Question 1

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$750
$300
$325
$350
A) 1.91 years
B) 2.12 years
C) 2.36 years
D) 2.59 years
E) 2.85 years

Accepted Answer

The answer of Poder Inc.is considering a project that has...

Question 2

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$500
$150
$200
$300
A) 2.03 years
B) 2.25 years
C) 2.50 years
D) 2.75 years
E) 3.03 years

Accepted Answer

To calculate payback, we add up the cash inflows until we reach the initial investment. 
For this project: 
Year 0: -$500 
Year 1: +$150 (Cumulative cash flow = -$350) 
Year 2: +$200 (Cumulative cash flow = -$150) 
Year 3: +$300 (Cumulative cash flow = $150) 
The payback period is the end of Year 2, plus the amount of time it takes to recover the remaining $150. 
Payback period = 2 + ($150/$200) = 2.75 years.

Question 3

In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.

Accepted Answer

Capital budgeting decisions should be based solely on forecasted cash flows and opportunity cost of capital because objectively evaluating potential projects based on these factors will lead to the most profitable decisions for the company. Personal tastes, accounting methods, and unrelated project profitability should not factor into the decision-making process.

Question 4

Shannon Co.is considering a project that has the following cash flow and cost of capital (r)data.What is the project's discounted payback?
R =
10)00%
Year
0
1
2
3
4
Cash flows
−$950
$525
$485
$445
$405
A) 1.61 years
B) 1.79 years
C) 1.99 years
D) 2.22 years
E) 2.44 years

Accepted Answer

The discounted payback period is the time it takes for the present value of cash inflows to cover the initial investment. By discounting each cash flow at 10% and summing them, the cumulative present value becomes positive between years 2 and 3, specifically at 2.22 years.

Question 5

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A) One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
B) If a project's payback is positive,then the project should be rejected because it must have a negative NPV.
C) The regular payback ignores cash flows beyond the payback period,but the discounted payback method overcomes this problem.
D) If a company uses the same payback requirement to evaluate all projects,say it requires a payback of 4 years or less,then the company will tend to reject projects with relatively short lives and accept long-lived projects,and this will cause its risk to increase over time.
E) The longer a project's payback period,the more desirable the project is normally considered to be by this criterion.

Accepted Answer

The regular payback method does not account for the time value of money, which means that it does not take into consideration the fact that money received in the future is worth less than money received today due to inflation and the opportunity cost of waiting for the cash flows.

Question 6

Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
4
5
Cash flows
−$1,100
$300
$310
$320
$330
$340
A) 2.31 years
B) 2.56 years
C) 2.85 years
D) 3.16 years
E) 3.52 years

Accepted Answer

The answer of Suzanne's Cleaners is considering a project that...

Question 7

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital,the payback method and NPV method would always lead to the same decision on which project to undertake.

Accepted Answer

While the payback method and NPV method may lead to the same decision in some cases, they can also lead to different decisions. The payback method only considers the time it takes to recoup the initial investment, while the NPV method takes into account the time value of money and the projected cash flows for the life of the project. Therefore, it is possible for the payback method to prefer a shorter-term project with lower returns, while the NPV method may favor a longer-term project with higher returns.

Question 8

Which of the following statements is CORRECT?
A) The discounted payback method eliminates all of the problems associated with the payback method.
B) When evaluating independent projects,the NPV and IRR methods often yield conflicting results regarding a project's acceptability.
C) To find the MIRR,we discount the TV at the IRR.
D) A project's NPV profile must intersect the X-axis at the project's cost of capital.
E) The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount,which the NPV method provides.

Accepted Answer

The IRR (Internal Rate of Return) method is indeed appealing to some managers because it provides a rate of return, which can be more intuitive or easier to compare across projects, unlike the NPV (Net Present Value) method that provides a dollar amount indicating the value added by the project.

Question 9

Craig's Car Wash Inc.is considering a project that has the following cash flow and cost of capital (r)data.What is the project's discounted payback?
R =
10)00%
Year
0
1
2
3
Cash flows
−$900
$500
$500
$500
A) 1.88 years
B) 2.09 years
C) 2.29 years
D) 2.52 years
E) 2.78 years

Accepted Answer

The answer of Craig's Car Wash Inc.is considering a project...

