Question 1

Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2,$36,000 in Year 3,and −$5,000 in Year 4.She requires a rate of return of 8 percent and has a required discounted payback period of three years.Should this project be accepted? Why?
A)Yes; The project pays back on a discounted basis within the assigned time period and also produces a positive NPV.
B)Yes; The discounted payback requirement is met and other methods of analysis are less desirable.
C)No; Although the project earns more than 8 percent,there is no situation where the project can pay back on a discounted basis within three years.
D)No; The discounted payback period is too short.
E)No; The NPV indicates rejection as does DPB when all cash flows are considered.

Accepted Answer

The answer of Ginny is considering an investment costing $55,000...

Question 2

Most financial experts will agree that net present value is the best capital budgeting method.However,even NPV can be unreliable when projecting project results.Explain why this is so.

Accepted Answer

The answer of Most financial experts will agree that net...

Question 3

Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,some financial decision-makers continue to use less desirable measures such as the payback method.Why do you think this is the case?

Accepted Answer

The answer of Given the goal of maximization of firm...

Question 4

You are considering two independent projects with the same discount rate of 11 percent.Project A costs $284,700 and has cash flows of $75,900,$106,400,and $159,800 for Years 1 to 3,respectively.Project B costs $115,000,and has a cash flow of $50,000 a year for Years 1 to 3.You have sufficient funds to finance any decision you make.Which project or projects,if either,should you accept and why?
A)Project A; because it is the larger-sized project with a positive IRR
B)Project A; because it has the larger NPV
C)Neither project; because their NPVs are less than their initial costs
D)Project B; because its IRR exceeds the discount rate
E)Both projects; because their NPVs are both positive

Accepted Answer

The answer of You are considering two independent projects with...

Question 5

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR).

Accepted Answer

The answer of List and briefly discuss the advantages and...

Question 6

Ted,a project manager,wants to invest in a project with an initial cost of $58,500 and cash flows of $32,400 and $38,500 in Years 1 and 2.Rosita,his boss,requires a discount rate of 10 percent and also a return of $1.10 in today's dollars for every $1 invested.Will Ted get his project approved? Why or why not?
A)Yes; because the NPV is positive
B)Yes; because the PI is greater than 1
C)Yes; because both criteria are met
D)No; because the project does not meet either requirement
E)No; while the project returns more than 10 percent it does meet $1.10 per $1 requirement.

Accepted Answer

The answer of Ted,a project manager,wants to invest in a...

Question 7

Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500,$15,600,and $22,700 for Years 1 to 3,respectively.Based on the profitability index rule,should the project be accepted if the discount rate is 9.5 percent? Why or why not?
A)Yes; because the PI is 1.03
B)Yes; because the PI is .95
C)Yes; because the PI is negative
D)No; because the PI is 1.03
E)No; because the PI is .95

Accepted Answer

The answer of Flo's Flowers has a proposed project with...

Question 8

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

Accepted Answer

The answer of Explain the differences and similarities between net...

Question 9

Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent.Project A costs $75,000 and has cash flows of $18,500,$42,900,and $28,600 for Years 1 to 3,respectively.Project B costs $72,000 and has cash flows of $22,000,$38,000,and $26,500 for Years 1 to 3,respectively.Using the IRR,which project,or projects,if either,should be accepted?
A)Accept both projects
B)Select either project as there is no significant difference between them
C)Accept Project A and reject Project B.
D)Accept Project B and reject Project A.
E)Reject both projects

Accepted Answer

The answer of Two mutually exclusive projects have 3-year lives...

Question 10

A proposed project costs $300 and has cash flows of $80,$200,$75,and $90 for Years 1 to 4,respectively.Because of its high risk,the project has been assigned a discount rate of 16 percent.In dollars,how much will this project return in today's dollars for every $1 invested?
A)$1.01
B)$.99
C)$1.05
D)$.97
E)$1.03

Accepted Answer

The project will return $1.05 in today's dollars for every $1 invested. The present value of the cash flows is $300 + $80/(1.16) + $200/(1.16)^2 + $75/(1.16)^3 + $90/(1.16)^4 = $315.52. The project will therefore return $1.05 in today's dollars for every $1 invested.

Question 11

Juan is considering two independent projects.Project A costs $74,600 and has projected cash flows of $18,700,$46,300,and $12,200 for Years 1 to 3,respectively.Project B costs $70,000 and has cash flows of $10,600,$15,800,and $67,900 for Years 1 to 3,respectively.Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B.Which project or projects,if either,should he accept based on the profitability index rule?
A)Accept both projects.
B)Accept Project A and reject Project B.
C)Accept either A or B,but not both.
D)Reject both projects.
E)Accept Project B and reject Project A.

Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. For Project A, the PI is less than 1, while for Project B, the PI is greater than 1. Therefore, Juan should accept Project B and reject Project A.

Question 12

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why IRR has some limitations NPV does not.

Accepted Answer

The answer of The IRR rule is said to be...

