Question 1

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

Accepted Answer

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

Question 2

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A has annual cash flows for Years 1 to 3 of $28,300, $31,500, and $22,300, respectively. Project B has annual cash flows for Year 1 of $36,900 and $40,500 for Year 2. What is the crossover rate?

Accepted Answer

A)   17.17 percent
B)   16.33 percent
C)   17.32 percent
D)   16.99 percent
E)   15.20 percent D

Question 3

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

Accepted Answer

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  D

Question 4

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?

Accepted Answer

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

Question 5

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?

Accepted Answer

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 6

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.

Accepted Answer

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

Question 7

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

Accepted Answer

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 8

Net present value:

Accepted Answer

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

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

Accepted Answer

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 10

Weston's uses straight-line depreciation to zero over a project's life. A new project has a fixed asset cost of $2,687,300 and projected annual net income of $95,000, $162,000, $286,000, and $304,000 over Years 1 to 4. What is the average accounting return?

Accepted Answer

A)   14.35 percent
B)   15.63 percent
C)   14.87 percent
D)   15.76 percent
E)   16.05 percent

Question 11

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?

Accepted Answer

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

Question 12

A venture will provide a net cash inflow of $57,000 in Year 1. The annual cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $739,000 and has a required return of 15.6 percent. The company is somewhat unsure about the growth rate assumption. At what constant rate of growth would the company just break even?

Accepted Answer

A)   9.48 percent
B)   9.29 percent
C)   7.89 percent
D)   8.49 percent
E)   7.75 percent

Question 13

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?

Accepted Answer

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 14

Drinkable Water Systems is analyzing a project with projected cash inflows of $127,400, $209,300, and -$46,000 for Years 1 to 3, respectively. The project costs $251,000 and has been assigned a discount rate of 12.5 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not?

Accepted Answer

A)   Yes; The MIRR is 11.85 percent.
B)   No; The MIRR is 11.33 percent.
C)   Yes; The MIRR is 11.33 percent.
D)   No; The MIRR is 11.68 percent.
E)   No; The MIRR is 11.85 percent.

Question 15

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?

Accepted Answer

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

Question 16

You are considering two mutually exclusive projects. Project A has cash flows of -$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of -$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis?

Accepted Answer

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)   You should not use IRR; use a different method of analysis.

Question 17

Graphing the crossover point helps explain:

Accepted Answer

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 18

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?

Accepted Answer

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 19

TL Lumber is evaluating a project with cash flows of -$12,800, $7,400, $11,600, and -$3,200 for Years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach?

Accepted Answer

A)   13.25 percent 
B)   14.08 percent 
C)   15.40 percent 
D)   14.36 percent 
E)   19.23 percent

Question 20

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?

Accepted Answer

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

Exam 9: Net Present Value and Other Investment Criteria