Deck 11: Investment Decision Criteria

Question 1

Which of the following are typical consequences of good capital budgeting decisions?

A)The firm increases in value.
B)The firm gains knowledge and experience that may be useful in future decisions.
C)Good capital budgeting decisions help a company define its core competencies.
D)All of the above.

Answer 1

D

Question 2

BlackDiamond Ambulance can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1.)

A)$50,000
B)$5061
C)$5517
D)$5571

Answer 2

C

Question 3

Which of the following is one of the capital investment categories?

A)Revenue-enhancing investments
B)Cost-reduction investments
C)Mandatory investments that are a result of government mandates
D)All of the above

Answer 3

D

Question 4

BlackDiamond Ambulance can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.The salvage value of the ambulance will be $25 000.Assume the ambulance is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1.)

A)$9,731
B)$10,731
C)$5517
D)$4517

Question 5

The majority of a firm's capital expenditure proposals are aimed at revenue enhancement.

Question 6

Project Sigma requires an investment of $1 million and has a NPV of $10.Project Delta requires an investment of $500,000 and has a NPV of $150,000.The projects involve unrelated new product lines.The firm can raise unlimited amounts of capital.

A)Both projects should be accepted because they have positive NPVs.
B)Neither project should be accepted because they might compete with one another.
C)Only project Delta should be accepted.Alpha's NPV is too low for the investment.
D)The company should look at other investment criteria, not just NPV.

Question 7

The primary objective of all capital budgeting decisions is to increase the size of the firm.

Question 8

Which of the following is a typical capital budgeting decision?

A)Purchase of office supplies
B)Granting credit to a new customer
C)Replacement of manufacturing equipment with more modern and efficient equipment
D)Financing the firm with more long-term debt and less equity

Question 9

Australia Unlimited can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6000 per year for five years.Calculate the NPV of the assembler if the required rate of return is 12%.(Round your answer to the nearest $1.)

A)$1056
B)$4568
C)$7621
D)$6577

Question 10

Which of the following would be an example of a mandated capital budgeting decision?

A)A powerful political figure wants a manufacturing facility to be located in his district.
B)A solar array installs landscaping to reduce objections from near-by residents.
C)A company must install elevators to comply with the Americans With Disabilities Act (ADA)
D)All of the above.

Question 11

Good capital investment opportunities are most likely to exist when

A)many firms compete to sell similar products.
B)interest rates are high and rising.
C)goods and services can be produced cheaply using readily available tools and technologies.
D)a line of business is expensive to enter and uses proprietary technology.

Question 12

Competitive market forces make it unimportant for a firm to have a systematic strategy for generating capital-budgeting projects.

Question 13

As a general rule, good investments are most likely to be found in markets that are [blank]

A)more competitive
B)less competitive
C)saturated
D)up and coming

Question 14

There aren't any capital budgeting decisions mandated by government regulations.

Question 15

Why is it so difficult for firms to find good investment ideas? How is that involved in the capital budgeting process?

Question 16

Distinguish between revenue enhancement investments, cost-reduction investments, and mandated investments.

Question 17

Investments that lead to cost reduction often involve the expansion of existing businesses.

Question 18

Which of the following would be considered a capital budgeting decision?

A)Walmart purchases inventory for resale to customers.
B)Apple sells bonds and uses the proceeds to repurchase stock.
C)Goldman Sachs obtains short-term loans to finance day-to-day operations.
D)Pfizer develops a new therapy and brings it to market.

Question 19

Why are capital budgeting decisions among the most important decisions made by any company? Give a few examples from recent business developments.

Question 20

Scrubbers installed on smokestacks of coal-fired power plants is an example of mandated investments.

Question 21

Brighter Investment has a NPV of $50,000 and Apogee Investment has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?

A)Brighter has a shorter payback period.
B)The projects are mutually exclusive.
C)The projects have unequal lives.
D)The projects are mandated.

