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Chapter 09 - Net Present Value and Other Investment Criteria

Chapter 09 Net Present Value and Other Investment Criteria


Multiple Choice Questions

1. A project has an initial cost of !"#$00 and a mar%et value of &!#'00. (hat is the difference )et*een these t*o values called+ A. net present value ,. internal return C. pa-)ac% value .. profita)ilit- inde/ 0. discounted pa-)ac%

!. (hich one of the follo*in1 methods of project anal-sis is defined as computin1 the value of a project )ased upon the present value of the project2s anticipated cash flo*s+ A. constant dividend 1ro*th model ,. discounted cash flo* valuation C. avera1e accountin1 return .. e/pected earnin1s model 0. internal rate of return

&. 3he len1th of time a firm must *ait to recoup the mone- it has invested in a project is called the4 A. internal return period. ,. pa-)ac% period. C. profita)ilit- period. .. discounted cash period. 0. valuation period.

$. 3he len1th of time a firm must *ait to recoup# in present value terms# the mone- it has in invested in a project is referred to as the4 A. net present value period. ,. internal return period. C. pa-)ac% period. .. discounted profita)ilit- period. 0. discounted pa-)ac% period.

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Chapter 09 - Net Present Value and Other Investment Criteria

5. A project2s avera1e net income divided )- its avera1e )oo% value is referred to as the project2s avera1e4 A. net present value. ,. internal rate of return. C. accountin1 return. .. profita)ilit- inde/. 0. pa-)ac% period.

'. 3he internal rate of return is defined as the4 A. ma/imum rate of return a firm e/pects to earn on a project. ,. rate of return a project *ill 1enerate if the project in financed solel- *ith internal funds. C. discount rate that e6uates the net cash inflo*s of a project to 7ero. .. discount rate *hich causes the net present value of a project to e6ual 7ero. 0. discount rate that causes the profita)ilit- inde/ for a project to e6ual 7ero.

". 8ou are vie*in1 a 1raph that plots the NPVs of a project to various discount rates that could )e applied to the project2s cash flo*s. (hat is the name 1iven to this 1raph+ A. project tract ,. projected ris% profile C. NPV profile .. NPV route 0. present value se6uence

9. 3here are t*o distinct discount rates at *hich a particular project *ill have a 7ero net present value. In this situation# the project is said to4 A. have t*o net present value profiles. ,. have operational am)i1uit-. C. create a mutuall- e/clusive investment decision. .. produce multiple economies of scale. 0. have multiple rates of return.

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Chapter 09 - Net Present Value and Other Investment Criteria

9. If a firm accepts Project A it *ill not )e feasi)le to also accept Project , )ecause )oth projects *ould re6uire the simultaneous and e/clusive use of the same piece of machiner-. 3hese projects are considered to )e4 A. independent. ,. interdependent. C. mutuall- e/clusive. .. economicall- scaled. 0. operationall- distinct.

10. 3he present value of an investment2s future cash flo*s divided )- the initial cost of the investment is called the4 A. net present value. ,. internal rate of return. C. avera1e accountin1 return. .. profita)ilit- inde/. 0. profile period.

11. A project has a net present value of 7ero. (hich one of the follo*in1 )est descri)es this project+ A. 3he project has a 7ero percent rate of return. ,. 3he project re6uires no initial cash investment. C. 3he project has no cash flo*s. .. 3he summation of all of the project2s cash flo*s is 7ero. 0. 3he project2s cash inflo*s e6ual its cash outflo*s in current dollar terms.

1!. (hich one of the follo*in1 *ill decrease the net present value of a project+ A. increasin1 the value of each of the project2s discounted cash inflo*s ,. movin1 each of the cash inflo*s )ac% to a later time period C. decreasin1 the re6uired discount rate .. increasin1 the project2s initial cost at time 7ero 0. increasin1 the amount of the final cash inflo*

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Chapter 09 - Net Present Value and Other Investment Criteria

1&. (hich one of the follo*in1 methods determines the amount of the chan1e a proposed project *ill have on the value of a firm+ A. net present value ,. discounted pa-)ac% C. internal rate of return .. profita)ilit- inde/ 0. pa-)ac%

1$. If a project has a net present value e6ual to 7ero# then4 A. the total of the cash inflo*s must e6ual the initial cost of the project. ,. the project earns a return e/actl- e6ual to the discount rate. C. a decrease in the project2s initial cost *ill cause the project to have a ne1ative NPV. .. an- dela- in receivin1 the projected cash inflo*s *ill cause the project to have a positive NPV. 0. the project2s PI must )e also )e e6ual to 7ero.

