Question 1

A project has an initial cost of $16,780 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?
A)28.56%
B)34.13%
C)14.28%
D)27.11%
E)32.18%

Accepted Answer

AAR = [($3,320 + $3,080 + $1,700)/ 3] / ($16,780 / 2)= 0.3218,or 32.18%

Question 2

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?
A)-$687.22
B)-$757.69
C)-$204.15
D)-$878.92
E)-$696.94

Accepted Answer

NPV = -$59,600 + $21,200 / 1.16 + $44,500 / 1.16² + $11,700 / 1.16³ = -$757.69

Question 3

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?
A)$2,405.66
B)$1,608.14
C)$1,919.08
D)$2,134.85
E)$2,671.02

Accepted Answer

NPV = -$22,400 + $13,400 / 1.155 + $13,400 / 1.155² + $7,500 / 1.155⁶ = $2,405.66

Question 4

A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?
A)13.46%
B)14.32%
C)13.98%
D)13.71%
E)14.62%

Accepted Answer

Average net income = ($10,500 + $15,700 + $16,200)/ 3 = $14,133.33
Average book value = ($210,000 + $140,007 + $46,662 + $15,561)/ 4 = $103,057.50
AAR = $14,133.33 / $103,057.50 = 0.1371,or 13.71%

Question 5

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

Accepted Answer

NPV = $0 = -$35,900 + $52,500 / (1 + IRR)+ $11,300 / (1 + IRR)² IRR = 65.28%

Question 6

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?
A)3)70 years
B)3)91 years
C)3)82 years
D)3)64 years
E)Never

Accepted Answer

Discounted Year 1 cash flow = $5,500 / 1.1125 = $4,943.82 Discounted Year 2 cash flow = $5,500 / 1.1125² = $4,443.88 Discounted Year 3 cash flow = $5,500 / 1.1125³ = $3,994.50 Discounted Year 4 cash flow = $5,500 / 1.1125⁴ = $3,590.56 Discounted payback period = 3 + ($15,900 - $4,943.82 - $4,443.88 - $3,994.50)/ $3,590.56 = 3.70 years

Question 7

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?
A)2)13 years
B)2)34 years
C)2)78 years
D)2)91 years
E)Never

Accepted Answer

Discounted Year 1 cash flow = $5,200 / 1.12 = $4,642.86 Discounted Year 2 cash flow = $5,300 / 1.12² = $4,225.13 Discounted Year 3 cash flow = $4,800 / 1.12³ = $3,416.55 Total discounted cash flows Years 1 to 3 = $4,642.86 + $4,225.13 + $3,416.55 = $12,284.54 The project never pays back on a discounted basis.

Question 8

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

Accepted Answer

NPV = -$40,500 + $34,500 / 1.1853 + $34,500 / 1.185⁴ + $12,000 / 1.185⁶ = $2,063.19

Question 9

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?
A)11.86%
B)12.37%
C)20.08%
D)13.92%
E)19.10%

Accepted Answer

NPV = $0 = -$63,100 + $18,700 / (1 + IRR)+ $38,600 / (1 + IRR)² + $34,100 / (1 + IRR)³ IRR = 19.10%

Question 10

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?
A)4)06 years
B)3)97 years
C)3)89 years
D)Never
E)3)81 years

Accepted Answer

Payback period = Never.The total cash inflows are less than the initial cost.

Question 11

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

Accepted Answer

AAR = .1165 = Average net income / ($65,000 + 0)/ 2
Average net income = $3,786.25

Question 12

You are considering two independent projects.The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B.Project A has an initial cost of $51,400 and cash inflows of $21,400,$24,900,and $22,200 for Years 1 to 3,respectively.Project B has an initial cost of $38,300 and cash inflows of $23,000 a year for 2 years.Which project(s),if either,should you accept?
A)Accept both A and B
B)Reject both A and B
C)Accept A and reject B
D)Accept B and reject A
E)Accept either A or B but not both A and B

Accepted Answer

NPV_A= -$51,400 + $21,400 / 1.1375 + $24,900 / 1.1375² + $22,200 / 1.1375³ = $1,740.62;Accept NPV_B = -$38,300 + $23,000 / 1.1425 + $23,000 / 1.1425² = -$548.32;Reject

Question 13

The Depot is considering a project with an initial cost for fixed assets of $279,900 and annual sales of $284,000 for four years.The profit margin is 6.72 percent,and the tax rate is 34 percent.The fixed assets will be depreciated straight-line over the life of the project to a zero book value.The required average accounting rate of return is 14.5 percent.Should this project be accepted or rejected? What is the AAR?
A)Rejected;14.81%
B)Rejected;13.68%
C)Rejected;15.03%
D)Accepted;14.81%
E)Accepted;13.68%

