounting profit of $210.
C)The project's discounted cash flows are $210 less than its undiscounted cash flows.
D)The project will increase the firm's cash account by $210 when the project is started.
E)The project is earning $210 in addition to the project's required rate of return.

Answer 1

The project is earning $210 in addition to the project's required rate of return.

Question 2

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

A)Net present value and internal rate of return
B)Payback and discounted payback
C)Accounting rate of return and internal rate of return
D)Payback and accounting rate of return
E)Internal rate of return and discounted payback

Answer 2

Payback and discounted payback

Question 3

If the discounted payback method is preferable to the payback method,then why is the payback method ever used?

A)The discounted payback requires an arbitrary cutoff point while payback does not.
B)Payback is easier to compute than discounted payback.
C)Payback considers all of a project's cash flows but discounted payback does not.
D)Payback requires the initial investment be recovered during a project's life while the required discounted payback period may be shorter.
E)Payback can be used with mutually exclusive projects but discounted payback cannot.

Answer 3

Payback is easier to compute than discounted payback.

Question 4

All else constant,the net present value of a typical investment project increases when

A)the discount rate increases.
B)each cash inflow is delayed by one year.
C)the initial cost of a project increases.
D)the rate of return decreases.
E)all cash inflows are moved to the last year of the project.

Question 5

One advantage of the payback method of project analysis is the method's

A)application of a discount rate to each separate cash flow.
B)simplicity.
C)difficulty of use.
D)arbitrary cutoff point.
E)consideration of all relevant cash flows.

Question 6

The value of a firm

A)increases when a new project with a negative net present value is accepted.
B)equals the sum of the individual values of the firm's projects and divisions.
C)is unaffected by the value of any one individual project.
D)increases anytime a project with a zero net present value is accepted.
E)is equal to the sum of all of the future cash flows derived from the firm's projects.

Question 7

The discounted payback method

A)discounts a project's initial cost.
B)is simpler and more reliable than the payback period.
C)is as reliable as NPV because both methods use discounted cash flo.
D)uses an arbitrary cutoff period.
E)ignores a project's initial costs.

Question 8

The payback method

A)discounts all cash flows properly.
B)requires each firm to set a firmwide cash flow cutoff period.
C)considers all relevant cash flows.
D)superior to the net present value method.
E)ignores the time value of money.

Question 9

What is the key reason why a positive NPV project should be accepted?

A)The project is expected to increase shareholder value.
B)The present value of the expected cash flows equals the project's cost.
C)The project will produce positive cash flows in the future.
D)The project's payback will be positive during its life.
E)The project's PI will be less than 1,which indicates acceptance.

Question 10

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the

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

Question 11

All else equal,the payback period for a project will decrease whenever the

A)duration of a project is lengthened.
B)cash inflows are moved earlier in time.
C)assigned discount rate decreases.
D)required return for a project increases.
E)initial cost increases.

Question 12

An investment

A)is acceptable if its calculated payback period is less than some prespecified period of time.
B)should be accepted if the payback is positive and rejected if it is negative.
C)should be rejected if the payback is positive and accepted if it is negative.
D)is acceptable if its calculated payback period is greater than some prespecified period of time.
E)should be accepted any time the payback period is less than the discounted payback period,given a positive discount rate.

Question 13

Assume a project has normal cash flows.Given this,you should accept the project

A)if,and only if,the NPV is exactly equal to zero.
B)only if the NPV is equal to the initial cash flow.
C)if the NPV is positive and reject it if the NPV is negative.
D)if the total cash inflows exceed the initial cash outflow.
E)because it has positive cash flows for every time period after the initial investment.

Question 14

Net present value

A)considers only cash flows occurring during the first 5 years of a project.
B)is based on projected annual net income for each year of a project's life.
C)calculations consider the risk of each project.
D)ignores the time value of money.
E)assumes all projects are risk-free.

Question 15

An investment is acceptable if its average accounting return (AAR)

A)exceeds the target AAR.
B)is less than the target AAR.
C)exceeds the firm's return on equity (ROE).
D)is less than the firm's return on assets (ROA).
E)is equal to zero.

