Question 1

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

Accepted Answer

A) True 
 B)False  False

Question 2

The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.

Accepted Answer

A) True 
 B)False  False

Question 3

A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%.The project's required rate of return is 13%.The internal rate of return is

Accepted Answer

A) greater than $30,000. 
B) less than 13%. 
C) between 13% and 15%. 
D) greater than 15% 
A) greater than $30,000. 
B) less than 13%. 
C) between 13% and 15%. 
D) greater than 15% D

Question 4

A project's IRR is analogous to the concept of the yield to maturity for bonds.

Accepted Answer

A) True 
 B)False

Question 5

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The equivalent annual annuity amount for project B,rounded to the nearest dollar,is

Accepted Answer

A) $17,385. 
B) $20,936. 
C) $22,789. 
D) $26,551. 
A) $17,385. 
B) $20,936. 
C) $22,789. 
D) $26,551.

Question 6

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.Which project would you recommend using the replacement chain method to evaluate the projects with different lives?

Accepted Answer

A) Project B because its NPV is higher than Project A's replacement chain NPV of $47,623 
B) Project A because its replacement chain NPV is $76,652,which exceeds the NPV for Project B 
C) Project A because its replacement chain NPV is $45,642,which is less than the NPV for Project B 
D) Both projects will be valued the same since they are now both four year projects. 
A) Project B because its NPV is higher than Project A's replacement chain NPV of $47,623 
B) Project A because its replacement chain NPV is $76,652,which exceeds the NPV for Project B 
C) Project A because its replacement chain NPV is $45,642,which is less than the NPV for Project B 
D) Both projects will be valued the same since they are now both four year projects.

Question 7

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project A is

Accepted Answer

A) 31.43%. 
B) 29.42%. 
C) 25.88%. 
D) 19.45%. 
A) 31.43%. 
B) 29.42%. 
C) 25.88%. 
D) 19.45%.

Question 8

Southeast Compositions,Inc.is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 Compute the net present value of this project if the company's discount rate is 14%.

Accepted Answer

A) -$249,335 
B) -$138,561 
C) $239,209 
D) $725,000 
A) -$249,335 
B) -$138,561 
C) $239,209 
D) $725,000

Question 9

A major disadvantage of the discounted payback period is the arbitrariness of the process used to select the maximum desired payback period.

Accepted Answer

A) True 
 B)False

Question 10

Raindrip Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

Accepted Answer

A) $558,378 
B) $513,859 
C) $473,498 
D) $447,292 
A) $558,378 
B) $513,859 
C) $473,498 
D) $447,292

Question 11

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Accepted Answer

A) True 
 B)False

Question 12

Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years.Project X is expected to produce an after-tax cash flow of $180,000 each year.Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5.The discount rate is 14 percent. 
a.Calculate the net present value for each project. 
b.Calculate the IRR for each project. 
c.What decision should you make regarding these projects?

Accepted Answer

a.NPV of A = $17,955 NPV of B

Question 13

Kingston Corp.is considering a new machine that requires an initial investment of $480,000 installed,and has a useful life of 8 years.The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter. 
a.Calculate the net present value of the machine if the required rate of return is 11 percent. 
b.Calculate the IRR of this project. 
c.Should Kingston accept the project (assume that it is independent and not subject to any capital rationing constraint)? Explain your answer.

Accepted Answer

a.NPV = ($21,995)From Excel Spreadsheet

Question 14

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

Accepted Answer

A) True 
 B)False

Question 15

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the internal rate of return of this project?

Accepted Answer

A) 10.87% 
B) 11.57% 
C) 13.68% 
D) 15.13% 
A) 10.87% 
B) 11.57% 
C) 13.68% 
D) 15.13%

Question 16

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below.   Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

Accepted Answer

Choose Project S.Although the NPV of Pro

Question 17

A one-sign-reversal project should be accepted if it

Accepted Answer

A) generates an internal rate of return that is higher than the profitability index. 
B) produces an internal rate of return that is greater than the firm's discount rate. 
C) results in an internal rate of return that is above a project's equivalent annual annuity. 
D) results in a modified internal rate of return that is higher than the internal rate of return. 
A) generates an internal rate of return that is higher than the profitability index. 
B) produces an internal rate of return that is greater than the firm's discount rate. 
C) results in an internal rate of return that is above a project's equivalent annual annuity. 
D) results in a modified internal rate of return that is higher than the internal rate of return.

Question 18

The Bolster Company is considering two mutually exclusive projects:   The required rate of return on these projects is 12 percent. 
a.What is each project's payback period? 
b.What is each project's discounted payback period? 
c.What is each project's net present value? 
d.What is each project's internal rate of return? 
e.Fully explain the results of your analysis.Which project do you prefer,and why?

Accepted Answer

a.Payback of A = 3.2 years Payback of B

Question 19

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

Accepted Answer

A) the firm's discount rate; the internal rate of return 
B) the internal rate of return; the internal rate of return 
C) the internal rate of return; the firm's discount rate 
D) Neither criteria assumes reinvestment of future cash flows. 
A) the firm's discount rate; the internal rate of return 
B) the internal rate of return; the internal rate of return 
C) the internal rate of return; the firm's discount rate 
D) Neither criteria assumes reinvestment of future cash flows.

Question 20

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

Accepted Answer

A) 3.98% 
B) 5.54% 
C) 11.89% 
D) 14.74% 
A) 3.98% 
B) 5.54% 
C) 11.89% 
D) 14.74%

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.

A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%.The project's required rate of return is 13%.The internal rate of return is

A project's IRR is analogous to the concept of the yield to maturity for bonds.

Southeast Compositions,Inc.is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 Compute the net present value of this project if the company's discount rate is 14%.

A major disadvantage of the discounted payback period is the arbitrariness of the process used to select the maximum desired payback period.

Raindrip Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

A one-sign-reversal project should be accepted if it

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 10: Capital-Budgeting Techniques and Practice

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.

A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%.The project's required rate of return is 13%.The internal rate of return is

A project's IRR is analogous to the concept of the yield to maturity for bonds.

Southeast Compositions,Inc.is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 Compute the net present value of this project if the company's discount rate is 14%.

A major disadvantage of the discounted payback period is the arbitrariness of the process used to select the maximum desired payback period.

Raindrip Corp.can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years.The machine will be sold for $120,000 after taxes at the end of year five.What is the net present value of the machine if the required rate of return is 13.5%.

Two projects that have the same cost and the same expected cash flows will have the same net present value.

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

A one-sign-reversal project should be accepted if it

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at ________.

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

The Net Present Value (or NPV)criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ,and the Internal Rate of Return (or IRR)criteria assumes that expected future cash flows are reinvested at .