Question 1

Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?

Accepted Answer

A) 65.28% 
B) 24.79% 
C) 38.03% 
D) 56.65% 
E) 20.04%

Question 2

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

Accepted Answer

A) Net present value and internal rate of return 
B) Payback and discounted payback 
C) Accounting rate of return and internal rate of return 
D) Payback and accounting rate of return 
E) Internal rate of return and discounted payback

Question 3

The value of a firm

Accepted Answer

A) increases when a new project with a negative net present value is accepted. 
B) equals the sum of the individual values of the firm's projects and divisions. 
C) is unaffected by the value of any one individual project. 
D) increases anytime a project with a zero net present value is accepted. 
E) is equal to the sum of all of the future cash flows derived from the firm's projects.

Question 4

A new product has start-up costs of $389,200 and projected cash flows of $102,000,$187,500,and $245,000 for Years 1 to 3,respectively.What is the profitability index given a required return of 14 percent?

Accepted Answer

A) 0.98 
B) 0.83 
C) 1.16 
D) 1.03 
E) 1.21

Question 5

Two key weaknesses of the internal rate of return rule are the

Accepted Answer

A) arbitrary determination of a discount rate and failure to consider initial expenditures. 
B) failure to correctly analyze mutually exclusive projects and the multiple rate of return problem. 
C) failure to consider all cash flows and the multiple rate of return problem. 
D) failure to consider initial expenditures and failure to correctly analyze mutually exclusive projects. 
E) failure to correctly analyze mutually exclusive projects and the lack of a clear-cut decision rule.

Question 6

Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as

Accepted Answer

A) (Sum of all net income / 5)/ ($48,000 / 2) 
B) (Sum of all net income / 2)/ ($48,000 / 2) 
C) ($48,000 / 5)/ (Sum of all net income / 5) 
D) ($48,000 / 2)/ (Sum of all net income / 2) 
E) (Sum of all net income / 5)/ $48,000

Question 7

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 8

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 9

When two projects can share the same economic resource,the projects are generally considered to be

Accepted Answer

A) mutually exclusive. 
B) independent. 
C) underfunded. 
D) inferior. 
E) financially equivalent.

Question 10

Project Water has an initial cost of $598,900 and projected cash flows of $302,000,$264,000,and $250,000 for Years 1 to 3,respectively.Project Aqua has an initial cost of $512,200 and projected cash flows of $290,000,$214,000,and $220,000 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) 2.75% 
D) 11.06% 
E) 4.37%

Question 11

A project has an initial cost of $12,100 and cash flows of -$2,100,$5,800,$16,600,and -$800 for Years 1 to 4,respectively.How many IRRs will this project have?

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) 4

Question 12

A project initially costs $40,500 and will not produce any cash flows for the first 2 years.Starting in Year 3,it will produce cash flows of $34,500 a year for 2 years.In Year 6,the project will end and should produce a final cash inflow of $12,000.What is the net present value of this project if the required rate of return is 18.5 percent?

Accepted Answer

A) $2,474.76 
B) $2,063.19 
C) $1,935.56 
D) $1,865.95 
E) $2,647.76

Question 13

If the discounted payback method is preferable to the payback method,then why is the payback method ever used?

Accepted Answer

A) The discounted payback requires an arbitrary cutoff point while payback does not. 
B) Payback is easier to compute than discounted payback. 
C) Payback considers all of a project's cash flows but discounted payback does not. 
D) Payback requires the initial investment be recovered during a project's life while the required discounted payback period may be shorter. 
E) Payback can be used with mutually exclusive projects but discounted payback cannot.

Question 14

You are considering two independent projects both of which have been assigned a discount rate of 12 percent.Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years.Based on the profitability index,what is your recommendation concerning these projects?

Accepted Answer

A) Accept both projects 
B) Accept Project B because it has the lower PI 
C) Accept Project A because it has the lower PI 
D) Accept Project A and reject Project B 
E) Reject Project A and accept Project B

Question 15

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 16

Assume you are looking at a graph that relates the net present value of two mutually exclusive investment projects to various discount rates.Assume the projects have differing cash flows and finite lives.Which one of these statements accurately reflects this graph?

Accepted Answer

A) The lines representing the projects will be upward sloping. 
B) If one project has equal cash flows for each year of its life,the line representing that project will be horizontal. 
C) The lines representing the projects will be parallel over multiple discount rates. 
D) The lines representing the projects must cross at a point where the NPV of each project is positive. 
E) The project lines will reflect lower NPV values at higher discount rates.

Question 17

A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project.If the firm requires a minimum average accounting return of 11.65 percent,what must be the minimum average net income for the project to be accepted?

Accepted Answer

A) $7,572.50 
B) $8,001.29 
C) $3,786.25 
D) $4,029.14 
E) $5,504.73

Question 18

All else constant,the net present value of a typical investment project increases when

Accepted Answer

A) the discount rate increases. 
B) each cash inflow is delayed by one year. 
C) the initial cost of a project increases. 
D) the rate of return decreases. 
E) all cash inflows are moved to the last year of the project.

Question 19

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.

Question 20

Two mutually exclusive projects produce the same positive NPV at a discount rate of 11.34 percent.Both projects have 4-year lives.Project A has larger cash flows than Project B in the first 2 years.Given this information,you know that

Accepted Answer

A) it makes no difference which project you accept as long as the discount rate does not exceed 11.34 percent. 
B) Project A should always be preferred. 
C) one project will be preferred at rates less than 11.34 percent and the other will be preferred at higher rates. 
D) Project B must require a smaller investment than Project A at Time 0. 
E) Project B should only be accepted if the discount rate is 11.34 percent.

Exam 7: Net Present Value and Other Investment Rules