Accepted Answer

AAR = (0.0672 × $284,000)/ [($279,000 + 0)/ 2] = 0.1368,or 13.68%;Reject

Question 14

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?
A)2)68 years
B)2)07 years
C)2)75 years
D)2)46 years
E)Never

Accepted Answer

Payback period = $28,900 / $10,500 = 2.75 years

Question 15

Rodriquez's Hot Rods is considering a new project with an initial cost of $54,780 and a discount rate of 14 percent.The project is expected to have cash inflows of $27,000 a year for 3 years.What is the discounted payback period?
A)2)17 years
B)2)11 years
C)2)62 years
D)2)57 years
E)Never

Accepted Answer

Discounted Year 1 cash flow = $27,000 / 1.14 = $23,684.21 Discounted Year 2 cash flow = $27,000 / 1.14² = $20,775.62 Discounted Year 3 cash flow = $27,000 / 1.14³ = $18,224.23 Discounted payback period = 2 + ($54,780 - $23,684.21 - $20,775.62)/ $18,224.23 = 2.57 years

Question 16

A new project has an initial cost of $125,000 and cash flows of $33,300,$78,700,and $69,500 for Years 1 to 3,respectively.What is the net present value (NPV)of this project if the discount rate is 19.3 percent? What is the NPV if the discount rate is 12.7 percent?
A)$1,127.10;$17,209.11
B)-$859.11;$17,209.11
C)-$859.11;$15,062.34
D)$1,127.10;$17,388.09
E)-$604.17;$15,062.34

Accepted Answer

NPV_19.5% = -$125,000 + $33,300 / 1.193 + $78,700 / 1.193² + $69,500 / 1.193³ = -$859.11 NPV_12% = -$125,000 + $33,300 / 1.127 + $78,700 / 1.127² + $69,500 / 1.127³ = $15,062.34

Question 17

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?
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

Accepted Answer

Discounted cash flow Year 1 = $0 Discounted cash flow Year 2 = $48,700 / 1.11² = $39,526.01 Discounted cash flow Year 3 = $36,500 / 1.11³ = $26,688.49 Discounted cash flow Year 4 = $19,900 / 1.11⁴ = $13,108.75 Discounted payback period = 2 + ($65,500 - 0 - $39,526.01)/ $26,688.49)= 2.97 years;Accept

Question 18

Leo is considering adding a deli to his general store.The remodelling expenses and shelving costs are estimated at $27,500.Deli sales are expected to produce net cash inflows of $7,300,$8,600,$9,700,and $9,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?
A)Yes;because the payback period is 3.19 years
B)Yes;because the payback period is 2.82 years
C)No;because the project never pays back
D)No;because the payback period is 2.82 years
E)No;because the payback period is 3.19 years

Accepted Answer

Payback period = 3 + ($27,500 - $7,300 - $8,600 - $9,700)/ $9,750 = 3.19 years;Reject;The deli should not be added.

Question 19

Baxter's Market is considering opening a new location with an initial cost of $139,200.This location is expected to generate cash flows of $22,400,$61,500,$37,800,and $21,000 in Years 1 to 4,respectively.What is the payback period?
A)3)92 years
B)3)83 years
C)2)46 years
D)2)57 years
E)3)01 years

Accepted Answer

Payback period = 3 + ($139,200 - $22,400 - $61,500 - $37,800)/ $21,000 = 3.83 years

Question 20

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?
A)Yes;the NPV is $1,108.15.
B)Yes;the IRR is 12.97 percent.
C)Yes;the IRR is 28.72 percent.
D)Yes;the NPV is $1,409.27.
E)No;the IRR is 12.94 percent.

Accepted Answer

NPV = -$7,800 + $6,700 / 1.14 + $4,300 / 1.14² = $1,385.90 0 = -$7,800 + $6,700 / (1 + IRR)+ $4,300 / (1 + IRR)² IRR = 28.72%

Quiz 7: Net Present Value AMCQ Other Investment Rules

A project has an initial cost of $16,780 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?

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?

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?

Rodriquez's Hot Rods is considering a new project with an initial cost of $54,780 and a discount rate of 14 percent.The project is expected to have cash inflows of $27,000 a year for 3 years.What is the discounted payback period?

A new project has an initial cost of $125,000 and cash flows of $33,300,$78,700,and $69,500 for Years 1 to 3,respectively.What is the net present value (NPV) of this project if the discount rate is 19.3 percent? What is the NPV if the discount rate is 12.7 percent?

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?

Baxter's Market is considering opening a new location with an initial cost of $139,200.This location is expected to generate cash flows of $22,400,$61,500,$37,800,and $21,000 in Years 1 to 4,respectively.What is the payback period?

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?