Question 10

Which of the following statements is CORRECT?
A) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The net present value method (NPV)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The modified internal rate of return method (MIRR)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E) The internal rate of return method (IRR)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

Accepted Answer

Among the given options, the net present value method (NPV) is generally regarded as the best single method for evaluating capital budgeting projects by academics. This is because it considers the time value of money and provides the actual dollar value that a project will generate in excess of the required return. The payback method does not consider the time value of money, while the discounted payback method considers the time value of money but does not provide the actual dollar value. The internal rate of return (IRR) and modified internal rate of return (MIRR) methods are popular but can have limitations in certain situations. Therefore, the NPV method is considered the most reliable method for evaluating capital budgeting projects.

Question 11

Which of the following statements is CORRECT?
A) The discounted payback method recognizes all cash flows over a project's life,and it also adjusts these cash flows to account for the time value of money.
B) The regular payback method was,years ago,widely used,but virtually no companies even calculate the payback today.
C) The regular payback is useful as an indicator of a project's liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D) The regular payback does not consider cash flows beyond the payback year,but the discounted payback overcomes this defect.
E) The regular payback method recognizes all cash flows over a project's life.

Accepted Answer

The regular payback method is still used as an indicator of a project's liquidity because it tells managers how long it will take to recover the initial investment in a project. However, it does not consider cash flows beyond the payback period. Discounted payback accounts for the time value of money but is not mentioned in the statement. Option A is incorrect as it mistakenly states that the regular payback is discounted. Option B is incorrect as it overgeneralizes the disuse of the method. Option D is incorrect as it incorrectly suggests that only discounted payback considers cash flows beyond the payback year. Finally, option E is incorrect as it is a false statement, stating that the regular payback method takes all cash flows into account.

Question 12

Garner Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$350
$200
$200
$200
A) 1.42 years
B) 1.58 years
C) 1.75 years
D) 1.93 years
E) 2.12 years

Accepted Answer

The project's payback period is the time it takes for the cumulative cash flows to equal the initial investment. After Year 1, the cumulative cash flow is $200. After Year 2, it is $400. The initial investment is $350, so the payback period is between Year 1 and Year 2. The remaining $150 ($350 - $200) is recovered in 0.75 of Year 2 ($150/$200), so the payback period is 1.75 years.

Question 13

McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback?
Year
0
1
2
3
Cash flows
−$1,150
$500
$500
$500
A) 1.86 years
B) 2.07 years
C) 2.30 years
D) 2.53 years
E) 2.78 years

Accepted Answer

To calculate payback, we need to determine the point in time when the initial investment is recovered.

Year 0: -$1,150
Year 1: $500  (Cumulative cash flow: -$650)
Year 2: $500 (Cumulative cash flow: -$150)
Year 3: $500 (Cumulative cash flow: $350)

The initial investment of $1,150 is recovered at the end of Year 2. Therefore, the payback period is 2 + (150/500) = 2.3 years. Choice C is the closest to this answer.

Question 14

Assume a project has normal cash flows.All else equal,which of the following statements is CORRECT?
A) A project's NPV increases as the cost of capital declines.
B) A project's MIRR is unaffected by changes in the cost of capital.
C) A project's regular payback increases as the cost of capital declines.
D) A project's discounted payback increases as the cost of capital declines.
E) A project's IRR increases as the cost of capital declines.

Accepted Answer

When the cost of capital declines, the required rate of return also declines, making it easier for the project to generate positive cash flows. This results in a higher net present value (NPV) because the discount rate used to calculate the NPV is lower. The other statements are incorrect: B is false because the modified internal rate of return (MIRR) is affected by changes in the cost of capital; C is false because the regular payback period decreases as the cost of capital declines, not increases; D is false because the discounted payback period decreases as the cost of capital declines, not increases; and E is false because the internal rate of return (IRR) is not necessarily affected by changes in the cost of capital.

Question 15

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Accepted Answer

The payback method focuses on how long it takes to recoup the initial investment, which can provide insight into a project's liquidity and risk.