Question 16

What is the primary shortcoming of the average accounting rate of return from a financial perspective?

A)The lack of use in the business world
B)The lack of a clear-cut decision rule
C)The degree of the calculation difficulty
D)The degree of estimation involved with the initial cost
E)The use of net income rather than cash flows

Question 17

A project has a net present value of $1,200 and a project life of 4 years.Which one of these statements must be true?

A)The project's total cash inflows minus its cash outflows equals $1,200.
B)The project is expected to return $1,200 in Time 0 dollars over and above the discount rate.
C)The project would also have a positive net present value if Year 4 was omitted.
D)The project's cash inflows exceed its outflows by $1,200 over the 4 years.
E)The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.

Question 18

The payback method is a convenient and useful tool because

A)it provides a quick estimate of how rapidly an initial investment will be recouped.
B)it considers all of a project's relevant cash flows.
C)it considers the time value of money.
D)the required payback period for all of a firm's projects must be identical.
E)it only considers the cash flows within the current period of 12 months.

Question 19

A firm should accept projects with positive net present values primarily because those projects will

A)produce cash inflows that exceed the cash outflows.
B)return the firm's initial cash outlay within 1 year.
C)create value for the firm's current stockholders.
D)produce only positive cash flows after the initial investment period.
E)increase the current liquidity of the firm.

Question 20

The discounted payback period of a project will decrease whenever the

A)initial cash outlay for the project is increased.
B)amount of each projected cash inflow is decreased.
C)discount rate applied to the project is decreased.
D)time period of the project is increased.
E)costs of the fixed assets utilized in the project increase.

Question 21

You know that two mutually exclusive projects are of different sizes.The smaller project is known to have a positive NPV.Which one of these accurately describes a method of properly determining which one,if either,project should be accepted?

A)Select the project with the higher internal rate of return
B)Accept the project with the shorter payback period
C)Accept the larger project if the incremental IRR exceeds the discount rate
D)Select the project with the higher profitability index
E)Accept the smaller project without any further analysis

Question 22

Analysis using the profitability index

A)frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B)is useful as a decision tool when investment funds are limited.
C)offers no real value when making capital structure decisions.
D)utilizes the same basic variables as those used in the average accounting return.
E)produces results that typically are difficult to comprehend or apply.

Question 23

The two most commonly used methods of capital budgeting analysis are the

A)internal rate of return and net present value methods.
B)net present value and payback methods.
C)profitability index and the internal rate of return methods.
D)net present value and discounted payback methods.
E)average accounting return and discounted payback methods.

Question 24

The internal rate of return

A)is more reliable as a decision making tool than net present value when considering mutually exclusive projects.
B)is the discount rate that makes the net present value of a project equal to one.
C)is easier to apply than net present value when cash flows are unconventional.
D)will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent.
E)is influenced by daily changes in the market rate of interest.

Question 25

Uptown Developers is considering two projects.Project A consists of building a wholesale book outlet on the firm's downtown lot.Project B consists of building a sit-down restaurant on that same lot.The lot can only accommodate one of the projects.When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from which one of these methods?

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

Question 26

When two projects can share the same economic resource,the projects are generally considered to be

A)mutually exclusive.
B)independent.
C)underfunded.
D)inferior.
E)financially equivalent.

Question 27

Projects A and B require an initial investment of $48,000 and $98,000,respectively.The projects are mutually exclusive,and you know the smaller project has a positive NPV.Which one of these methods is probably the best method to use to determine which project to accept?

A)Discounted payback
B)Modified internal rate of return
C)Average accounting rate of return
D)Incremental internal rate of return
E)Internal rate of return

Question 28

Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as

A)(Sum of all net income / 5)/ ($48,000 / 2)
B)(Sum of all net income / 2)/ ($48,000 / 2)
C)($48,000 / 5)/ (Sum of all net income / 5)
D)($48,000 / 2)/ (Sum of all net income / 2)
E)(Sum of all net income / 5)/ $48,000

Question 29

The discount rate that makes the net present value of an investment exactly equal to zero is called the

A)profitable rate of return.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)risk-free rate.

