Question 1

What is the profitability index for an investment with the following cash flows given a 9% required return? 
A).96
B).98
C)1.00
D)1.02
E)1.04

Accepted Answer

We need to calculate the present value of all cash flows and then divide it by the initial investment to calculate the Profitability index.

Year 0: -$10,000 
Year 1: $2,000/1.09 = $1,834.86 
Year 2: $3,000/1.09^2 = $2,519.83 
Year 3: $4,000/1.09^3 = $3,285.91 
Year 4: $5,000/1.09^4 = $4,125.98

Total PV of cash flows: $11,766.58

Profitability Index = PV of cash flows / Initial Investment 
= $11,766.58 / $10,000 
= 1.1767

Therefore, the Profitability Index is 1.02, which is the option D.

Since the Profitability Index is greater than 1, the investment would be considered acceptable, meaning that it would generate a positive net present value. Thus, the best choice would be to invest in this project.

Question 2

It will cost $3,000 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).83 years
B)1.14 years
C)1.83 years
D)2.14 years
E)2.83 years

Accepted Answer

Payback period= 2+ (3,000-2,800)/2,800 = 2.14 years

Question 3

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? 
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

The project should be accepted because the IRR of 9.89% exceeds the required return of 9.5%.

Question 4

The Camel Company is considering two mutually exclusive projects with the following cash flows.The incremental IRR is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted. 
A)13.94%;A
B)13.94%;B
C)15.44%;A
D)15.44%;B
E)15.86%;A

Accepted Answer

The crossover rate is 13.94%.At a rate higher than the crossover rate,such as 15%,Project B will have the higher NPV and should be accepted.

Question 5

Homer is considering a project which will produce cash inflows of $950 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,900.What is the discounted payback period?
A)3.05 years
B)3.74 years
C)3.81 years
D)3.92 years
E)never

Accepted Answer

Year Cash Flow Discounted cash flow1 950 871.562 950 799.603 950 733.574 950 673.00Discounted payback = 3+ (2,900-871.56-799.60-733.57)/673= 3.74

Question 6

Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years.The expected cash flows in years 1 and 2 are $5,000,in years 3 and 4 are $5,500 and in year 5 is $1,000.The total cash inflow is expected to be $22,000 or an average of $4,400 per year.Compute the payback period in years.
A)3.18 years
B)3.82 years
C)4.00 years
D)4.55 years
E)None of the above

Accepted Answer

Payback Period = ($5,000 + $5,000 + $5,500 = $15,500 for 3 years;remainder $20,000 - $15,500 = 4,500.$4,500/$5,500 = .81818 = .82)= Payback Period = 3.82 years

Question 7

You are analyzing two mutually exclusive projects and have developed the following information.What is the incremental IRR? 
A)11.11%
B)13.01%
C)14.91%
D)16.75%
E)17.90%

Accepted Answer

The answer of You are analyzing two mutually exclusive projects...

Question 8

You would like to invest in the following project. 
Camille,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

You should reject the project since the PI of 1.05 is less than Victoria's requirement of 1.10.It is worth mentioning that the NPV of this project is $2,851.24 and the IRR is 13.71%,both of which would normally indicate project acceptance.However,neither the NPV nor the IRR meet the requirement of returning $1.10 for every $1 spent.

Question 9

Based on the profitability index of _____ for this project,you should _____ the project.
A).97;accept
B)1.05;accept
C)1.18;accept
D).97;reject
E)1.05;reject

Accepted Answer

The answer of Based on the profitability index of _____...

Question 10

A project has an initial cost of $2,100.The cash inflows are $0,$500,$900,and $700 over the next four years,respectively.What is the payback period?
A)1 years
B)2 years
C)3 years
D)4 years
E)never

Accepted Answer

2,100-0-500-900-700=0Payback period = 4 years

Question 11

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively.What is the discounted payback period if the required rate of return is 8%?
A)2.05 years
B)2.13 years
C)2.33 years
D)3.00 years
E)never

Accepted Answer

The project never pays back on a discounted basis.DCF=3200/(1+.08)+ 4900/(1+.08)^2 + 1500/ (1+.08)^3DCF = $8,354.67,which is less than the initial cost of $8,600

Question 12

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? 
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

Since C0₃ is a negative value resulting in more than one sign change,there are multiple IRRs.Thus,the IRR rule does not apply.

Question 13

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

Jack should reject the toy project because the payback period exceeds 3 years.

Question 14

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?
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 15

Based on the internal rate of return of _____ for this project,you should _____ the project.
A)8.95%;accept
B)10.75%;accept
C)8.44%;reject
D)9.67%;reject
E)10.33%;reject

Accepted Answer

You should accept because the IRR of 10.75% exceeds the required return of 8.50%.

Question 16

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? 
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

Because the projects are independent and their PIs exceed 1.0,both projects should be accepted.

Question 17

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? 
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 profitability index (PI) is calculated as the present value of the future cash flows divided by the initial investment. In this case, the initial investment is -$10,000 (a negative number because it represents an outflow of cash), and the future cash flows are $2,000 in year 1, $2,500 in year 2, $3,000 in year 3, and $8,000 in year 4. Using a discount rate of 8%, the present value of these cash flows is $14,961.39. So, the PI is 1.496139, which is less than 1. This means that the project is not generating a return that is greater than the cost of capital, so it should not be accepted. Therefore, the best choice is E, no; because the PI is .992.

Question 18

Based on the payback period of _____ for this project,you should _____ the project.
A)1.87 years;accept
B)2.87 years;accept
C)2.87 years;reject
D)3.13 years;reject
E)3.87 years;reject

Accepted Answer

Based on payback,the project should be rejected because the payback period of 2.87 years exceeds the required period of 2.5 years.

Question 19

Based on the net present value of _____ for this project,you should _____ the project.
A)-$2,021.28;reject
B)-$406.19;reject
C)$7,978.72;accept
D)$9,836.74;accept
E)$12,684.23;accept

Accepted Answer

You should accept because the NPV is positive.

Question 20

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

Ginny should reject the project since the payback period of 3.97 years exceeds the required 3 years.

Quiz 5: Net Present Value and Other Investment Rules

What is the profitability index for an investment with the following cash flows given a 9% required return?

It will cost $3,000 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?

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?

The Camel Company is considering two mutually exclusive projects with the following cash flows.The incremental IRR is _ and if the required rate is higher than the crossover rate then project _ should be accepted.

Homer is considering a project which will produce cash inflows of $950 a year for 4 years.The project has a 9% required rate of return and an initial cost of $2,900.What is the discounted payback period?

You are analyzing two mutually exclusive projects and have developed the following information.What is the incremental IRR?

You would like to invest in the following project. Camille,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:

Based on the profitability index of _ for this project,you should _ the project.

A project has an initial cost of $2,100.The cash inflows are $0,$500,$900,and $700 over the next four years,respectively.What is the payback period?

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively.What is the discounted payback period if the required rate of return is 8%?

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?

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?

Based on the internal rate of return of _ for this project,you should _ the project.

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?

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?

Based on the payback period of _ for this project,you should _ the project.

Based on the net present value of _ for this project,you should _ the project.