15. :ossiter :estaurants is anal-7in1 a project that re6uires 190#000 of fi/ed assets. (hen the project ends# those assets are e/pected to have an afterta/ salva1e value of $5#000. ;o* is the $5#000 salva1e value handled *hen computin1 the net present value of the project+ A. reduction in the cash outflo* at time 7ero ,. cash inflo* in the final -ear of the project C. cash inflo* for the -ear follo*in1 the final -ear of the project .. cash inflo* prorated over the life of the project 0. not included in the net present value

1'. (hich one of the follo*in1 increases the net present value of a project+ A. an increase in the re6uired rate of return ,. an increase in the initial capital re6uirement C. a deferment of some cash inflo*s until a later -ear .. an increase in the afterta/ salva1e value of the fi/ed assets 0. a reduction in the final cash inflo*

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Chapter 09 - Net Present Value and Other Investment Criteria

1". Net present value4 A. is the )est method of anal-7in1 mutuall- e/clusive projects. ,. is less useful than the internal rate of return *hen comparin1 different si7ed projects. C. is the easiest method of evaluation for non-financial mana1ers to use. .. is less useful than the profita)ilit- inde/ *hen comparin1 mutuall- e/clusive projects. 0. is ver- similar in its methodolo1- to the avera1e accountin1 return.

19. (hich one of the follo*in1 is a project acceptance indicator 1iven an independent project *ith investin1 t-pe cash flo*s+ A. profita)ilit- inde/ less than 1.0 ,. project2s internal rate of return less than the re6uired return C. discounted pa-)ac% period 1reater than re6uirement .. avera1e accountin1 return that is less than the internal rate of return 0. modified internal rate of return that e/ceeds the re6uired return

19. (h- is pa-)ac% often used as the sole method of anal-7in1 a proposed small project+ A. Pa-)ac% considers the time value of mone-. ,. All relevant cash flo*s are included in the pa-)ac% anal-sis. C. It is the onl- method *here the )enefits of the anal-sis out*ei1h the costs of that anal-sis. .. Pa-)ac% is the most desira)le of the various financial methods of anal-sis. 0. Pa-)ac% is focused on the lon1-term impact of a project.

!0. (hich of the follo*in1 are advanta1es of the pa-)ac% method of project anal-sis+ I. *or%s *ell for research and development projects II. li6uidit- )ias III. ease of use IV. ar)itrar- cutoff point A. I and II onl,. I and III onlC. II and III onl.. II and IV onl0. II# III# and IV onl-

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Chapter 09 - Net Present Value and Other Investment Criteria

!1. <amuelson 0lectronics has a re6uired pa-)ac% period of three -ears for all of its projects. Currentl-# the firm is anal-7in1 t*o independent projects. Project A has an e/pected pa-)ac% period of !.9 -ears and a net present value of '#900. Project , has an e/pected pa-)ac% period of &.1 -ears *ith a net present value of !9#$00. (hich projects should )e accepted )ased on the pa-)ac% decision rule+ A. Project A onl,. Project , onlC. ,oth A and , .. Neither A nor , 0. Ans*er cannot )e determined )ased on the information 1iven.

!!. A project has a re6uired pa-)ac% period of three -ears. (hich one of the follo*in1 statements is correct concernin1 the pa-)ac% anal-sis of this project+ A. 3he cash flo*s in each of the three -ears must e/ceed one-third of the project2s initial cost if the project is to )e accepted. ,. 3he cash flo* in -ear three is i1nored. C. 3he project2s cash flo* in -ear three is discounted )- a factor of =1 > :?&. .. 3he cash flo* in -ear t*o is valued just as hi1hl- as the cash flo* in -ear one. 0. 3he project is accepta)le *henever the pa-)ac% period e/ceeds three -ears.

