Question 1

Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Accepted Answer

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

Question 2

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

Accepted Answer

A)  The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. 
B)  The cash flow in Year 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 3

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

Accepted Answer

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 4

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?

Accepted Answer

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

Question 5

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

Accepted Answer

A)  Conventional cash flows 
B)  Cash flows that extend beyond the acceptable payback period 
C)  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 6

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

Accepted Answer

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 7

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?

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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?

Accepted Answer

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 10

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?

Accepted Answer

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

Question 11

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

Accepted Answer

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 12

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

Accepted Answer

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 13

Project A has cash flows of −$50,000, $49,400, $27,200, and $24,500 for Years 0 to 3, respectively. Project B has an initial cost of $50,000 and an annual cash inflow of $18,500 for four years. These are mutually exclusive projects. What is the crossover rate?

Accepted Answer

A)  30.89 percent 
B)  16.08 percent 
C)  −30.89 percent 
D)  Cannot be computed 
E)  −16.08 percent

Question 14

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

Accepted Answer

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.

Question 15

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?

Accepted Answer

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 16

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?

Accepted Answer

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

Question 17

Projects A and B are mutually exclusive. Project A has cash flows of -$10,000, $5,100, $3,400, and $4,500 for Years 0 to 3, respectively. Project B has cash flows of -$10,000, $4,500, $3,400, and $5,100 for Years 0 to 3, respectively. What is the crossover rate for these two projects?

Accepted Answer

A)  0 percent 
B)  5.48 percent 
C)  6.71 percent 
D)  2.75 percent 
E)  4.94 percent

Question 18

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?

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)  The AAR cannot be computed.

Question 19

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?

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 9: Net Present Value and Other Investment Criteria