Question 22

A machine has a cost of $5,375,000.It will produce cash inflows of $1,825,000 (year 1); $1,775,000 (year 2); $1,630,000 (year 3); $1,585,000 (year 4); and $1,650,000 (year 5).At a discount rate of 16.25%, what is the NPV?

A)$81724
B)$257,106
C)$416,912
D)$190,939

Question 23

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%.

A)NPV = −$30,000 + (3 × 20,000)/(1.10)3
B)NPV = −$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3
C)NPV = −$30,000 + $20,000/(1.01).10 + $20,000/(1.02).10 + $20,000/(1.03).10
D)NPV = −$30,000 + $20,000/(1.1).10 + $20,000(1.2).10 + $20,000(1.3).10

Question 24

Mission Co.requires an initial investment of $50,000, and has a net present value of $12,000.Ardent Co.requires an initial investment of $100,000, and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept

A)Mission Co.
B)Ardent Co.
C)both projects.
D)neither project.

Question 25

NorthCoast Inc.is considering the purchase of a 3-D printer that will require an initial investment of $15,000.The printer will produce parts at a net savings of $4000 per year in operating costs.The company will use a discount rate of 8.5%.What is the NPV of this equipment to the nearest dollar?

A)$5000
B)$15,703
C)$703
D)$763

Question 26

A machine costs $10,000, has a three-year life, and has an estimated salvage value of $1000.It will generate after-tax annual cash flows (ACF)of $6000 a year, starting next year.If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answer to the nearest $1.00.)

A)$9000
B)$5672
C)$5157
D)-$1500

Question 27

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next three years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3.If the discount rate is 10% and the projects are mutually exclusive

A)Project H should be chosen.
B)Project T should be chosen.
C)H and T are equally attractive.
D)Both projects should be chosen.

Question 28

Coastline Project has an initial outlay of $30,000, followed by positive cash flows of $10,000 in year 1, $15,000 in year 2, and $15,000 in year 3.The project should be accepted if the required rate of return is

A)greater than 0.
B)less than 14.6%.
C)less than 16.25%.
D)greater than 12%.

Question 29

Cloud Inc is considering a project with the following cash flows: Initial outlay = $750,000
Incremental after-tax cash flows from operations for years 1-4 = $250,000 per year
Calculate the NPV of this project if the company's discount rate is 12%.

A)$9337
B)$7758
C)$4337
D)$2534

Question 30

Which of the following statements is correct?

A)The project should be accepted since its NPV is $353.87.
B)The project should be rejected since its NPV is −$353.87.
C)The project should be accepted since it has a payback of less than four years.
D)The project should be rejected since its NPV is −$23.91.

Question 31

Which of the following is a correct EXCEL formula to solve for the net present value of a project? Assume that CF0 is expressed as a negative number.

A)=NPV (k,CF1, CF2,...CFn)+CF0
B)=NPV (k,CF0,CF1, CF2,...CFn)
C)=NPV (CF0,CF1, CF2,...CFn)
D)=NPV (CF1, CF2,...CFn)+CF0

Question 32

Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by incremental cash inflows in the next three years of $15,000, $20,000, and $30,000? Assume a discount rate of 10%.

A)NPV = −$30,000 + $15 000(1.10)1 + $20 000(1.10)2 + $30 000(1.10)3
B)NPV = −$30,000 + $15 000/(1.10)1 + $20 000/(1.10)2 + $30 000/(1.10)3
C)NPV = −$30,000 + $15 000/(1.01).10 + $20 000/(1.02).10 + $30 000/(1.03).10
D)NPV = −$30,000 + $15 000/(1.1).10 + $20,000(1.2).10 + $30,000(1.3).10

Question 33

A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (year 1); $1,775,000 (year 2); $1,630,000 (year 3); $1,585,000 (year 4)and $1,650,000 (year 5).At a discount rate of 16.25%, the project should be

A)accepted.
B)rejected.
C)discounted at a lower rate.
D)abandoned after the first year.