!&. A project has a discounted pa-)ac% period that is e6ual to the re6uired pa-)ac% period. @iven this# *hich of the follo*in1 statements must )e true+ I. 3he project must also )e accepta)le under the pa-)ac% rule. II. 3he project must have a profita)ilit- inde/ that is e6ual to or 1reater than 1.0. III. 3he project must have a 7ero net present value. IV. 3he project2s internal rate of return must e6ual the re6uired return. A. I onl,. I and II onlC. II and III onl.. I# III# and IV onl0. I# II# III# and IV

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Chapter 09 - Net Present Value and Other Investment Criteria

!$. (hich one of the follo*in1 statements related to pa-)ac% and discounted pa-)ac% is correct+ A. Pa-)ac% is a )etter method of anal-sis than is discounted pa-)ac%. ,. .iscounted pa-)ac% is used more fre6uentl- in )usiness than is pa-)ac%. C. .iscounted pa-)ac% does not re6uire a cutoff point li%e the pa-)ac% method does. .. .iscounted pa-)ac% is )iased to*ards lon1-term projects *hile pa-)ac% is )iased to*ards short-term projects. 0. Pa-)ac% is used more fre6uentl- even thou1h discounted pa-)ac% is a )etter method.

!5. Appl-in1 the discounted pa-)ac% decision rule to all projects ma- cause4 A. some positive net present value projects to )e rejected. ,. the most li6uid projects to )e rejected in favor of the less li6uid projects. C. projects to )e incorrectl- accepted due to i1norin1 the time value of mone-. .. a firm to )ecome more lon1-term focused. 0. some projects to )e accepted *hich *ould other*ise )e rejected under the pa-)ac% rule.

!'. (hich one of the follo*in1 correctl- applies to the avera1e accountin1 rate of return+ A. It considers the time value of mone-. ,. It measures net income as a percenta1e of the sales 1enerated )- a project. C. It is the )est method of anal-7in1 mutuall- e/clusive projects from a financial point of vie*. .. It is the primar- methodolo1- used in anal-7in1 independent projects. 0. It can )e compared to the return on assets ratio.

!". (hich one of the follo*in1 is an advanta1e of the avera1e accountin1 return method of anal-sis+ A. eas- availa)ilit- of information needed for the computation ,. inclusion of time value of mone- considerations C. the use of a cutoff rate as a )enchmar% .. the use of pre-ta/ income in the computation 0. use of real# versus nominal# avera1e income

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Chapter 09 - Net Present Value and Other Investment Criteria

!9. (hich of the follo*in1 are considered *ea%nesses in the avera1e accountin1 return method of project anal-sis+ I. e/clusion of time value of mone- considerations II. need of a cutoff rate III. easil- o)taina)le information for computation IV. )ased on accountin1 values A. I onl,. I and IV onlC. II and III onl.. I# II# and IV onl0. I# II# III# and IV

!9. (hich one of the follo*in1 statements related to the internal rate of return =I::? is correct+ A. 3he I:: -ields the same accept and reject decisions as the net present value method 1iven mutuall- e/clusive projects. ,. A project *ith an I:: e6ual to the re6uired return *ould reduce the value of a firm if accepted. C. 3he I:: is e6ual to the re6uired return *hen the net present value is e6ual to 7ero. .. Ainancin1 t-pe projects should )e accepted if the I:: e/ceeds the re6uired return. 0. 3he avera1e accountin1 return is a )etter method of anal-sis than the I:: from a financial point of vie*.

&0. 3he internal rate of return4 A. ma- produce multiple rates of return *hen cash flo*s are conventional. ,. is )est used *hen comparin1 mutuall- e/clusive projects. C. is rarel- used in the )usiness *orld toda-. .. is principall- used to evaluate small dollar projects. 0. is eas- to understand.

