Question 1

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV(II - I) which project(s)should be accepted and why?

Accepted Answer

A) Project II; because the incremental NPV(II - I) is negative. 
B) Project I; because both the incremental NPV(II - I)and NPVI are positive. 
C) Both Project I and II; because both project NPVs are positive. 
D) Project II; because it has the larger NPV. 
E) Project I; because the incremental NPV(II - I) is negative and NPVI is positive.

Question 2

Uptown Developers is considering two projects.Project A consists of building a wholesale book outlet on the firm's downtown lot.Project B consists of building a sit-down restaurant on that same lot.The lot can only accommodate one of the projects.When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from which one of these methods?

Accepted Answer

A) Profitability index 
B) Internal rate of return 
C) Payback 
D) Net present value 
E) Accounting rate of return

Question 3

An independent,financing type project has an IRR of 11.4 percent and a required rate of return of 10.6 percent.Given this,you know the

Accepted Answer

A) initial cash flow is negative. 
B) net present value is positive. 
C) cash flows are conventional. 
D) accept/reject decision cannot be based on the IRR. 
E) project should be rejected.

Question 4

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?

Accepted Answer

A) -$687.22 
B) -$757.69 
C) -$204.15 
D) -$878.92 
E) -$696.94

Question 5

A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?

Accepted Answer

A) 13.46% 
B) 14.32% 
C) 13.98% 
D) 13.71% 
E) 14.62%

Question 6

All else equal,the payback period for a project will decrease whenever the

Accepted Answer

A) duration of a project is lengthened. 
B) cash inflows are moved earlier in time. 
C) assigned discount rate decreases. 
D) required return for a project increases. 
E) initial cost increases.

Question 7

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?

Accepted Answer

A) 2.13 years 
B) 2.34 years 
C) 2.78 years 
D) 2.91 years 
E) Never

Question 8

An investment is acceptable if its average accounting return (AAR)

Accepted Answer

A) exceeds the target AAR. 
B) is less than the target AAR. 
C) exceeds the firm's return on equity (RO
E) . 
D) is less than the firm's return on assets (RO
A) . 
E) is equal to zero.

Question 9

The two most commonly used methods of capital budgeting analysis are the

Accepted Answer

A) internal rate of return and net present value methods. 
B) net present value and payback methods. 
C) profitability index and the internal rate of return methods. 
D) net present value and discounted payback methods. 
E) average accounting return and discounted payback methods.

Question 10

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2.Project R has an initial cost of $345,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2.The discount rate is 12.2 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?

Accepted Answer

A) Accept both Project Q and R 
B) Reject both Project Q and R 
C) Accept Project Q and reject Project R 
D) Accept Project R and reject Project Q 
E) Accept either Project R or Project Q,but not both

Question 11

Projects A and B require an initial investment of $48,000 and $98,000,respectively.The projects are mutually exclusive,and you know the smaller project has a positive NPV.Which one of these methods is probably the best method to use to determine which project to accept?

Accepted Answer

A) Discounted payback 
B) Modified internal rate of return 
C) Average accounting rate of return 
D) Incremental internal rate of return 
E) Internal rate of return

Question 12

A firm should accept projects with positive net present values primarily because those projects will

Accepted Answer

A) produce cash inflows that exceed the cash outflows. 
B) return the firm's initial cash outlay within 1 year. 
C) create value for the firm's current stockholders. 
D) produce only positive cash flows after the initial investment period. 
E) increase the current liquidity of the firm.

Question 13

Assume a project has normal cash flows.Given this,you should accept the project

Accepted Answer

A) if,and only if,the NPV is exactly equal to zero. 
B) only if the NPV is equal to the initial cash flow. 
C) if the NPV is positive and reject it if the NPV is negative. 
D) if the total cash inflows exceed the initial cash outflow. 
E) because it has positive cash flows for every time period after the initial investment.

Question 14

One advantage of the payback method of project analysis is the method's

Accepted Answer

A) application of a discount rate to each separate cash flow. 
B) simplicity. 
C) difficulty of use. 
D) arbitrary cutoff point. 
E) consideration of all relevant cash flows.

Question 15

The discounted payback period of a project will decrease whenever the

Accepted Answer

A) initial cash outlay for the project is increased. 
B) amount of each projected cash inflow is decreased. 
C) discount rate applied to the project is decreased. 
D) time period of the project is increased. 
E) costs of the fixed assets utilized in the project increase.

Question 16

The Walk-Up Window is considering two mutually exclusive projects.Project A has an initial cost of $64,230 and annual cash flows of $25,200 for three years.Project B has an initial cost of $45,400 and annual cash flows of $21,400,$21,900,and $10,200 for Years 1 to 3,respectively.What is the incremental IRRA-B? Which project should be accepted if the discount rate is 9 percent? Which project should be accepted if the discount rate is 6 percent?

Accepted Answer

A) 6.65%; Project A; Project A 
B) 6.65%; Project B; Project A 
C) 7.21%; Project A; Project B 
D) 7.21%; Project B: Project A 
E) 6.65%; Project A; Project B

Question 17

The discount rate that makes the net present value of an investment exactly equal to zero is called the

Accepted Answer

A) profitable rate of return. 
B) internal rate of return. 
C) average accounting return. 
D) profitability index. 
E) risk-free rate.

Question 18

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?

Accepted Answer

A) 4.06 years 
B) 3.97 years 
C) 3.89 years 
D) Never 
E) 3.81 years

Question 19

An investment

Accepted Answer

A) is acceptable if its calculated payback period is less than some prespecified period of time. 
B) should be accepted if the payback is positive and rejected if it is negative. 
C) should be rejected if the payback is positive and accepted if it is negative. 
D) is acceptable if its calculated payback period is greater than some prespecified period of time. 
E) should be accepted any time the payback period is less than the discounted payback period,given a positive discount rate.

Question 20

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?

Accepted Answer

A) 2.68 years 
B) 2.07 years 
C) 2.75 years 
D) 2.46 years 
E) Never

Exam 7: Net Present Value and Other Investment Rules