Question 16

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?
A) It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
B) The firm will accept too many projects in all economic states because a 4-year payback is too low.
C) The firm will accept too few projects in all economic states because a 4-year payback is too high.
D) If the 4-year payback results in accepting just the right set of projects under average economic conditions,then this payback will result in too few long-term projects when the economy is weak.
E) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).

Accepted Answer

The answer of Suppose a firm relies exclusively on the...

Question 17

Which of the following statements is CORRECT?
A) For mutually exclusive projects with normal cash flows,the NPV and MIRR methods can never conflict,but their results could conflict with the discounted payback and the regular IRR methods.
B) Multiple IRRs can exist,but not multiple MIRRs.This is one reason some people favor the MIRR over the regular IRR.
C) If a firm uses the discounted payback method with a required payback of 4 years,then it will accept more projects than if it used a regular payback of 4 years.
D) The percentage difference between the MIRR and the IRR is equal to the project's cost of capital.
E) The NPV,IRR,MIRR,and discounted payback (using a payback requirement of 3 years or less)methods always lead to the same accept/reject decisions for independent projects.

Accepted Answer

Multiple IRRs can exist for projects with non-normal cash flows, but not for projects with normal cash flows. The MIRR method avoids this issue and always yields a single rate of return. This is one reason why some analysts prefer the MIRR over the regular IRR method. The other statements are not correct.

Question 18

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

Accepted Answer

The discounted payback method still does not consider cash flows beyond the payback period; it merely discounts the cash flows to their present value within the payback period.

Question 19

Which of the following statements is NOT a disadvantage of the regular payback method?
A) Ignores cash flows beyond the payback period.
B) Does not directly account for the time value of money.
C) Does not provide any indication regarding a project's liquidity or risk.
D) Does not take account of differences in size among projects.
E) Lacks an objective,market-determined benchmark for making decisions.

Accepted Answer

The regular payback method does not provide any indication regarding a project's liquidity or risk, but this is not a disadvantage of the method. The regular payback method has other disadvantages, such as ignoring cash flows beyond the payback period and not directly accounting for the time value of money. It also does not take account of differences in size among projects, and lacks an objective, market-determined benchmark for making decisions.

Question 20

Which of the following statements is CORRECT?
A) One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.
B) If a project's payback is positive,then the project should be accepted because it must have a positive NPV.
C) The regular payback ignores cash flows beyond the payback period,but the discounted payback method overcomes this problem.
D) One drawback of the discounted payback is that this method does not consider the time value of money,while the regular payback overcomes this drawback.
E) The shorter a project's payback period,the less desirable the project is normally considered to be by this criterion.

Accepted Answer

The regular payback method only considers the time it takes for a project to recover its initial investment but ignores any cash flows beyond that period.

Quiz 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Poder Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$750 $300 $325 $350

Worthington Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$500 $150 $200 $300

In theory,capital budgeting decisions should depend solely on forecasted cash flows and the opportunity cost of capital.The decision criterion should not be affected by managers' tastes,choice of accounting method,or the profitability of other independent projects.

Shannon Co.is considering a project that has the following cash flow and cost of capital (r) data.What is the project's discounted payback? R = 10) 00% Year 0 1 2 3 4 Cash flows −$950 $525 $485 $445 $405

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.

Suzanne's Cleaners is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 4 5 Cash flows −$1,100 $300 $310 $320 $330 $340

If you were evaluating two mutually exclusive projects for a firm with a zero cost of capital,the payback method and NPV method would always lead to the same decision on which project to undertake.

Which of the following statements is CORRECT?

Craig's Car Wash Inc.is considering a project that has the following cash flow and cost of capital (r) data.What is the project's discounted payback? R = 10) 00% Year 0 1 2 3 Cash flows −$900 $500 $500 $500

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Garner Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$350 $200 $200 $200

McGlothin Inc.is considering a project that has the following cash flow data.What is the project's payback? Year 0 1 2 3 Cash flows −$1,150 $500 $500 $500

Assume a project has normal cash flows.All else equal,which of the following statements is CORRECT?

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?

Which of the following statements is CORRECT?

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.

Which of the following statements is NOT a disadvantage of the regular payback method?

Which of the following statements is CORRECT?