Question 1

Nagle's Machinery is spending $97 500 to update its equipment.This is necessary if the firm wishes to be competitive in the market place and provide a wide array of product models.The company estimates that these updates will improve their cash inflows by $18 500 a year for five years.What is the payback period?
A)1.37 years
B)2.84 years
C)3.29 years
D)5.49 years
E)this project never pays back

Accepted Answer

E

Question 2

You are considering a project that has an initial outlay of $500 000.The project will generate cash inflows of $150 000 per year for four years,followed by $80 000 for one more year.Considering the discount rate of 10%,what is the profitability index?
A)0.95
B)0.97
C)1.00
D)1.05
E)1.36

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash inflows by the initial investment. The present value of cash inflows is calculated using the discount rate of 10%. The PI is greater than 1, indicating a potentially profitable project.

Question 3

You are using a net present value profile to compare two projects.At the point where the net present values of the two projects intersect,the:
A)net present value of each project is equal to zero
B)internal rate of return is equal to the required rate of return
C)relevant discount rate is called the crossover rate
D)internal rate of return of each project is equal to zero
E)the accounting rate of return of each project is equal to zero

Accepted Answer

The point where the net present values of the two projects intersect is called the crossover point, and the relevant discount rate at this point is called the crossover rate. This is the rate at which the net present values of the two projects are equal, and it indicates the point at which the two projects are equally attractive. Thus, the correct answer is C.

Question 4

The payback rule works best in evaluating which one of the following?
A)a low-cost project which pays back slowly
B)a low-cost project which pays back rapidly
C)a high-cost project with equal cash inflows over a long period of time
D)a high-cost project with increasing cash inflows over time
E)projects requiring significant research and development time

Accepted Answer

The payback rule is most appropriate for projects with a low cost that can pay back the investment rapidly. This is because the payback period rule only measures the time it takes for a project to recover its initial investment. A low-cost project that pays back rapidly is more likely to have a shorter payback period, making it easier to evaluate using this method. Higher-cost projects, or those with uneven cash inflows, are better evaluated using other methods such as net present value or internal rate of return.

Question 5

Sonny and James are both considering the same project with the cash flows shown below.Sonny is content earning 8 per cent on the project but James wants to earn at least 12 per cent.Who,if either,should accept this project?
A)Sonny,but not James
B)James,but not Sonny
C)Sonny,James can either accept or reject as his NPV is zero
D)neither Sonny nor James
E)both Sonny and James

Accepted Answer

To evaluate the project, we need to calculate the net present value (NPV) of the cash flows. Using an 8% discount rate, the NPV of the project is $1,017.36. However, using a 12% discount rate, the NPV of the project is -$407.56. This means that at a 12% discount rate, the project is not worth investing in as it would result in a negative NPV. Sonny, who is content earning 8%, can accept the project as it has a positive NPV at his desired rate of return. However, James will not accept the project as it does not meet his minimum required rate of return of 12%.

Question 6

Calculate the approximate internal rate of return given the following series of cash flows.
A)14.47%
B)15.80%
C)19.67%
D)17.92%
E)16.83%

Accepted Answer

The answer of Calculate the approximate internal rate of return...

Question 7

A net present value of zero implies that an investment:
A)has an initial cost of zero
B)has cash inflows which have a zero present value
C)has no expected impact on shareholders
D)does not pay back its initial cash outlay
E)has a profitability index that is less than 1.0

Accepted Answer

A net present value (NPV) of zero means that the investment is expected to generate cash flows that exactly cover the initial investment cost, resulting in no net gain or loss for shareholders.

Question 8

The net present value rule states that you should accept a project if the NPV:
A)is equal to zero or negative
B)exceeds the required rate
C)is less than 1.0
D)is positive
E)exceeds the initial cost

Accepted Answer

The NPV rule states that a project should be accepted if the net present value is positive, which means the expected future cash flows exceed the initial cost of the investment.

