Question 1

The Winston Co.is considering two mutually exclusive projects with the following cash flows.The incremental IRR is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted. $\begin{array}{cll}
\underline{\text { Year }} & \begin{array}{l}
\text { Project A } \
\underline{\text { Cash Flow }}
\end{array} & \begin{array}{l}
\text { Project B } \
\underline{\text { Cash Flow }}
\end{array} \
 0 &-\$75,000 &-\$60,000\
1 & \$30,000 & \$ 25,000 \
2 & \$ 35,000 & \$ 30,000 \
3 & \$35,000 & \$ 25,000
\end{array}$

Accepted Answer

A) 13.94%; A 
B) 13.94%; B 
C) 15.44%; A 
D) 15.44%; B 
E) 15.86%; A

Question 2

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%. $$\begin{array} { c l } 
\text { Year } & \text { Cash Inflows } \
\hline 1 & \$ 4,375 \
2 & \$ \quad 0 \
3 & \$ 8,750 \
4 & \$ 4,100
\end{array}$$

Accepted Answer

A) $218.68 
B) $370.16 
C) $768.20 
D) $1,249.65 
E) $1,371.02

Question 3

The discounted payback period rule:

Accepted Answer

A) considers the time value of money. 
B) discounts the cutoff point. 
C) ignores uncertain cash flows. 
D) is preferred to the NPV rule. 
E) None of the above.

Question 4

You are considering a project with an initial cost of $4,300.What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year over the next four years?

Accepted Answer

A) 2.04 years 
B) 2.36 years 
C) 2.89 years 
D) 3.04 years 
E) 3.36 years

Question 5

The payback period rule is a convenient and useful tool because:

Accepted Answer

A) it provides a quick estimate of how rapidly the initial investment will be recouped. 
B) results of a short payback rule decision will be quickly seen. 
C) it does not have to take into account time value of money. 
D) All of the above. 
E) None of the above.

Question 6

The internal rate of return is:

Accepted Answer

A) more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects. 
B) equivalent to the discount rate that makes the net present value equal to one. 
C) difficult to compute without the use of either a financial calculator or a computer. 
D) dependent upon the interest rates offered in the marketplace. 
E) a better methodology than net present value when dealing with unconventional cash flows.

Question 7

The profitability index is the ratio of:

Accepted Answer

A) average net income to average investment. 
B) internal rate of return to current market interest rate. 
C) net present value of cash flows to internal rate of return. 
D) net present value of cash flows to return on equity. 
E) present value of cash flows to initial investment cost.

Question 8

Which of the following methods of project analysis are biased towards short-term projects?
I.internal rate of return
II.net present value
III.payback
IV.discounted payback

Accepted Answer

A) I and II only 
B) III and IV only 
C) II and III only 
D) I and IV only 
E) II and IV only

Question 9

Using internal rate of return, a conventional project should be accepted if the internal rate of return is:

Accepted Answer

A) equal to the discount rate. 
B) greater than the discount rate. 
C) less than the discount rate. 
D) negative. 
E) positive.

Question 10

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300.The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year.The interest rate is 12%.Calculate the project's Discounted Payback and Profitability Index assuming end of year cash flows.Should the project be taken? If the Average Accounting Return was positive, how would this affect your decision?

Accepted Answer

The answer of The Ziggy Trim and Cut Company can...

Question 11

What is the net present value of a project with the following cash flows and a required return of 12%? $$\begin{array} { c c } 
\text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 28,900 \
1 & \$ 12,450 \
2 & \$ 19,630 \
3 & \$ 2,750
\end{array}$$

Accepted Answer

A) -$287.22 
B) -$177.62 
C) $177.62 
D) $204.36 
E) $287.22

Question 12

You are trying to determine whether to accept project A or project B.These projects are mutually exclusive.As part of your analysis, you should compute the incremental IRR by determining:

Accepted Answer

A) the internal rate of return for the cash flows of each project. 
B) the net present value of each project using the internal rate of return as the discount rate. 
C) the discount rate that equates the discounted payback periods for each project. 
D) the discount rate that makes the net present value of each project equal to 1. 
E) the internal rate of return for the differences in the cash flows of the two projects.

Question 13

Jack is considering adding toys to his general store.He estimates that the cost of inventory will be $4,200.The remodeling and shelving costs are estimated at $1,500.Toy sales are expected to produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years, respectively.Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

A) yes; because the payback period is 2.94 years. 
B) yes; because the payback period is 2.02 years. 
C) yes; because the payback period is 3.80 years. 
D) no; because the payback period is 2.02 years. 
E) no; because the payback period is 3.80 years.

Question 14

Net present value:

Accepted Answer

A) cannot be used when deciding between two mutually exclusive projects. 
B) is more useful to decision makers than the internal rate of return when comparing different sized projects. 
C) is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management. 
D) is not an as widely used tool as payback and discounted payback. 
E) is very similar in its methodology to the average accounting return.

Question 15

The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.

Accepted Answer

A) net present value profiling 
B) operational ambiguity 
C) mutually exclusive investment decision 
D) issues of scale 
E) multiple rates of return

Question 16

A project has an initial cost of $8,500 and produces cash inflows of $2,600, $4,900, and $1,500 over the next three years, respectively.What is the discounted payback period if the required rate of return is 7%?

Accepted Answer

A) 2.13 years 
B) 2.33 years 
C) 2.67 years 
D) 2.91 years 
E) never

Question 17

Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years.The expected cash flows in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000.The total cash inflow is expected to be $22,000 or an average of $4,400 per year.Compute the payback period in years.

Accepted Answer

A) 3.18 years 
B) 3.82 years 
C) 4.00 years 
D) 4.55 years 
E) None of the above

Question 18

Yancy is considering a project which will produce cash inflows of $900 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,800.What is the discounted payback period?

Accepted Answer

A) 3.11 years 
B) 3.18 years 
C) 3.82 years 
D) 4.18 years 
E) never

Question 19

You are analyzing two mutually exclusive projects and have developed the following information.What is the incremental IRR? $\begin{array}{cll}
\underline{\text { Year }} & \begin{array}{l}
\text { Project A } \
\underline{\text { Cash Flow }}
\end{array} & \begin{array}{l}
\text { Project B } \
\underline{\text { Cash Flow }}
\end{array} \
 0 &-\$ 84,500 &-\$76,900\
1 & \$ 29,000 & \$ 25,000 \
2 & \$ 40,000 & \$ 35,000 \
3 & \$ 27,000 & \$ 26,000
\end{array}$

Accepted Answer

A) 11.11% 
B) 13.01% 
C) 14.91% 
D) 16.75% 
E) 17.90%

Question 20

If there is a conflict between mutually exclusive projects due to the IRR, one should:

Accepted Answer

A) drop the two projects immediately. 
B) spend more money on gathering information. 
C) depend on the NPV as it will always provide the most value. 
D) depend on the payback because it does not suffer from these same problems. 
E) None of the above.

Exam 5: Net Present Value and Other Investment Rules

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%. $\begin{array} { c l } \text { Year } & \text { Cash Inflows } \\\hline 1 & \$ 4,375 \\2 & \$ \quad 0 \\3 & \$ 8,750 \\4 & \$ 4,100\end{array}$