Question 1

Assume a project has cash flows of -$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent?

Accepted Answer

A)  .946 
B)  .98 
C)  1.02 
D)  1.06 
E)  1.00

Question 2

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?

Accepted Answer

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

Question 3

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.

Accepted Answer

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

Question 4

Home & More is considering a project with cash flows of-$368,000, $133,500,-$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not?

Accepted Answer

A)  Yes; The MIRR is 14.78 percent. 
B)  Yes; The MIRR is 16.96 percent. 
C)  Yes; The MIRR is 12.91 percent. 
D)  No; The MIRR is 14.78 percent. 
E)  No; The MIRR is 16.96 percent.

Question 5

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

Accepted Answer

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

Question 6

An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today. At what rate would you be indifferent between accepting the investment and rejecting it?

Accepted Answer

A)  17.60 percent 
B)  15.90 percent 
C)  15.51 percent 
D)  15.93 percent 
E)  16.74 percent

Question 7

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?

Accepted Answer

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 8

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

Accepted Answer

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 9

A firm evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of -$37,048, $16,850, $15,700, and $19,300 for Years 0 to 3, respectively. The required return is 18 percent. What is the project IRR? Should the project be accepted or rejected?

Accepted Answer

A)  18.42 percent; accept 
B)  16.05 percent; accept 
C)  16.05 percent; reject 
D)  18.42 percent; reject 
E)  21.08 percent; reject

Question 10

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

Accepted Answer

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 11

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?

Accepted Answer

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 12

A project has projected cash flows of −$148,500, $32,800, $64,200, −$7,500 and $87,300 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 10.5 percent? Why or why not?

Accepted Answer

A)  Yes; The MIRR is 8.04 percent. 
B)  Yes; The MIRR is 9.23 percent. 
C)  No; The MIRR is 8.04 percent. 
D)  No; The MIRR is 9.06 percent. 
E)  No; The MIRR is 9.23 percent.

Question 13

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

Accepted Answer

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 14

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?

Accepted Answer

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 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

Crystal Industries is considering an expansion project with cash flows of −$287,500, $107,500, $196,100, $104,500, and −$92,700 for Years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Accepted Answer

A)  No; The MIRR is 9.13 percent. 
B)  No; The MIRR is 14.45 percent. 
C)  Yes; The MIRR is 9.13 percent. 
D)  No; The MIRR is 11.23 percent. 
E)  Yes; The MIRR is 14.45 percent.

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

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 20

The average accounting rate of return (AAR):

Accepted Answer

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.

Exam 9: Net Present Value and Other Investment Criteria