Question 30

Assume you are looking at a graph that relates the net present value of two mutually exclusive investment projects to various discount rates.Assume the projects have differing cash flows and finite lives.Which one of these statements accurately reflects this graph?

A)The lines representing the projects will be upward sloping.
B)If one project has equal cash flows for each year of its life,the line representing that project will be horizontal.
C)The lines representing the projects will be parallel over multiple discount rates.
D)The lines representing the projects must cross at a point where the NPV of each project is positive.
E)The project lines will reflect lower NPV values at higher discount rates.

Question 31

An independent,financing type project has an IRR of 11.4 percent and a required rate of return of 10.6 percent.Given this,you know the

A)initial cash flow is negative.
B)net present value is positive.
C)cash flows are conventional.
D)accept/reject decision cannot be based on the IRR.
E)project should be rejected.

Question 32

The average accounting return method

A)ignores some project years.
B)ignores the timing of net income.
C)properly discounts all values.
D)is preferred by financial analysts over the alternative methods.
E)is never used in practice.

Question 33

The modified internal rate of return is designed primarily to analyze projects that

A)are financing rather than investing projects.
B)are mutually exclusive.
C)have positive and then negative cash flows following the initial cash flow.
D)have significantly different sizes.
E)are both mutually exclusive and have significantly different lives.

Question 34

You are considering a project with conventional cash flows.The IRR is 12.6 percent,NPV is -$198,and the payback period is 2.87 years.Which one of the following statements is correct given this information?

A)The discount rate used in computing the net present value was less than 12.6 percent.
B)The discounted payback period will have to be less than 2.87 years.
C)The project life must be 2.87 years.
D)This project should be accepted based on the internal rate of return.
E)The required rate of return must be greater than 12.6 percent.

Question 35

An investment is acceptable if the profitability index (PI)of the investment is

A)greater than one.
B)less than one.
C)greater than the internal rate of return (IRR).
D)less than the net present value (NPV).
E)greater than a prespecified rate of return.

Question 36

Two key weaknesses of the internal rate of return rule are the

A)arbitrary determination of a discount rate and failure to consider initial expenditures.
B)failure to correctly analyze mutually exclusive projects and the multiple rate of return problem.
C)failure to consider all cash flows and the multiple rate of return problem.
D)failure to consider initial expenditures and failure to correctly analyze mutually exclusive projects.
E)failure to correctly analyze mutually exclusive projects and the lack of a clear-cut decision rule.

Question 37

A project has an initial cost of $12,100 and cash flows of -$2,100,$5,800,$16,600,and -$800 for Years 1 to 4,respectively.How many IRRs will this project have?

A)0
B)1
C)2
D)3
E)4

Question 38

Assume a project has normal cash flows.According to the accept/reject rules,the project should be accepted if the

A)PI is less than 1.
B)AAR is less than the required AAR.
C)IRR exceeds the required return.
D)payback period is less than the life of the project.
E)discounted payback period is less than the life of the project.

Question 39

Assume a project has normal cash flows and a positive (non-zero)net present value.The project's

A)profitability index will be less than 1.
B)internal rate of return will exceed its required rate of return.
C)costs exceed its benefits.
D)discounted payback period will exceed the life of the project.
E)payback period must equal the life of the project.

Question 40

Two mutually exclusive projects produce the same positive NPV at a discount rate of 11.34 percent.Both projects have 4-year lives.Project A has larger cash flows than Project B in the first 2 years.Given this information,you know that

A)it makes no difference which project you accept as long as the discount rate does not exceed 11.34 percent.
B)Project A should always be preferred.
C)one project will be preferred at rates less than 11.34 percent and the other will be preferred at higher rates.
D)Project B must require a smaller investment than Project A at Time 0.
E)Project B should only be accepted if the discount rate is 11.34 percent.