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Chapter 09 - Net Present Value and Other Investment Criteria

&1. 3edder Binin1 has anal-7ed a proposed e/pansion project and determined that the internal rate of return is lo*er than the firm desires. (hich one of the follo*in1 chan1es to the project *ould )e most e/pected to increase the project2s internal rate of return+ A. decreasin1 the re6uired discount rate ,. increasin1 the initial investment in fi/ed assets C. condensin1 the firm2s cash inflo*s into fe*er -ears *ithout lo*erin1 the total amount of those inflo*s .. eliminatin1 the salva1e value 0. decreasin1 the amount of the final cash inflo*

&!. 3he internal rate of return is4 A. the discount rate that ma%es the net present value of a project e6ual to the initial cash outla-. ,. e6uivalent to the discount rate that ma%es the net present value e6ual to one. C. tedious to compute *ithout the use of either a financial calculator or a computer. .. hi1hl- dependent upon the current interest rates offered in the mar%etplace. 0. a )etter methodolo1- than net present value *hen dealin1 *ith unconventional cash flo*s.

&&. (hich of the follo*in1 statements related to the internal rate of return =I::? are correct+ I. 3he I:: method of anal-sis can )e adapted to handle non-conventional cash flo*s. II. 3he I:: that causes the net present value of the differences )et*een t*o project2s cash flo*s to e6ual 7ero is called the crossover rate. III. 3he I:: tends to )e used more than net present value simpl- )ecause its results are easier to comprehend. IV. ,oth the timin1 and the amount of a project2s cash flo*s affect the value of the project2s I::. A. I and II onl,. III and IV onlC. I# II# and III onl.. II# III# and IV onl0. I# II# III# and IV

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Chapter 09 - Net Present Value and Other Investment Criteria

&$. .ou1lass Interiors is considerin1 t*o mutuall- e/clusive projects and have determined that the crossover rate for these projects is 11." percent. Project A has an internal rate of return =I::? of 15.& percent and Project , has an I:: of 1'.5 percent. @iven this information# *hich one of the follo*in1 statements is correct+ A. Project A should )e accepted as its I:: is closer to the crossover point than is Project ,2s I::. ,. Project , should )e accepted as it has the hi1her I::. C. ,oth projects should )e accepted as )oth of the project2s I::s e/ceed the crossover rate. .. Neither project should )e accepted since )oth of the project2s I::s e/ceed the crossover rate. 0. 8ou cannot determine *hich project should )e accepted 1iven the information provided.

&5. 8ou are comparin1 t*o mutuall- e/clusive projects. 3he crossover point is 1!.& percent. 8ou have determined that -ou should accept project A if the re6uired return is 1&.1 percent. 3his implies -ou should4 A. al*a-s accept project A. ,. )e indifferent to the projects at an- discount rate a)ove 1&.1 percent. C. al*a-s accept project A if the re6uired return e/ceeds the crossover rate. .. accept project , onl- *hen the re6uired return is e6ual to the crossover rate. 0. accept project , if the re6uired return is less than 1&.1 percent.

&'. @raphin1 the crossover point helps e/plain4 A. *h- one project is al*a-s superior to another project. ,. ho* decisions concernin1 mutuall- e/clusive projects are derived. C. ho* the duration of a project affects the decision as to *hich project to accept. .. ho* the net present value and the initial cash outflo* of a project are related. 0. ho* the profita)ilit- inde/ and the net present value are related.

&". A project *ith financin1 t-pe cash flo*s is t-pified )- a project that has *hich one of the follo*in1 characteristics+ A. conventional cash flo*s ,. cash flo*s that e/tend )e-ond the accepta)le pa-)ac% period C. a -ear or more in the middle of a project *here the cash flo*s are e6ual to 7ero .. a cash inflo* at time 7ero 0. cash inflo*s *hich are e6ual in amount

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Chapter 09 - Net Present Value and Other Investment Criteria

&9. (hich of the follo*in1 statements 1enerall- appl- to the cash flo*s of a financin1 t-pe project+ I. nonconventional cash flo*s II. cash outflo*s e/ceed cash inflo*s prior to an- time value adjustments III. cash for services rendered is received prior to the cash that is spent providin1 the services IV. the total of all cash flo*s must e6ual 7ero on an unadjusted )asis A. I onl,. I and III onlC. II and IV onl.. I# II# and III onl0. I# II# III# and IV

