Question 1

A project has an initial cost of £1,900.The cash inflows are £0,£500,£900,and £700 over the next four years,respectively.What is the payback period?
A)2.71 years.
B)2.98 years.
C)3.11 years.
D)3.71 years.
E)never.

Accepted Answer

The answer of A project has an initial cost of...

Question 2

Jack is considering adding toys to his general store.He estimates that the cost of inventory will be £4,200.The remodeling expenses 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?
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.

Accepted Answer

The total initial investment is $4,200 (inventory) + $1,500 (remodeling and shelving) = $5,700. The cash inflows over the first three years are $1,200 + $1,500 + $1,600 = $4,300. By the end of the third year, the investment hasn't been fully paid back, indicating a payback period longer than 3 years. Since Jack's requirement is a three-year payback period, the project does not meet his criteria.

Question 3

What is the internal rate of return on an investment with the following cash flows?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 123,400 \
\hline 1 & £ 36,200 \
\hline 2 & £ 54,800 \
\hline 3 & £ 48,100 \
\hline
\end{array}$
A)5.93%
B)5.96%
C)6.04%
D)6.09%
E)6.13%

Accepted Answer

The answer of What is the internal rate of return...

Question 4

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 8% ? Why or why not?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline  0& -£ 18,600 \
\hline 1 & £ 10,000 \
\hline 2 & £ 7,300 \
\hline 3 & £ 3,700\
\hline 
\end{array}$
A)yes; because the PI is 1.008
B)yes; because the PI is .992
C)yes; because the PI is .999
D)no; because the PI is 1.008
E)no; because the PI is .992

Accepted Answer

The answer of Based on the profitability index (PI)rule,should a...

Question 5

You are considering two independent projects both of which have been assigned a discount rate of 8% .Based on the profitability index,what is your recommendation concerning these projects?
$$\begin{array} { | l | l | l | } 
\hline \text { Year } & \text { Project A } & \text { Project } \mathbf { B } \
\hline 0 & \text { -£38,500 } & -£42,000 \
\hline 1 & £20,000 &£ 10,000 \
\hline 2 & £24,000 & £ 40,000 \
\hline
\end{array}$$
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.
C)You should accept both projects since both of their PIs are greater than 1.
D)You should only accept project B since it has the largest PI and the PI exceeds 1.
E)Neither project is acceptable.

Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Both projects have a PI greater than 1, indicating they are acceptable.

Question 6

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

Accepted Answer

The answer of You are considering a project with an...

Question 7

A project has an initial cost of £38,000 and a four-year life.The company usesstraight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is £1,000,£1,200,£1,500,and £1,700 a year for the next four years,respectively.What is the average accounting return?
A)3.55%
B)4.13%
C)4.28%
D)7.11%
E)14.21%

Accepted Answer

The answer of A project has an initial cost of...

Question 8

You are considering two mutually exclusive projects with the following cash flows.Will your choice between the two projects differ if the required rate of return is 8% rather than 11% ? If so,what should you do?
$\begin{array}{|l|l|l|}
\hline \text { Year } & \text { Project A } & \text { Project B } \
\hline 0 & -£ 240,000 & -£ 198,000 \
\hline 1 & £ 0 & £ 110,800 \
\hline 2 & £ 0 & £ 82,500 \
\hline 3 & £ 325,000 & £ 45,000 \
\hline
\end{array}$
A)yes; Select A at 8% and B at 11%.
B)yes; Select B at 8% and A at 11%.
C)yes; Select A at 8% and select neither at 11%.
D)no; Regardless of the required rate,project A always has the higher NPV.
E)no; Regardless of the required rate,project B always has the higher NPV.

Accepted Answer

At 8%, the NPV of Project A is £55,585, while the NPV of Project B is £14,284. Therefore, we should select Project A.
At 11%, the NPV of Project A is £11,367, while the NPV of Project B is £4,112. Therefore, we should select Project B.
Thus, the choice between the two projects depends on the required rate of return. At 8%, we should select Project A, and at 11%, we should select Project B.