Question 41

Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2,$36,500 in Year 3,and $19,900 in Year 4.The discount rate is 11 percent,and the required discounted payback period is 3 years.Should this project be accepted or rejected? What is the discounted payback period?

A)Rejected 2.82 years
B)Accepted; 1.97 years
C)Accepted; 2.38 years
D)Rejected; 3.77 years
E)Accepted; 2.97 years

Question 42

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

A)11.86%
B)12.37%
C)20.08%
D)13.92%
E)19.10%

Question 43

A project has an initial cost of $16,780 and a 3-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 $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?

A)28.56%
B)34.13%
C)14.28%
D)27.11%
E)32.18%

Question 44

A new project has an initial cost of $125,000 and cash flows of $33,300,$78,700,and $69,500 for Years 1 to 3,respectively.What is the net present value (NPV)of this project if the discount rate is 19.3 percent? What is the NPV if the discount rate is 12.7 percent?

A)$1,127.10; $17,209.11
B)-$859.11; $17,209.11
C)-$859.11; $15,062.34
D)$1,127.10; $17,388.09
E)-$604.17; $15,062.34

Question 45

Leo is considering adding a deli to his general store.The remodelling expenses and shelving costs are estimated at $27,500.Deli sales are expected to produce net cash inflows of $7,300,$8,600,$9,700,and $9,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?

A)Yes; because the payback period is 3.19 years
B)Yes; because the payback period is 2.82 years
C)No; because the project never pays back
D)No; because the payback period is 2.82 years
E)No; because the payback period is 3.19 years

Question 46

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?

A)$2,405.66
B)$1,608.14
C)$1,919.08
D)$2,134.85
E)$2,671.02

Question 47

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?

A)2.13 years
B)2.34 years
C)2.78 years
D)2.91 years
E)Never

Question 48

You are considering two independent projects.The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B.Project A has an initial cost of $51,400 and cash inflows of $21,400,$24,900,and $22,200 for Years 1 to 3,respectively.Project B has an initial cost of $38,300 and cash inflows of $23,000 a year for 2 years.Which project(s),if either,should you accept?

A)Accept both A and B
B)Reject both A and B
C)Accept A and reject B
D)Accept B and reject A
E)Accept either A or B but not both A and B

Question 49

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?

A)4.06 years
B)3.97 years
C)3.89 years
D)Never
E)3.81 years

Question 50

Baxter's Market is considering opening a new location with an initial cost of $139,200.This location is expected to generate cash flows of $22,400,$61,500,$37,800,and $21,000 in Years 1 to 4,respectively.What is the payback period?

A)3.92 years
B)3.83 years
C)2.46 years
D)2.57 years
E)3.01 years

Question 51

The Depot is considering a project with an initial cost for fixed assets of $279,900 and annual sales of $284,000 for four years.The profit margin is 6.72 percent,and the tax rate is 34 percent.The fixed assets will be depreciated straight-line over the life of the project to a zero book value.The required average accounting rate of return is 14.5 percent.Should this project be accepted or rejected? What is the AAR?

A)Rejected; 14.81%
B)Rejected; 13.68%
C)Rejected; 15.03%
D)Accepted; 14.81%
E)Accepted; 13.68%

Question 52

A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?

A)13.46%
B)14.32%
C)13.98%
D)13.71%
E)14.62%

Question 53

Rodriquez's Hot Rods is considering a new project with an initial cost of $54,780 and a discount rate of 14 percent.The project is expected to have cash inflows of $27,000 a year for 3 years.What is the discounted payback period?

A)2.17 years
B)2.11 years
C)2.62 years
D)2.57 years
E)Never

Question 54

A project initially costs $40,500 and will not produce any cash flows for the first 2 years.Starting in Year 3,it will produce cash flows of $34,500 a year for 2 years.In Year 6,the project will end and should produce a final cash inflow of $12,000.What is the net present value of this project if the required rate of return is 18.5 percent?

A)$2,474.76
B)$2,063.19
C)$1,935.56
D)$1,865.95
E)$2,647.76

Question 55

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?

