Question 1

A project has an initial cost of $10,800 and produces cash inflows of $4,100,$4,800,and $5,600 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 11 percent?

Accepted Answer

A)  2.13 years
B)  2.34 years
C)  2.78 years
D)  2.91 years
E)  Never C

Question 2

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. D

Question 3

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)  bias towards liquidity.
C)  difficulty of use.
D)  arbitrary cutoff point.
E)  consideration of all relevant cash flows. B

Question 4

Which one of the following is the best example of two mutually exclusive projects?

Accepted Answer

A)  Building a warehouse and a retail outlet side by side on company property
B)  Buying sufficient inventory to stock both the warehouse and the retail outlet
C)  Using the company's sales force to sell items to both individuals and other retailers
D)  Assigning an employee to work in the retail outlet rather than in the warehouse
E)  Acquiring a computer program to track inventory throughout the warehouse and retail store

Question 5

Benji's has an opportunity with an initial cash flow of $48,900 and future cash flows of -$31,300 in Year 1 and -$21,600 in Year 2.The discount rate is 7 percent.Should this project be accepted or rejected? Why?

Accepted Answer

A)  Accepted;because the IRR of 5.28 percent is less than the discount rate
B)  Accepted;because the IRR of 5.77 percent is less than the discount rate
C)  Rejected: because the IRR of 5.28 percent is less than the discount rate
D)  Rejected;because the IRR of 5.77 percent is less than the discount rate
E)  Rejected;because the IRR of 6.01 percent is less than the discount rate

Question 6

A project has an initial cost of $68,300 and cash flows of $38,700,$102,300,and -$18,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 8.7 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 7

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 8

Provide an example where payback should be used as the primary determination of whether or not a project should be accepted.

Accepted Answer

The answer of Provide an example where payback should be...

Question 9

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 IRR's will this project have?

Accepted Answer

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

Question 10

It will cost $3,200 to acquire a small ice cream cart.Cart sales are expected to be $1,500 a year for three years.After the three years,the cart is expected to be worthless.What is the payback period?

Accepted Answer

A)  1.88 years
B)  2.07 years
C)  2.13 years
D)  2.46 years
E)  3.13 years

Question 11

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 12

What is the internal rate of return on an investment that has an initial cost of $38,400 and projected cash inflows of $11,200,$19,600,and $18,100 for Years 1 to 3,respectively?

Accepted Answer

A)  11.86%
B)  12.37%
C)  11.08%
D)  13.92%
E)  12.15%

Question 13

You are considering a project with the following data: IRR = 8.7 percent;PI = .98;NPV = -$393;Payback period = 2.44 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 must have been less than 8.7 percent.
B)  The discounted payback period will have to be less than 2.44 years.
C)  The discount rate used to compute the profitability ratio was equal to the internal rate of return.
D)  This project should be accepted based on the profitability ratio.
E)  The required rate of return must be greater than 8.7 percent.

Question 14

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 15

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $77,400,$21,300 and -$6,200 for Years 1 to 3,respectively.The initial cash outlay is $84,900 and the discount rate is 11 percent.What is the modified IRR?

Accepted Answer

A)  7.77%
B)  8.13%
C)  8.26%
D)  8.67%
E)  8.79%

Question 16

Uptown Developers is considering two projects.Project A consists of building a wholesale book outlet on the firm's downtown lot.Project B consists of building a sit-down restaurant on that same lot.The lot can only accommodate one of the projects.When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from which one of these methods?

Accepted Answer

A)  Profitability index
B)  Internal rate of return
C)  Payback
D)  Net present value
E)  Accounting rate of return

Question 17

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 18

A project requires an initial investment of $21,600 and will produce cash inflows of $4,900,$14,200,and $8,700 over the next three years,respectively.What is the project's NPV at a required return of 14 percent?

Accepted Answer

A)  -$287.22
B)  -$503.06
C)  $6,200.00
D)  $21,096.94
E)  $42,696.94

Question 19

Which one of these methods uses accounting values rather than financial values?

Accepted Answer

A)  AAR
B)  IRR
C)  NPV
D)  PI
E)  Discounted payback

Question 20

Project Water has an initial cost of $639,700 and projected cash flows of $288,000,$319,000,and $165,000 for Years 1 to 3,respectively.Project Aqua has an initial cost of $411,200 and projected cash flows of $186,000,$178,000,and $145,000 for Years 1 to 3,respectively.What is the incremental IRR of these two mutually exclusive projects?

Accepted Answer

A)  8.67%
B)  10.93%
C)  8.77%
D)  1.06%
E)  2.335

Exam 7: Net Present Value and Other Investment Rules