Question 1

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 2

Rodriquez's Hot Rods is considering a new project with an initial cost of $54,780 and a discount rate of 14 percent.The project is expected to have cash inflows of $27,000 a year for 3 years.What is the discounted payback period?

Accepted Answer

A) 2.17 years 
B) 2.11 years 
C) 2.62 years 
D) 2.57 years 
E) Never

Question 3

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?

Accepted Answer

A) $2,405.66 
B) $1,608.14 
C) $1,919.08 
D) $2,134.85 
E) $2,671.02

Question 4

An investment is acceptable if the profitability index (PI)of the investment is

Accepted Answer

A) greater than one. 
B) less than one. 
C) greater than the internal rate of return (IRR). 
D) less than the net present value (NPV). 
E) greater than a prespecified rate of return.

Question 5

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 6

You are considering two independent projects that have a required return of 15 percent.Project A has an initial cost of $198,700 and cash inflows of $67,200,$109,600,and $88,700 for Years 1 to 3,respectively.Project B has an initial cost of $102,000 and cash inflows of $37,600 and $91,200 for Years 1 and 2,respectively.Given this information,which one of the following statements is correct based on the NPV and IRR methods of analysis?

Accepted Answer

A) You should accept both projects. 
B) You should accept Project A and reject Project B. 
C) You should accept Project B and reject Project A. 
D) NPV indicates accept Project A while IRR indicates accepting Project B. 
E) You should reject both projects.

Question 7

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 8

Assume a project has normal cash flows and a positive (non-zero)net present value.The project's

Accepted Answer

A) profitability index will be less than 1. 
B) internal rate of return will exceed its required rate of return. 
C) costs exceed its benefits. 
D) discounted payback period will exceed the life of the project. 
E) payback period must equal the life of the project.

Question 9

Leo is considering adding a deli to his general store.The remodelling expenses and shelving costs are estimated at $27,500.Deli sales are expected to produce net cash inflows of $7,300,$8,600,$9,700,and $9,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?

Accepted Answer

A) Yes; because the payback period is 3.19 years 
B) Yes; because the payback period is 2.82 years 
C) No; because the project never pays back 
D) No; because the payback period is 2.82 years 
E) No; because the payback period is 3.19 years

Question 10

A project has an initial cost of $16,780 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?

Accepted Answer

A) 28.56% 
B) 34.13% 
C) 14.28% 
D) 27.11% 
E) 32.18%

Question 11

Baxter's Market is considering opening a new location with an initial cost of $139,200.This location is expected to generate cash flows of $22,400,$61,500,$37,800,and $21,000 in Years 1 to 4,respectively.What is the payback period?

Accepted Answer

A) 3.92 years 
B) 3.83 years 
C) 2.46 years 
D) 2.57 years 
E) 3.01 years

Question 12

Assume a project has an initial cost of $207,600 and cash flows of $62,100,$99,100,and $105,300 for Years 1 to 3,respectively.The required discount rate is 11 percent,the required payback period is 3 years,and the required AAR is 13 percent.Should this project be accepted based on the two most commonly used methods of analysis by large firms? Justify your answer.

Accepted Answer

A) Accept based on the positive NPV but reject based on the payback period. 
B) Accept based on the positive NPV and an IRR that exceeds the required discount rate. 
C) Reject based on the negative NPV and the long payback period. 
D) Accept based on payback and an IRR that exceeds the required discount rate. 
E) Reject based on the negative NPV and an IRR that is less than the required rate of return.

Question 13

The internal rate of return

Accepted Answer

A) is more reliable as a decision making tool than net present value when considering mutually exclusive projects. 
B) is the discount rate that makes the net present value of a project equal to one. 
C) is easier to apply than net present value when cash flows are unconventional. 
D) will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent. 
E) is influenced by daily changes in the market rate of interest.

Question 14

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?

Accepted Answer

A) 3.70 years 
B) 3.91 years 
C) 3.82 years 
D) 3.64 years 
E) Never

Question 15

You know that two mutually exclusive projects are of different sizes.The smaller project is known to have a positive NPV.Which one of these accurately describes a method of properly determining which one,if either,project should be accepted?

Accepted Answer

A) Select the project with the higher internal rate of return 
B) Accept the project with the shorter payback period 
C) Accept the larger project if the incremental IRR exceeds the discount rate 
D) Select the project with the higher profitability index 
E) Accept the smaller project without any further analysis

Question 16

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 17

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the

Accepted Answer

A) net present value. 
B) payback period. 
C) internal rate of return. 
D) profitability index. 
E) discounted cash period.

Question 18

Project A has an initial cost of $211,400 and projected cash flows of $46,200,$64,900,and $135,800 for Years 1 to 3,respectively.Project B has an initial cost of $187,900 and projected cash flows of $43,200,$59,700,and $125,600 for Years 1 to 3,respectively.What is the incremental IRRA-B of these two mutually exclusive projects?

Accepted Answer

A) 8.67% 
B) −6.93% 
C) 11.06% 
D) −9.62% 
E) 9.37%

Question 19

Miller's is considering a 2-year expansion project that will require $398,000 up front.The project will produce cash flows of $361,000 and $114,000 for Years 1 and 2,respectively.Based on the profitability index (PI)rule,should the project be accepted if the discount rate is 12 percent? Should it be accepted if the discount rate is 17 percent?

Accepted Answer

A) Yes; Yes,because the PI is 1.2 
B) Yes; No,because the PI is 0.98 
C) No; Yes,because the PI is 0.98 
D) No; No,because the PI is 1.2 
E) Yes; Yes,because the PI is 1.19

Question 20

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?

Accepted Answer

A) Yes; the NPV is $1,108.15. 
B) Yes; the IRR is 12.97 percent. 
C) Yes; the IRR is 28.72 percent. 
D) Yes; the NPV is $1,409.27. 
E) No; the IRR is 12.94 percent.

Exam 7: Net Present Value and Other Investment Rules