A)Yes; the NPV is $1,108.15.
B)Yes; the IRR is 12.97 percent.
C)Yes; the IRR is 28.72 percent.
D)Yes; the NPV is $1,409.27.
E)No; the IRR is 12.94 percent.

Question 56

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?

A)3.70 years
B)3.91 years
C)3.82 years
D)3.64 years
E)Never

Question 57

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?

A)2.68 years
B)2.07 years
C)2.75 years
D)2.46 years
E)Never

Question 58

A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project.If the firm requires a minimum average accounting return of 11.65 percent,what must be the minimum average net income for the project to be accepted?

A)$7,572.50
B)$8,001.29
C)$3,786.25
D)$4,029.14
E)$5,504.73

Question 59

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?

A)-$687.22
B)-$757.69
C)-$204.15
D)-$878.92
E)-$696.94

Question 60

Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?

A)65.28%
B)24.79%
C)38.03%
D)56.65%
E)20.04%

Question 61

A proposed project has an initial cost of $200,000 and cash flows of -$13,200,$124,500,and $187,900 for Years 1 to 3,respectively.Victoria,the boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a discount rate of 14 percent to all cash flows.Based on these criteria,the project should be

A)accepted because the PI is 0.89.
B)rejected because the PI exceeds 1.
C)accepted because the PI is 1.17.
D)rejected because the PI is 1.06.
E)rejected because the PI is 0.95.

Question 62

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR_B-A?

A)2.89%
B)4.07%
C)5.91%
D)6.75%
E)7.90%

Question 63

Project A has an initial cost of $211,400 and projected cash flows of $46,200,$64,900,and $135,800 for Years 1 to 3,respectively.Project B has an initial cost of $187,900 and projected cash flows of $43,200,$59,700,and $125,600 for Years 1 to 3,respectively.What is the incremental IRR_A-B of these two mutually exclusive projects?

A)8.67%
B)−6.93%
C)11.06%
D)−9.62%
E)9.37%

Question 64

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

A)Accepted,because this is a financing project and the IRR is less than the discount rate.
B)Rejected,because this is an investing project and the IRR is less than the discount rate.
C)Accepted,because this is a financing project and the IRR is greater than the discount rate.
D)Rejected,because this is an investing project and the IRR is greater than the discount rate.
E)Accepted,because the IRR equals the discount rate.

Question 65

A new product has start-up costs of $389,200 and projected cash flows of $102,000,$187,500,and $245,000 for Years 1 to 3,respectively.What is the profitability index given a required return of 14 percent?

A)0.98
B)0.83
C)1.16
D)1.03
E)1.21

Question 66

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?

A)14.66%
B)13.22%
C)12.73%
D)18.67%
E)15.70%

Question 67

Dorian International has $75,000 that it can invest for 2.5 years.After that,the funds are needed to repay an outstanding bond issue.The company has two potential projects that are within the funding limit.Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2 years.Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years.If the required rate of return on both projects is 12 percent,what is your recommendation?

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

Question 68

Assume a project has an initial cost of $207,600 and cash flows of $62,100,$99,100,and $105,300 for Years 1 to 3,respectively.The required discount rate is 11 percent,the required payback period is 3 years,and the required AAR is 13 percent.Should this project be accepted based on the two most commonly used methods of analysis by large firms? Justify your answer.

A)Accept based on the positive NPV but reject based on the payback period.
B)Accept based on the positive NPV and an IRR that exceeds the required discount rate.
C)Reject based on the negative NPV and the long payback period.
D)Accept based on payback and an IRR that exceeds the required discount rate.
E)Reject based on the negative NPV and an IRR that is less than the required rate of return.

Question 69

Project Water has an initial cost of $598,900 and projected cash flows of $302,000,$264,000,and $250,000 for Years 1 to 3,respectively.Project Aqua has an initial cost of $512,200 and projected cash flows of $290,000,$214,000,and $220,000 for Years 1 to 3,respectively.What is the incremental IRR_A-B of these two mutually exclusive projects?

A)8.67%
B)6.93%
C)2.75%
D)11.06%
E)4.37%

Question 70

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV_{(II - I)} which project(s)should be accepted and why?