Question 9

The internal rate of return identifies:
A)the minimum acceptable discount rate
B)the benefit-cost ratio
C)the average profit from a project
D)none of the given answers
E)all of the given answers

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. It is the minimum acceptable discount rate because any discount rate higher than the IRR will result in a negative NPV, and any discount rate lower than the IRR will result in a positive NPV. The IRR is not the benefit-cost ratio, which is the ratio of the present value of the benefits of a project to the present value of the costs of the project. The IRR is also not the average profit from a project, which is the total profit from the project divided by the number of years of the project.

Question 10

Nawano is considering an investment of $200 000 with cash inflows of $80 000;$70 000;$75 000;$10 000 and $35 000 over the next five years,respectively.What is the net present value of this investment if the relevant discount rate is 11 per cent?
A)$63 063.10
B)$11 083.10
C)$17 008.60
D)$14 200.87
E)$44 151.62

Accepted Answer

The answer of Nawano is considering an investment of $200...

Question 11

Angie is evaluating a proposed project and wants to answer two questions.First,what is the market value of the project? Second,how much profit will the project produce in relation to its book value.To answer these two questions,Angie should use which one of the following sets of investment analysis methods?
A)internal rate of return and payback
B)payback and profitability index
C)net present value and average accounting return
D)net present value and payback
E)profitability index and net present value

Accepted Answer

The answer of Angie is evaluating a proposed project and...

Question 12

Your firm requires an average accounting return (AAR)of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-year life over which time it will be depreciated on a straight line basis to a zero book value.The annual net income from this project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?
A)yes;because the AAR is less than 15 per cent
B)yes;because the AAR is equal to 15 per cent
C)yes;because the AAR is greater than 15 per cent
D)no;because the AAR is less than 15 per cent
E)no;because the AAR is equal to 15 per cent

Accepted Answer

The AAR is calculated as the average annual net income divided by the initial investment. In this case, the average annual net income is ($5500 + $12400 + $17600) / 3 = $11833.33. The initial investment is $96000. Therefore, the AAR is $11833.33 / $96000 = 12.3%. Since the AAR is greater than the required 15%, the project should be accepted.

Question 13

Which one of the following defines the internal rate of return for a project?
A)a discount rate that creates a zero cash flow from assets
B)a discount rate which results in a zero net present value for the project
C)a discount rate which results in a net present value equal to the project's initial cost
D)a rate of return required by the project's investors
E)the project's current market rate of return

Accepted Answer

The internal rate of return (IRR) is the discount rate that results in a net present value (NPV) of zero for the project. In other words, it is the rate at which the present value of future cash inflows equals the present value of the project's initial investment. Therefore, option B is the correct definition of IRR. Option A is incorrect as it refers to a zero cash flow from assets, not NPV. Option C is incorrect as it assumes the NPV equals the initial cost, not zero. Option D is incorrect as it refers to the required rate of return by the investors, which may or may not be the same as the IRR. Option E is incorrect as it refers to the project's current market rate of return, which is not necessarily equal to the IRR.

Question 14

The payback method of analysis is the most beneficial in which one of the following situations?
A)a firm is considering a project that can easily be extended if it is profitable
B)a firm can either build a bowling alley or a miniature golf course on a piece of land,but not both
C)a ski resort is considering adding a golf course to increase revenues
D)a firm has free cash which can be invested but must be returned in time to meet a bond obligation two years from now
E)a firm is trying to decide between two projects with vastly different costs

Accepted Answer

The payback method of analysis is best used when a firm has a specific time constraint, such as the need to return free cash within a certain timeframe to meet a bond obligation. Therefore, choice D is the most appropriate situation for using the payback method.

Question 15

You are considering a project which has an internal rate of return that is equal to the required return.This means that:
A)the net present value is negative in an amount equal to the initial investment
B)the project is returning the minimal amount that is acceptable to you
C)the profitability index is greater than one
D)the average accounting return exceeds the project's required return
E)the project will lower the value of the firm

Accepted Answer

If the internal rate of return is equal to the required return, it means that the project is just returning the minimal amount that is acceptable to the investor. In other words, the project is not generating any excess returns above the required return. Therefore, the best choice is B. All other options are incorrect.