&9. (hich one of the follo*in1 statements is correct in relation to independent projects+ A. 3he internal rate of return cannot )e used to determine the accepta)ilit- of a project that has financin1 t-pe cash flo*s. ,. A project *ith investin1 t-pe cash flo*s is accepta)le if its internal rate of return e/ceeds the re6uired return. C. A project *ith financin1 t-pe cash flo*s is accepta)le if its internal rate of return e/ceeds the re6uired return. .. 3he net present value profile is upslopin1 for projects *ith )oth investin1 and financin1 t-pe cash flo*s. 0. Projects *ith financin1 t-pe cash flo*s are accepta)le onl- *hen the internal rate of return is ne1ative.

$0. 3he profita)ilit- inde/ is most closel- related to *hich one of the follo*in1+ A. pa-)ac% ,. discounted pa-)ac% C. avera1e accountin1 return .. net present value 0. modified internal rate of return

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Chapter 09 - Net Present Value and Other Investment Criteria

$1. :o1er2s Beat Bar%et is considerin1 t*o independent projects. 3he profita)ilit- inde/ decision rule indicates that )oth projects should )e accepted. 3his result most li%el- does *hich one of the follo*in1+ A. conflicts *ith the results of the net present value decision rule ,. assumes the firm has sufficient funds to underta%e )oth projects C. a1rees *ith the decision that *ould also appl- if the projects *ere mutuall- e/clusive .. )ases the acceptCreject decision on the same varia)les as the avera1e accountin1 return 0. fails to provide useful information as the firm must reject at least one of the projects

$!. (hich one of the follo*in1 methods of anal-sis provides the )est information on the cost)enefit aspects of a project+ A. net present value ,. pa-)ac% C. internal rate of return .. avera1e accountin1 return 0. profita)ilit- inde/

$&. (hen the present value of the cash inflo*s e/ceeds the initial cost of a project# then the project should )e4 A. accepted )ecause the internal rate of return is positive. ,. accepted )ecause the profita)ilit- inde/ is 1reater than 1. C. accepted )ecause the profita)ilit- inde/ is ne1ative. .. rejected )ecause the internal rate of return is ne1ative. 0. rejected )ecause the net present value is ne1ative.

$$. (hich one of the follo*in1 is the )est e/ample of t*o mutuall- e/clusive projects+ A. )uildin1 a retail store that is attached to a *holesale outlet ,. producin1 )oth plastic for%s and spoons on the same assem)l- line at the same time C. usin1 an empt- *arehouse to store )oth ra* materials and finished 1oods .. promotin1 t*o products durin1 the same television commercial 0. *aitin1 until a machine finishes moldin1 Product A )efore )ein1 a)le to mold Product ,

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Chapter 09 - Net Present Value and Other Investment Criteria

$5. <outhern Chic%en is considerin1 t*o projects. Project A consists of creatin1 an outdoor eatin1 area on the unused portion of the restaurant2s propert-. Project , *ould use that outdoor space for creatin1 a drive-thru service *indo*. (hen tr-in1 to decide *hich project to accept# the firm should rel- most heavil- on *hich one of the follo*in1 anal-tical methods+ A. profita)ilit- inde/ ,. internal rate of return C. pa-)ac% .. net present value 0. accountin1 rate of return

$'. Butuall- e/clusive projects are )est defined as competin1 projects *hich4 A. *ould commence on the same da-. ,. have the same initial start-up costs. C. )oth re6uire the total use of the same limited resource. .. )oth have ne1ative cash outflo*s at time 7ero. 0. have the same life span.

$". 3he final decision on *hich one of t*o mutuall- e/clusive projects to accept ultimateldepends upon *hich one of the follo*in1+ A. initial cost of each project ,. timin1 of the cash inflo*s C. total cash inflo*s of each project .. re6uired rate of return 0. len1th of each project2s life

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Chapter 09 - Net Present Value and Other Investment Criteria

$9. Isaac has anal-7ed t*o mutuall- e/clusive projects of similar si7e and has compiled the follo*in1 information )ased on his anal-sis. ,oth projects have &- -ear lives.

Isaac has )een as%ed for his )est recommendation 1iven this information. ;is recommendation should )e to accept4 A. )oth projects. ,. project , )ecause it has the shortest pa-)ac% period. C. project , and reject project A )ased on their net present values. .. project A and reject project , )ased on their avera1e accountin1 returns. 0. neither project.

$9. (hich one of the follo*in1 statements *ould 1enerall- )e considered as accurate 1iven independent projects *ith conventional cash flo*s+ A. 3he internal rate of return decision ma- contradict the net present value decision. ,. ,usiness practice dictates that independent projects should have three distinct accept indicators )efore a project is actuall- implemented. C. 3he pa-)ac% decision rule could override the net present value decision rule should cash availa)ilit- )e limited. .. 3he profita)ilit- inde/ rule cannot )e applied in this situation. 0. 3he projects cannot )e accepted unless the avera1e accountin1 return decision rulin1 is positive.

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Chapter 09 - Net Present Value and Other Investment Criteria

50. In actual practice# mana1ers fre6uentl- use the4 I. avera1e accountin1 return method )ecause the information is so readil- availa)le. II. internal rate of return )ecause the results are eas- to communicate and understand. III. discounted pa-)ac% )ecause of its simplicit-. IV. net present value )ecause it is considered )- man- to )e the )est method of anal-sis. A. I and III onl,. II and III onlC. I# II# and IV onl.. II# III# and IV onl0. I# II# III# and IV

51. Dristi *ants to start trainin1 her most junior assistant# Am-# in the art of project anal-sis. Am- has just started colle1e and has no e/perience or )ac%1round in )usiness finance. 3o 1et her started# Dristi is 1oin1 to assi1n the responsi)ilit- for all projects that have initial costs less than 1#000 to Am- to anal-7e. (hich method is Dristi most apt to as% Am- to use in ma%in1 her initial decisions+ A. discounted pa-)ac% ,. profita)ilit- inde/ C. internal rate of return .. pa-)ac% 0. avera1e accountin1 return

5!. (hich t*o methods of project anal-sis *ere the most *idel- used )- C0O2s as of 1999+ A. net present value and pa-)ac% ,. internal rate of return and pa-)ac% C. net present value and avera1e accountin1 return .. internal rate of return and net present value 0. pa-)ac% and avera1e accountin1 return

5&. (hich t*o methods of project anal-sis are the most )iased to*ards short-term projects+ A. net present value and internal rate of return ,. internal rate of return and profita)ilit- inde/ C. pa-)ac% and discounted pa-)ac% .. net present value and discounted pa-)ac% 0. discounted pa-)ac% and profita)ilit- inde/

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Chapter 09 - Net Present Value and Other Investment Criteria

5$. (estern ,eef 0/porters is considerin1 a project that has an NPV of &!#'00# an I:: of 15.1 percent# and a pa-)ac% period of &.! -ears. 3he re6uired return is 1$.5 percent and the re6uired pa-)ac% period is &.0 -ears. (hich one of the follo*in1 statements correctl- applies to this project+ A. 3he net present value indicates accept *hile the internal rate of return indicates reject. ,. Pa-)ac% indicates acceptance. C. 3he pa-)ac% decision rule could override the accept decision indicated )- the net present value. .. 3he pa-)ac% rule *ill automaticall- )e i1nored since )oth the net present value and the internal rate of return indicate an accept decision. 0. 3he net present value decision rule is the onl- rule that matters *hen ma%in1 the final decision.

55. 8ou are considerin1 a project *ith conventional cash flo*s and the follo*in1 characteristics4

(hich of the follo*in1 statements is correct 1iven this information+ I. 3he discount rate used in computin1 the net present value *as less than 11.'& percent. II. 3he discounted pa-)ac% period must )e less than !.99 -ears. III. 3he discount rate used in the computation of the profita)ilit- ratio *as 11.'& percent. IV. 3his project should )e accepted as the internal rate of return e/ceeds the re6uired return. A. I and II onl,. III and IV onlC. I# II# and IV onl.. II# III# and IV onl0. I# II# III# and IV