A)Project II; because the incremental NPV_{(II - I)} is negative.
B)Project I; because both the incremental NPV_{(II - I)}and NPV_I are positive.
C)Both Project I and II; because both project NPVs are positive.
D)Project II; because it has the larger NPV.
E)Project I; because the incremental NPV_{(II - I)} is negative and NPV_I is positive.

Question 71

A project has an initial cost of $48,900 and cash flows of $31,300,-$11,600,and $40,300 for Years 1 to 3,respectively.The discount rate is 14 percent.What is the modified IRR?

A)11.68%
B)15.59%
C)10.59%
D)12.67%
E)14.92%

Question 72

You are considering two independent projects both of which have been assigned a discount rate of 12 percent.Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years.Based on the profitability index,what is your recommendation concerning these projects?

A)Accept both projects
B)Accept Project B because it has the lower PI
C)Accept Project A because it has the lower PI
D)Accept Project A and reject Project B
E)Reject Project A and accept Project B

Question 73

A project has an initial cost of $51,900 and cash flows of $18,700,$56,500,and -$9,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 17 percent,should you accept it based solely on the internal rate of return rule? Why or why not?

A)Yes,because the IRR exceeds the required return.
B)Yes,because the IRR is a positive rate of return.
C)You cannot apply the IRR rule in this case because there are multiple IRRs.
D)No,because the IRR is a negative rate of return.
E)No,because the IRR is less than the required return.

Question 74

The Walk-Up Window is considering two mutually exclusive projects.Project A has an initial cost of $64,230 and annual cash flows of $25,200 for three years.Project B has an initial cost of $45,400 and annual cash flows of $21,400,$21,900,and $10,200 for Years 1 to 3,respectively.What is the incremental IRR_A-B? Which project should be accepted if the discount rate is 9 percent? Which project should be accepted if the discount rate is 6 percent?

A)6.65%; Project A; Project A
B)6.65%; Project B; Project A
C)7.21%; Project A; Project B
D)7.21%; Project B: Project A
E)6.65%; Project A; Project B

Question 75

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?

A)17.77%
B)18.13%
C)18.66%
D)17.04%
E)16.98%

Question 76

You are considering two independent projects that have a required return of 15 percent.Project A has an initial cost of $198,700 and cash inflows of $67,200,$109,600,and $88,700 for Years 1 to 3,respectively.Project B has an initial cost of $102,000 and cash inflows of $37,600 and $91,200 for Years 1 and 2,respectively.Given this information,which one of the following statements is correct based on the NPV and IRR methods of analysis?

A)You should accept both projects.
B)You should accept Project A and reject Project B.
C)You should accept Project B and reject Project A.
D)NPV indicates accept Project A while IRR indicates accepting Project B.
E)You should reject both projects.

Question 77

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2.Project R has an initial cost of $345,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2.The discount rate is 12.2 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?

A)Accept both Project Q and R
B)Reject both Project Q and R
C)Accept Project Q and reject Project R
D)Accept Project R and reject Project Q
E)Accept either Project R or Project Q,but not both

Question 78

Miller's is considering a 2-year expansion project that will require $398,000 up front.The project will produce cash flows of $361,000 and $114,000 for Years 1 and 2,respectively.Based on the profitability index (PI)rule,should the project be accepted if the discount rate is 12 percent? Should it be accepted if the discount rate is 17 percent?

A)Yes; Yes,because the PI is 1.2
B)Yes; No,because the PI is 0.98
C)No; Yes,because the PI is 0.98
D)No; No,because the PI is 1.2
E)Yes; Yes,because the PI is 1.19

Question 79

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

A)Accepted,because the IRR is less than the discount rate.
B)Rejected,because the IRR is less than the discount rate.
C)Accepted,because the IRR is greater than the discount rate.
D)Rejected,because the IRR is greater than the discount rate.
E)Accepted,because the IRR equals the discount rate.

Question 80

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

A).92
B)1.05
C).99
D)1.01
E).96