Question 9

What is the net present value of a project with the following cash flows and a required return of 12%?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 28,900 \
\hline 1 & £ 12,450 \
\hline 2 & £ 19,630 \
\hline 3 & £ 2,750\
\hline
\end{array}$
A)-£287.22
B)-£177.62
C)£177.62
D)£204.36
E)£287.22

Accepted Answer

The answer of What is the net present value of...

Question 10

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

Accepted Answer

The answer of Yancy is considering a project which will...

Question 11

A project will produce cash inflows of £1,750 a year for four years.The project initially costs £10,600 to get started.In year five,the project will be closed and as a result should produce a cash inflow of £8,500.What is the net present value of this project if the required rate of return is 13.75%?
A)-£5,474.76
B)-£1,011.40
C)-£935.56
D)£1,011.40
E)£5,474.76

Accepted Answer

To calculate the net present value (NPV), we need to find the present value of all the cash inflows and outflows of the project using a discount rate of 13.75%.

Year 0: -$10,600 (initial cost)
Year 1: $1,750 ÷ (1+0.1375) = $1,537.39
Year 2: $1,750 ÷ (1+0.1375)² = $1,350.70
Year 3: $1,750 ÷ (1+0.1375)³ = $1,178.19
Year 4: $1,750 ÷ (1+0.1375)⁴ = $1,018.06
Year 5: $8,500 ÷ (1+0.1375)⁵ = $4,145.09

NPV = Present value of cash inflows - Present value of cash outflows
NPV = $1,537.39 + $1,350.70 + $1,178.19 + $1,018.06 + $4,145.09 - $10,600
NPV = -$935.56

Therefore, the net present value of this project is -$935.56, which means the project is not worth pursuing as it will result in a loss. Option B is the correct answer.

Question 12

Larry's Lanterns is considering a project which will produce sales of £240,000 a year for the next five years.The profit margin is estimated at 6% .The project will cost £290,000 and be depreciated straight-line to a book value of zero over the life of the project.Larry's has a required accounting return of 8%.This project should be _____ because the AAR is _____.
A)rejected; 4.14%
B)rejected; 6%
C)rejected; 8.28%
D)accepted; 8.28%
E)accepted; 9.93%

Accepted Answer

The answer of Larry's Lanterns is considering a project which...

Question 13

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?
A).86 years.
B)1.46 years.
C)1.86 years.
D)2.46 years.
E)2.86 years.

Accepted Answer

The payback period is the amount of time it takes to recover the initial investment.

Payback period = Initial investment / Annual cash inflow
Payback period = £2,600 / £1,400 = 1.86 years

Therefore, the best choice is C.

Question 14

You are considering an investment with the following cash flows.If the required rate of return for this investment is 13.5%,should you accept it based solely on the internal rate of return rule? Why or why not?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 12,000 \
\hline 1 & £ 5,500 \
\hline 2 & £ 8,000 \
\hline 3 & -£ 1,500 \
\hline
\end{array}$
A)yes; because the IRR exceeds the required return.
B)yes; because the IRR is a positive rate of return.
C)no; because the IRR is less than the required return.
D)no; because the IRR is a negative rate of return.
E)You can not apply the IRR rule in this case because there are multiple IRRs.

Accepted Answer

The cash flows have more than one sign change, indicating the possibility of multiple IRRs, making the IRR rule unreliable in this case.

Question 15

Ginny Trueblood is considering an investment which will cost her £120,000.The investment produces no cash flows for the first year.In the second year the cash inflow is £35,000.This inflow will increase to £55,000 and then £75,000 for the following two years before ceasing permanently.Ginny requires a 10% rate of return and has a required discounted payback period of three years.Ginny should _____ this project because the discounted payback period is _____.
A)accept; 2.03 years
B)accept; 2.97 years
C)accept; 3.97 years
D)reject; 3.03 years
E)reject; 3.97 years

Accepted Answer

The answer of Ginny Trueblood is considering an investment which...

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

Accepted Answer

The answer of A project has an initial cost of...

