Question 1

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?

Accepted Answer

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 2

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

Accepted Answer

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 3

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?

Accepted Answer

A) 2)68 years 
B) 2)07 years 
C) 2)75 years 
D) 2)46 years 
E) Never

Question 4

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?

Accepted Answer

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 5

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?

Accepted Answer

A) 2)13 years 
B) 2)34 years 
C) 2)78 years 
D) 2)91 years 
E) Never

Question 6

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?

Accepted Answer

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

Question 7

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?

Accepted Answer

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

Question 8

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

Accepted Answer

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 9

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?

Accepted Answer

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 10

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 IRRB-A?

Accepted Answer

A) 2)89% 
B) 4)07% 
C) 5)91% 
D) 6)75% 
E) 7)90%

Question 11

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?

Accepted Answer

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

Question 12

Analysis using the profitability index

Accepted Answer

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 13

The payback method is a convenient and useful tool because

Accepted Answer

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 14

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

Accepted Answer

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 15

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

Accepted Answer

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 16

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

Accepted Answer

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.

Question 17

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?

Accepted Answer

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 18

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

Accepted Answer

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 19

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?

Accepted Answer

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 20

The payback method

Accepted Answer

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.

Exam 7: Net Present Value AMCQ Other Investment Rules