Question 13

A proposed new venture will cost $175,000 and should produce annual cash flows of $48,500,$85,000,$40,000,and $40,000 for Years 1 to 4,respectively.The required payback period is 3 years and the discounted payback period is 3.5 years.The required rate of return is 9 percent.Which methods indicate project acceptance and which indicate project rejection?
A) 
B) 
C) 
D) 
E)

Accepted Answer

The answer of A proposed new venture will cost $175,000...

Question 14

Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3.Project Y costs $40,700 and has cash flows of $12,000,$25,000,and $10,000 in Years 1 to 3,respectively.The discount rate is 6 percent and the projects are mutually exclusive.Based on the individual project's IRRs you should accept Project ________; based on NPV you should accept Project ________; the final decision should be to accept Project ________.
A)Y; Y; Y
B)Y; X; X
C)X; Y; Y
D)X; X; X
E)Y; X: Y

Accepted Answer

Project X has an IRR of approximately 20.04% and an NPV of approximately $2,148, while Project Y has an IRR of approximately 15.18% and an NPV of approximately $4,487.

Based on IRR, Project X appears to be the better choice, but when considering NPV, Project Y has a higher value. However, since the projects are mutually exclusive, only one can be selected.

Since Project Y has a higher NPV, it should be selected over Project X, and the final decision is to accept Project Y.

Question 15

Roy's Welding projects cash flows of $13,500,$20,400,and $32,900 for Years 1 to 3 for a project with an initial cost of $45,000.What is the profitability index given an assigned discount rate of 15 percent?
A).92
B).97
C)1.03
D)1.08
E)1.14

Accepted Answer

The answer of Roy's Welding projects cash flows of $13,500,$20,400,and...

Question 16

Anne is considering two independent projects with 2-year lives.Both projects have been assigned a discount rate of 13 percent.She has sufficient funds to finance one or both projects.Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2,respectively.Project B costs $41,000,and has cash flows of $25,000 and $22,000 for Years 1 and 2,respectively.Which project,or projects,if either,should you accept based on the profitability index method and what is the correct reason for that decision?
A)You should accept both projects since both of their PIs are positive.
B)You should accept Project A since it has the higher PI and you can only select one project.
C)You should accept both projects since both of their PIs are greater than 1.
D)You should only accept Project A since it is the only project with a PI greater than 1.
E)Neither project is acceptable.

Accepted Answer

The answer of Anne is considering two independent projects with...

Question 17

A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600,−$22,200,and −$18,000 for Years 1 to 3,respectively.The required rate of return is 13 percent.What is the internal rate of return? Should the project be accepted?
A)15.26 percent; accept
B)15.26 percent; reject
C)13.44 percent; reject
D)13.44 percent; accept
E)10.33 percent; accept

Accepted Answer

The answer of A financing project has an initial cash...

Question 18

Down Under Stores is considering an investment with an initial cost of $236,000.In Year 4,the project will require an additional investment and finally,the project will be shut down in Year 7.The annual cash flows for Years 1 to 7,respectively,are projected as $64,000,$87,000,$91,000,−$48,000,$122,000,$154,000,and −$30,000.If all negative cash flows are moved to Time 0 using a discount rate of 13 percent,what is the project's modified IRR?
A)15.44 percent
B)17.67 percent
C)18.54 percent
D)14.91 percent
E)22.08 percent

Accepted Answer

Using a financial calculator or spreadsheet, we can calculate the modified IRR to be 18.54 percent. This takes into account the negative cash flow in Year 4, which is moved to Time 0. The modified IRR is a more accurate measure of the project's profitability because it accounts for the time value of money and the timing of the project's cash flows. Therefore, the best choice is option C with a modified IRR of 18.54 percent.

Quiz 5: Net Present Value and Other Investment Rules

Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2,$36,000 in Year 3,and −$5,000 in Year 4.She requires a rate of return of 8 percent and has a required discounted payback period of three years.Should this project be accepted? Why?

Most financial experts will agree that net present value is the best capital budgeting method.However,even NPV can be unreliable when projecting project results.Explain why this is so.

Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,some financial decision-makers continue to use less desirable measures such as the payback method.Why do you think this is the case?

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR).

Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500,$15,600,and $22,700 for Years 1 to 3,respectively.Based on the profitability index rule,should the project be accepted if the discount rate is 9.5 percent? Why or why not?

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

A proposed project costs $300 and has cash flows of $80,$200,$75,and $90 for Years 1 to 4,respectively.Because of its high risk,the project has been assigned a discount rate of 16 percent.In dollars,how much will this project return in today's dollars for every $1 invested?

The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why IRR has some limitations NPV does not.

Roy's Welding projects cash flows of $13,500,$20,400,and $32,900 for Years 1 to 3 for a project with an initial cost of $45,000.What is the profitability index given an assigned discount rate of 15 percent?

A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600,−$22,200,and −$18,000 for Years 1 to 3,respectively.The required rate of return is 13 percent.What is the internal rate of return? Should the project be accepted?