Question 34

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next three years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3.If the discount rate increases from 10% to 16%

A)Project T should be chosen.
B)both projects should be rejected.
C)H and T are equally attractive.
D)the project rankings will change.

Question 35

Suppose you determine that the NPV of a project is $1 525 855.What does that mean?

A)If they are mutually exclusive, this project should be preferred to one that has an NPV of $850 000.
B)The project would add value to the firm.
C)The present value of positive cash flows exceeds the present value of negative cash flows.
D)All of the above

Question 36

Parkway Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000 and $60,000.The salvage value of the vehicle will be $25,000.Assume that the vehicle is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1.)

A)$7390
B)$6048
C)$6780
D)$19,483

Question 37

The present value of the total costs over a five-year period for TopNotch Investment is $50,000.The present value of total costs over the same five-year period for BotomLine Investment is $40,000.The company uses a discount rate of 9%.There are no positive cash flows for these projects, but one or the other is required to comply with government regulations.Which project should be chosen and why?

A)TopNotch because it has a higher net present value (NPV).
B)Both projects because they will add value to the company.
C)Neither project because the NPVs are negative.
D)BottomLine because it has a lower net present cost.

Question 38

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next three years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3.If the discount rate is 10% and the projects are not mutually exclusive

A)Project H should be chosen.
B)Project T should be chosen.
C)H and T are equally attractive.
D)Both projects should be accepted.

Question 39

Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000, $40,000 and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000.If the required rate of return is greater than 0% and the projects are mutually exclusive

A)H will always be preferable to T.
B)T will always be preferable to H.
C)H and T are equally attractive.
D)The project rankings will change with different discount rates.

Question 40

You have been asked to analyze a capital investment proposal.The project's cost is $2 775,000.Cash inflows are projected to be $925,000 in year 1; $1 000,000 in year 2; $1 000,000 in year 3; $1 000,000 in year 4; and $1 225,000 in year 5.Assume that your firm discounts capital projects at 15.5%.What is the project's NPV?

A)$101,247
B)$285,106
C)$473,904
D)$582,380

Question 41

Calculate the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $65
Year 3 = $100

A)3.43 years
B)3.17 years
C)2.88 years
D)2.6 years

Question 42

Net present value=

A)present value of future cash flows divided by initial cash outlay
B)present value of future cash flows plus initial cash outlay
C)present value of future cash flows multiplied by initial cash outlay
D)present value of future cash flows minus initial cash outlay

Question 43

Your company is considering a project with the following cash flows: Initial outlay = $1748.80
Cash flows in years 1-6 = $500
Calculate the IRR on the project.

A)9%
B)11%
C)18%
D)24%

Question 44

Two projects are under consideration by the same company at the same time.Project Alpha has a NPV of $20 million and an estimated useful life of 10 years.Project Beta has a NPV of $12 million and also an estimated useful life of 10 years.What should the company's decision be
a)if the projects involve unrelated expansion decisions or
b)if the projects are mutually exclusive because they would have to occupy the same space?

Question 45

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $170,000.If the company 's required rate of return is 12%, the project should be

A)rejected because the IRR is less than 12%.
B)accepted because the NPV is positive at 12%.
C)the project is unacceptable at any discount rate.
D)rejected because there may be more than one IRR.

Question 46

Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1800. Year Net Cash Flow

A)14%
B)12%
C)8%
D)25%

Question 47

Equipment should be replaced whenever replacement results in a positive NPV.

Question 48

If a project has a profitability index greater than 1,

A)the NPV will also be positive.
B)the internal rate of return (IRR)will be higher than the required rate of return.
C)the present value of future cash flows will exceed the amount invested in the project.
D)all of the above.

Question 49

Corp Suite is considering two expansion options, but does not have enough capital to undertake both.Project W requires an investment of $100,000 and has an NPV of $10,000.Project D requires an investment of $80,000 and has an NPV of $8200.If Corp Suite uses the profitability index to decide, it would

A)choose D because it has a higher profitability index.
B)choose W because it has a higher profitability index.
C)choose D because it has a lower profitability index.
D)choose W because it has a lower profitability index.

