Question 1

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { l c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \
\hline
\end{array}$$

Accepted Answer

A) Discounted payback = 4.25 years; accept the project 
B) Discounted payback = 3.50 years; accept the project 
C) Discounted payback > 5 years; reject the project 
D) Discounted payback = 4.67 years; reject the project

Question 2

Under what conditions can a rate-based statistic yield a different accept/reject decision than NPV?

Accepted Answer

A) Independent projects that are evaluated at a high cost of capital. 
B) Mutually exclusive projects that are evaluated at a low cost of capital. 
C) Any projects that exhibit differences in scale or timing. 
D) Mutually exclusive projects that exhibit differences in scale or timing.

Question 3

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent. $$\begin{array} { l c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 \
\hline \text { Cash Flow } & \$ 8,000 & \$ 3,350 & \$ 4,180 & \$ 1,520 & \$ 2,000
\end{array}$$

Accepted Answer

A)  $894.37 
B)  $993.97 
C)  $964.72 
D)  $1,008.03

Question 4

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { l c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \
\hline
\end{array}$$

Accepted Answer

A) PI = 6.94 percent; reject the project 
B) PI = 7.52 percent; reject the project 
C) PI = 23.61 percent; accept the project 
D) PI = 35.33 percent; accept the project

Question 5

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 1,000 & 300 & 400 & 700 \
\text { Project B Cash Flow } & - 500 & 200 & 400 & 300 \
\hline
\end{array}$$

Accepted Answer

A) Accept both A and B 
B) Accept neither A nor B 
C) Accept A, reject B 
D) Reject A, accept B

Question 6

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Accepted Answer

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

Question 7

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 100 & 75 & 100 & 300 & 75 & 200 \
\hline
\end{array}$$

Accepted Answer

A) 1.25 years, reject 
B) 1.25 years, accept 
C) 1.33 years, accept 
D) 2.25 years, accept

Question 8

The least-used capital budgeting technique in industry is:

Accepted Answer

A) NPV. 
B) IRR. 
C) P\payback. 
D) MIRR.

Question 9

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Accepted Answer

A) time value of money. 
B) market rates of return. 
C) cash flows that occur after payback. 
D) cash flows that occur during payback.

Question 10

Which of the following statements is correct?

Accepted Answer

A) A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback. 
B) Discounted payback uses a more aggressive reinvestment rate assumption than payback. 
C) Neither payback nor discounted payback uses time value of money concepts. 
D) None of the statements are correct.

Question 11

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.
 $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \
\hline
\end{array}$$

Accepted Answer

A) (-1.21 percent, reject) 
B) 1.08 percent, accept 
C) 1.21 percent, accept 
D) 121 percent, accept

Question 12

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. 
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000 \
\hline
\end{array}$$

Accepted Answer

A) (-0.39 percent, reject) 
B) 0.39 percent, accept 
C) (-38.88 percent, reject) 
D) 38.88 percent, accept

Question 13

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. $$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & \
\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \
\hline
\end{array}$$

Accepted Answer

A) 12.00 percent, reject 
B) 31.21 percent, accept 
C) 54.22 percent, accept 
D) 80.67 percent, accept

Question 14

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { l c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \
\hline
\end{array}$$

Accepted Answer

A) MIRR = 13.59 percent; accept the project 
B) MIRR = 7.96 percent; reject the project 
C) MIRR = 7.19 percent; reject the project 
D) MIRR = 12.58 percent; accept the project

Question 15

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 5,000 & 1,000 & 1,000 & 0 & 2,000 & 2,000 \
\hline
\end{array}$$

Accepted Answer

A) 7.62 percent, accept 
B) 7.62 percent, reject 
C) 47.09 percent, accept 
D) 47.09 percent, reject

Question 16

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { l c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\hline \text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$

Accepted Answer

A) IRR = 16.92 percent; accept the project 
B) IRR = 7.123 percent; reject the project 
C) IRR = 8.81 percent; reject the project 
D) IRR = 10.59 percent; accept the project

Question 17

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time:
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash flow: } & - 75 & - 75 & 0 & 100 & 75 & 50 \
\hline
\end{array}$$

Accepted Answer

A) $12.93 
B) $14.22 
C) $62.07 
D) $136.90

Question 18

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Accepted Answer

A) Expected cash flows 
B) Time line cash flows 
C) Non-normal cash flows 
D) Normal cash flows

Question 19

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

Accepted Answer

A) The discounted payback will be greater than zero. 
B) It will have a PI and NPV of zero. 
C) The NPV and IRR will yield the same decision. 
D) The IRR will just equal the cost of capital.

Question 20

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT:

Accepted Answer

A) MIRR. 
B) profitability index. 
C) discounted payback. 
D) NPV.

Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria