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Payback is best used to evaluate which type of projects?


A) Low-cost, short-term
B) High-cost, short-term
C) Low-cost, long-term
D) High-cost, long-term
E) Any size of long-term project

F) A) and E)
G) B) and E)

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A

Explain why the net present value is considered to be the best method of analyzing an investment.

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The net present value considers all cash flows,the timing of each cash flow,the time value of money,and risks (via the required rate of return).

Today,Sweet Snacks is investing $491,000 in a new oven.As a result,the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years.How long must the firm wait until it recovers all of its initial investment?


A) 3.97 years
B) 4.18 years
C) 4.46 years
D) 4.70 years
E) The project never pays back.

F) None of the above
G) A) and B)

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What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?


A) $798.48
B) $1,240.23
C) $1,869.69
D) $2,111.41
E) $2,470.01

F) A) and B)
G) All of the above

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The average accounting return:


A) measures profitability rather than cash flow.
B) discounts all values to today's dollars.
C) is expressed as a percentage of an investment's current market value.
D) will equal the required return when the net present value equals zero.
E) is used more often by CFOs than the internal rate of return.

F) A) and E)
G) A) and C)

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If a project with conventional cash flows has a profitability index of 1.0,the project will:


A) never pay back.
B) have a negative net present value.
C) have a negative internal rate of return.
D) produce more cash inflows than outflows in today's dollars.
E) have an internal rate of return that equals the required return.

F) A) and E)
G) A) and D)

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An investment has an initial cost of $420,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not? An investment has an initial cost of $420,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not? A) Yes, because the AAR is equal to 16 percent B) Yes, because the AAR is greater than 16 percent C) Yes, because the AAR is less than 16 percent D) No, because the AAR is greater than 16 percent E) No, because the AAR is less than 16 percent


A) Yes, because the AAR is equal to 16 percent
B) Yes, because the AAR is greater than 16 percent
C) Yes, because the AAR is less than 16 percent
D) No, because the AAR is greater than 16 percent
E) No, because the AAR is less than 16 percent

F) B) and D)
G) A) and E)

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E

A proposed project requires an initial cash outlay of $849,000 for equipment and an additional cash outlay of $48,500 in year 1 to cover operating costs.During years 2 through 4,the project will generate cash inflows of $354,000 a year.What is the net present value of this project at a discount rate of 13 percent? Round your answer to the nearest whole dollar.


A) -$152,232
B) -$66,391
C) $67,333
D) $128,612
E) $239,602

F) A) and B)
G) A) and C)

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The net present value:


A) decreases as the required rate of return increases.
B) is equal to the initial investment when the internal rate of return is equal to the required return.
C) method of analysis cannot be applied to mutually exclusive projects.
D) is directly related to the discount rate.
E) is unaffected by the timing of an investment's cash flows.

F) A) and C)
G) A) and E)

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Ed has to choose between Project A and Project B,which are mutually exclusive.Project A has an initial cost of $28,000 and an internal rate of return of 16 percent.Project B has an initial cost of $47,000 and an internal rate of return of 12 percent.Explain why the selection of the project with the higher internal rate of return could be a faulty decision.

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0.16 × $28,000 = $4,480
0.12 ×...

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Quattro,Inc.has the following mutually exclusive projects available.The company has historically used a four-year cutoff for projects.The required return is 11 percent. Quattro,Inc.has the following mutually exclusive projects available.The company has historically used a four-year cutoff for projects.The required return is 11 percent. The payback for Project A is ____ while the payback for Project B is ____.The NPV for Project A is _____ while the NPV for Project B is ____.Which project,if any,should the company accept? A) 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B B) 3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only C) 3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only D) 4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B E) 4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects The payback for Project A is ____ while the payback for Project B is ____.The NPV for Project A is _____ while the NPV for Project B is ____.Which project,if any,should the company accept?


A) 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B
B) 3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only
C) 3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only
D) 4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B
E) 4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects

F) None of the above
G) D) and E)

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Delta Mu Delta is considering purchasing some new equipment costing $400,000.The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project.Projected net income for the four years is $18,900,$21,300,$26,700,and $25,000.What is the average accounting rate of return?


A) 11.49 percent
B) 11.63 percent
C) 12.01 percent
D) 12.49 percent
E) 13.20 percent

F) A) and D)
G) C) and D)

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Miller Brothers is considering a project that will produce cash inflows of $61,500,$72,800,$84,600,and $68,000 a year for the next four years,respectively.What is the internal rate of return if the initial cost of the project is $225,000?


A) 9.39 percent
B) 10.22 percent
C) 11.47 percent
D) 11.62 percent
E) 12.24 percent

F) None of the above
G) B) and E)

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Which one of the following defines the internal rate of return for a project?


A) Discount rate that creates a zero cash flow from assets
B) Discount rate that results in a zero net present value for the project
C) Discount rate that results in a net present value equal to the project's initial cost
D) Rate of return required by the project's investors
E) The project's current market rate of return

F) None of the above
G) C) and E)

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Which one of the following methods of analysis is most similar to computing the return on assets (ROA) ?


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

F) A) and E)
G) All of the above

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Which one of the following indicates that a project should be rejected?


A) Average accounting return that exceeds the requirement
B) Payback period that is shorter than the requirement period
C) Positive net present value
D) Profitability index less than 1.0
E) Internal rate of return that exceeds the required return

F) B) and D)
G) B) and C)

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Molly is considering a project with cash inflows of $918,$867,$528,and $310 over the next four years,respectively.The relevant discount rate is 10 percent.What is the net present value of this project if it the start-up cost is $2,100?


A) $59.50
B) $131.83
C) $148.08
D) $210.45
E) $229.50

F) A) and E)
G) C) and D)

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The modified internal rate of return is specifically designed to address the problems associated with which one of the following?


A) Mutually exclusive projects
B) Unconventional cash flows
C) Long-term projects
D) Negative net present values
E) Crossover points

F) B) and C)
G) B) and E)

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Chasteen,Inc.is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years.What is the internal rate of return?


A) 6.44 percent
B) 6.94 percent
C) 7.43 percent
D) 7.55 percent
E) 8.11 percent

F) A) and E)
G) C) and E)

Correct Answer

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The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?


A) One of the time periods within the investment period has a cash flow equal to zero.
B) The initial cash flow is negative.
C) The investment has cash inflows that occur after the required payback period.
D) The investment is mutually exclusive with another investment under consideration.
E) The cash flows are conventional.

F) A) and B)
G) C) and D)

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