Question 50

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $170 000.

A)All possible IRRs for this project are negative.
B)It is not possible to calculate an IRR for this project.
C)This project might have more than one IRR, but only one MIRR.
D)The project is unacceptable at any required rate of return.This project might have more than one IRR.

Question 51

Net present value is suitable for comparing projects with unequal lives.

Question 52

Manufacture Hawk has two options for installing legally required safety equipment.Option Ex has an initial cost of $25,000 and annual operating costs over three years of $5000, $5250, $5600.Option WYE has an initial cost of $40,000 and annual operating costs of $4000, $4200, $4450, $4750 and $5100.Whether Manufacture Hawk chooses Ex or Wye, the equipment is always needed and must be replaced at the end of its useful life.Which choice is least expensive over the long run? Use a discount rate of 9%.

Question 53

A project has an initial outlay of $4000.It has a single payoff at the end of year 4 of $6996.46.What is the IRR for the project (round to the nearest percent)?

A)16%
B)13%
C)21%
D)15%

Question 54

Rockwell Smoothie is considering a project with the following cash flows
Initial outlay = $13,000
Cash flows: Year 1 = $5000
Year 2 = $3000
Year 3 = $9000
If the appropriate discount rate is 15%, calculate the NPV of this project.

Question 55

What is the NPV of a $45 000 project that is expected to have an after-tax cash flow of $14,000 for the first two years, $10 000 for the next two years, and $8000 for the fifth year? Use a discount rate of 8%.Would you accept or reject the investment?

Question 56

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs, cash flow for the third and final years of the project is $170,000.

A)All possible IRRs for this project are negative.
B)It is not possible to calculate an IRR for this project.
C)The project is unacceptable at any required rate of return.
D)This project might have more than one IRR.

Question 57

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years, $10 000 for the next two years, and $8000 for the fifth year? Use a 10% discount rate.Would you accept the project?

Question 58

Mutually exclusive projects may be ranked differently when higher or lower discount rates are used.

Question 59

The higher the discount rate, the greater the importance of the early cash flows.

Question 60

The required rate of return represents the cost of capital for a project.

Question 61

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in years 1 through 4, $35,000 per year in years 5 through 9, and $40,000 in year 10.This investment will cost the firm $100,000 today, and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year.The discounted payback period is [blank].

A)5.23 years
B)4.26 years
C)4.35 years
D)3.72 years

Question 62

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000.The project will generate after-tax cash flows of $33,100 in year 1, $31,500 in year 2, and $31,200 in year 3.Assume that the appropriate discount rate is 10% and that the firm's tax rate is 40%.What is the project's discounted payback period?

A)2.81 years
B)2.33 years
C)1.22 years
D)The project never reaches payback.

Question 63

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

Payback for Project Y is

A)two years.
B)one year.
C)three years.
D)four years.

Question 64

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

Mass Waste Disposal Inc.is considering the construction facility at a cost of $20 million.The project will produce positive cash flows of $7 million per year for the next four years but the fifth and final year will have a net negative cash flow of $5 million.If the discount rate is 10%, the MIRR of this project is [blank] and the project should be [blank].

A)8.16%; rejected
B)9.11%; accepted
C)7.40%; rejected
D)8.16%; accepted

Question 65

Worcester Corp is considering two mandated projects.They would serve the same purpose and be mutually exclusive.The present value of total costs over a five-year period for Project November is $50,000.The present value of total costs over a four-year period for Project December is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?

A)November because the NPV is higher.
B)November because EAC is higher.
C)December because it has a shorter life.
D)December because it has lower EAC.

Question 66

Credo Corp requires an initial investment of $50,000 and the produces annual cash flows of $30,000, $25,000 and $15,000.Project Ess requires an initial investment of $60,000 and then produces annual cash flows of $25,000 per year for the next ten years.The company ranks projects by their payback periods.