Question 16

If managers only invest in projects that have a profitability index greater than 1.0:
A)the firm will increase in value
B)the manager will be forced to explain to stockholders why the net worth of the firm is declining
C)the value of the firm's stock should remain constant
D)the cash flows of the firm should decrease
E)the net losses of the firm should increase

Accepted Answer

Only investing in projects with a profitability index greater than 1.0 means that the projects will generate more cash inflows than outflows, increasing overall profitability and value of the firm.

Question 17

Which one of the following best expresses two mutually exclusive investments?
A)constructing a theatre and a restaurant side by side
B)locating a restaurant inside a theatre building
C)building either a gas station or a restaurant on a corner lot
D)building both a restaurant and a parking lot on a vacant lot
E)building a parking lot for the benefit of both restaurant and theatre patrons

Accepted Answer

Mutually exclusive investments are ones where you can only choose one or the other. In option C, the choice must be made between building a gas station or a restaurant.

Question 18

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
A)duplication
B)the net present value profile
C)multiple rates of return
D)the AAR problem
E)the dual dilemma

Accepted Answer

Multiple rates of return occurs when there are multiple time periods in which the cash inflows and outflows change sign, resulting in multiple solutions for the discount rate that make the net present value of an investment equal to zero. This can pose a challenge for investment decision making as it makes it difficult to ascertain the true profitability of the investment.

Question 19

The World Dictionary needs to purchase a new printing machine costing $1.8 million.Management is estimating that the machine will generate cash inflows of $250 000 for three years and $350 000 for the following four years.If management requires a minimum 15 per cent rate of return,should they purchase this particular machine? Why or why not?
A)yes;because the IRR is 18.30 per cent
B)yes;because the IRR is 4.32 per cent
C)no;because the IRR is 18.30 per cent
D)no;because the IRR is 4.32 per cent
E)The answer can not be determined as there are multiple IRRs.

Accepted Answer

The answer of The World Dictionary needs to purchase a...

Question 20

Ben Lake Enterprises is currently considering a project that will produce cash inflows
Of $3500 a year for three years followed by $1200 a year for two more years.The cost of the project is $10 000.What is the profitability index if the discount rate is 7 per cent?
A)0.96
B)0.98
C)1.00
D)1.06
E)1.10

Accepted Answer

The answer of Ben Lake Enterprises is currently considering a...

Quiz 8: Net Present Value and Other Investment Criteria

You are considering a project that has an initial outlay of $500 000.The project will generate cash inflows of $150 000 per year for four years,followed by $80 000 for one more year.Considering the discount rate of 10%,what is the profitability index?

You are using a net present value profile to compare two projects.At the point where the net present values of the two projects intersect,the:

The payback rule works best in evaluating which one of the following?

Sonny and James are both considering the same project with the cash flows shown below.Sonny is content earning 8 per cent on the project but James wants to earn at least 12 per cent.Who,if either,should accept this project?

Calculate the approximate internal rate of return given the following series of cash flows.

A net present value of zero implies that an investment:

The net present value rule states that you should accept a project if the NPV:

The internal rate of return identifies:

Nawano is considering an investment of $200 000 with cash inflows of $80 000;$70 000;$75 000;$10 000 and $35 000 over the next five years,respectively.What is the net present value of this investment if the relevant discount rate is 11 per cent?

Which one of the following defines the internal rate of return for a project?

The payback method of analysis is the most beneficial in which one of the following situations?

You are considering a project which has an internal rate of return that is equal to the required return.This means that:

If managers only invest in projects that have a profitability index greater than 1.0:

Which one of the following best expresses two mutually exclusive investments?

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

Ben Lake Enterprises is currently considering a project that will produce cash inflows Of $3500 a year for three years followed by $1200 a year for two more years.The cost of the project is $10 000.What is the profitability index if the discount rate is 7 per cent?