Question 17

You would like to invest in the following project. $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 55,000 \
\hline 1 & £ 30,000 \
\hline 2 & £ 37,000 \
\hline
\end{array}$$ Victoria,your boss,insists that only projects that can return at least £1.10 in today's dollars for every £1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:
A)accept the project because it returns almost £1.22 for every £1 invested.
B)accept the project because it has a positive PI.
C)accept the project because the NPV is £2,851.
D)reject the project because the PI is 1.05.
E)reject the project because the IRR exceeds 10% .

Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. Using a 10% discount rate, the present value of cash flows is approximately £57,750, leading to a PI of 1.05 (£57,750/£55,000), which is below the required 1.10.

Question 18

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%.
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Inflows } \
\hline 1 & £ 4,375 \
\hline 2 & £ 0 \
\hline 3 & £ 8,750 \
\hline 4 & £ 4,100\
\hline
\end{array}$
A)£218.68
B)£370.16
C)£768.20
D)£1,249.65
E)£1,371.02

Accepted Answer

The NPV is calculated by discounting each cash inflow at the required return rate and subtracting the initial outflow. The NPV is £218.68.

Question 19

What is the profitability index for an investment with the following cash flows given a 9% required return?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 21,500 \
\hline 1 & £ 7,400 \
\hline 2 & £ 9,800 \
\hline 3 & £ 8,900 \
\hline
\end{array}$
A).96
B).98
C)1.00
D)1.02
E)1.04

Accepted Answer

To calculate the profitability index (PI), we need to find the present value of each cash flow and then divide the sum of present values by the initial investment. Using a financial calculator or a spreadsheet, we can find the present values as follows:

PV of year 1 cash flow = 7,400 / (1 + 0.09)^1 = £6,789.17
PV of year 2 cash flow = 9,800 / (1 + 0.09)^2 = £7,547.02
PV of year 3 cash flow = 8,900 / (1 + 0.09)^3 = £6,651.87
PV of initial investment = -21,500

PI = (PV of cash flows / PV of initial investment) = (6,789.17 + 7,547.02 + 6,651.87) / 21,500 = 1.02

Since the PI is greater than 1, the investment is acceptable. Among the given answer choices, the closest one to 1.02 is D) 1.02, which is the correct answer. Therefore, the best choice is D) 1.02.

Question 20

An investment has the following cash flows.Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 24,000 \
\hline 1 & £ 8,000 \
\hline 2 & £ 12,000 \
\hline 3 & £ 9,000\
\hline
\end{array}$
A)yes; because the IRR exceeds the required return by about 0.39%.
B)yes; because the IRR is less than the required return by about 3.9%.
C)yes; because the IRR is positive.
D)no; because the IRR exceeds the required return by about 3.9%.
E)no; because the IRR is 9.89%.

Accepted Answer

To determine whether to accept this investment, we need to calculate its internal rate of return (IRR), which is the discount rate that makes the present value of the investment's cash flows equal to zero. Using a financial calculator or spreadsheet, we can find that the IRR of this investment is 9.89%, which is greater than the required return of 9.5%. Therefore, the project should be accepted, and the best answer is A.

Quiz 6: Net Present Value and Other Investment Rules

A project has an initial cost of £1,900.The cash inflows are £0,£500,£900,and £700 over the next four years,respectively.What is the payback period?

What is the internal rate of return on an investment with the following cash flows? $\begin{array}{|l|l|}\hline \text { Year } & \text { Cash Flow } \\\hline 0 & -£ 123,400 \\\hline 1 & £ 36,200 \\\hline 2 & £ 54,800 \\\hline 3 & £ 48,100 \\\hline\end{array}$

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,respectively.

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

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?

It will cost £2,600 to acquire a small ice cream cart.Cart sales are expected to be £1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

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%?

What is the profitability index for an investment with the following cash flows given a 9% required return? $\begin{array}{|l|l|}\hline \text { Year } & \text { Cash Flow } \\\hline 0 & -£ 21,500 \\\hline 1 & £ 7,400 \\\hline 2 & £ 9,800 \\\hline 3 & £ 8,900 \\\hline\end{array}$