A)Projects with unequal lives cannot be ranked using the payback method.
B)Ess will be ranked higher than Ell.
C)Ell and Ess will be ranked equally.
D)Ell will be ranked higher than Ess.

Question 67

Manheim Candles is considering a project with the following incremental cash flows.Assume a discount rate of 10%. Year Cash Flow
Calculate the project's MIRR.(Round to the nearest whole percentage.)

A)31%
B)47%
C)53%
D)61%

Question 68

Nouvel An S.A.is considering a project that requires an initial investment of $51,000.It is expected to produce annual cash flows of $35,000, $25,000 and $15,000.What is the discounted payback period for this project if the discount rate is 12%?

A)Approximately one year
B)Approximately 1.6 years
C)Approximately two years
D)The project will never reach discounted payback.

Question 69

Profitability index=

A)present value of future cash flows divided by initial cash outlay
B)present value of future cash flows plus initial cash outlay
C)present value of future cash flows multiplied by initial cash outlay
D)present value of future cash flows minus initial cash outlay

Question 70

Project H requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000 and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000.The projects are mutually exclusive.The company accepts projects with payback periods of three years or less.

A)Project H will be accepted.
B)Project T will be accepted.
C)H and T will both be accepted.
D)Neither projected will be accepted.

Question 71

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

WKW, Inc.is analyzing a project that requires an initial investment of $10,000, followed by cash inflows of $1000 in year 1, $4000 in year 2 and $15,000 in year 3.The cost of capital is 10%.What is the profitability index of the project?

A)1.04
B)1.55
C)1.78
D)1.97

Question 72

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000 and $30,000.Which of the following will not change if the required rate of return is increased from 10% to 12%.

A)The net present value.
B)The internal rate of return.
C)The profitability index.
D)The modified internal rate of return.

Question 73

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs, cash flow for the third and final years of the project is $170,000.The company accepts all projects with a payback period of two years or less.

A)The payback rule would reject this project because of its risks are too high.
B)The payback rule would reject this project because all negative cash flows are added together.
C)If strictly applied, the payback rule would reject this project.
D)If strictly applied, the payback rule would accept this project.

Question 74

Consider a project with the following cash flows: After-Tax After-Tax
Accounting Cash Flow
Year Profits from Operations
Initial outlay = $1500
Terminal cash flow = 0
Calculate the profitability index if the company's discount rate is 10%.

A)15.8
B)1.61
C)1.81
D)0.62

Question 75

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000.The project will generate after-tax cash flows of $33,100 in year 1, $31,500 in year 2, and $31,200 in year 3.Assume that the firm's proper rate of discount is 10% and that the firm's tax rate is 40%.What is the project's payback period?

A)0.33 years
B)1.22 years
C)2.33 years
D)Three years

Question 76

Adam and Eve are thinking of leaving their high pressure jobs in finance and buying a frozen yogurt franchise.The franchise will generate strong positive cash flow initially, but the potential owners are not sure how long demand for this product will continue into the future.A useful technique for making this decision would be

A)the discounted payback method.
B)the profitability index.
C)the internal rate of return.
D)the modified internal rate of return.

Question 77

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

Analysis of a machine indicates that it has a cost of $5 375,000.The machine is expected to produce cash inflows of $1,825,000 in year 1; $1,775,000 in year 2; $1,630,000 in year 3; $1,585,000 in year 4; and $1,650,000 in year 5.What is the machine's IRR?

A)12.16%
B)17.81%
C)23.00%
D)11.11%

Question 78

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $5000
Year 2: $3200
Year 3: $7800
If the initial outlay for the project is $12 113, calculate the project's IRR.

A)14%
B)10%
C)32%
D)24%

Question 79

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

What is payback for Project Z?

A)Two years
B)One year
C)Zero years
D)Project Z does not payback the original investment.

Question 80

Use the following information to answer the following question.
Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z

Discounted payback periods for projects Y and Z are

A)1.64 and 1.71 years.
B)3.14 years and never
C)Two years and two years
D)Five years and never