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Chapter 09 - Net Present Value and Other Investment Criteria

5'. (hich of the follo*in1 are definite indicators of an accept decision for an independent project *ith conventional cash flo*s+ I. positive net present value II. profita)ilit- inde/ 1reater than 7ero III. internal rate of return 1reater than the re6uired rate IV. positive internal rate of return A. I and III onl,. II and IV onlC. I# II# and III onl.. II# III# and IV onl0. I# II# III# and IV

5". (hat is the net present value of a project *ith the follo*in1 cash flo*s if the re6uired rate of return is 1! percent+

A. - 1#5"$.$1 ,. - 1#!09.19 C. - 9$!.1! .. "!9.09 0. 1#&11.1'

9-1"

Chapter 09 - Net Present Value and Other Investment Criteria

59. (hat is the net present value of a project that has an initial cash outflo* of &$#900 and the follo*in1 cash inflo*s+ 3he re6uired return is 15.&5 percent.

A. - &#&9&.!5 ,. - !#"9$.'! C. - !#$91.5& .. 5!#&11.09 0. ''#$1'."5

59. A project *ill produce cash inflo*s of &#!00 a -ear for $ -ears *ith a final cash inflo* of 5#"00 in -ear 5. 3he project2s initial cost is 9#500. (hat is the net present value of this project if the re6uired rate of return is 1' percent+ A. - &11.0! ,. !#1'9.0! C. $#'50.11 .. 9#199.99 0. !1#1'9.0!

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Chapter 09 - Net Present Value and Other Investment Criteria

'0. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. 3he re6uired rate of return is 1$.' percent for project A and 1&.9 percent for project ,. (hich project should -ou accept and *h-+

A. project AE )ecause it has the hi1her re6uired rate of return ,. project AE )ecause its NPV is a)out $#900 more than the NPV of project , C. project ,E )ecause it has the lar1est total cash inflo* .. project ,E )ecause it has the lar1est cash inflo* in -ear one 0. project ,E )ecause it has the lo*er re6uired return

'1. 8ou are considerin1 t*o mutuall- e/clusive projects *ith the follo*in1 cash flo*s. (hich project=s? should -ou accept if the discount rate is 9.5 percent+ (hat if the discount rate is 1& percent+

A. accept project A as it al*a-s has the hi1her NPV ,. accept project , as it al*a-s has the hi1her NPV C. accept A at 9.5 percent and , at 1& percent .. accept , at 9.5 percent and A at 1& percent 0. accept , at 9.5 percent and neither at 1& percent

9-19

Chapter 09 - Net Present Value and Other Investment Criteria

'!. .a- Interiors is considerin1 a project *ith the follo*in1 cash flo*s. (hat is the I:: of this project+

A. '.$! percent ,. ".0& percent C. ".$9 percent .. 9.!! percent 0. 9.5' percent

'&. An investment has the follo*in1 cash flo*s and a re6uired return of 1& percent. ,ased on I::# should this project )e accepted+ (h- or *h- not+

A. NoE 3he I:: e/ceeds the re6uired return )- a)out 0.0' percent. ,. NoE 3he I:: is less than the re6uired return )- a)out 0.9$ percent. C. 8esE 3he I:: e/ceeds the re6uired return )- a)out 0.0' percent. .. 8esE 3he I:: e/ceeds the re6uired return )- a)out 0.9$ percent. 0. 8esE 3he I:: is less than the re6uired return )- a)out 0.0' percent.

9-!0

Chapter 09 - Net Present Value and Other Investment Criteria

'$. 8ou are considerin1 t*o independent projects *ith the follo*in1 cash flo*s. 3he re6uired return for )oth projects is 1' percent. @iven this information# *hich one of the follo*in1 statements is correct+

A. 8ou should accept Project A and reject Project , )ased on their respective NPVs. ,. 8ou should accept Project , and reject Project A )ased on their respective NPVs. C. 8ou should accept Project A and reject Project , )ased on their respective I::s. .. 8ou should accept Project , and reject Project A )ased on their respective I::s. 0. 8ou should accept )oth projects )ased on )oth the NPV and I:: decision rules.

'5. 8ou are considerin1 an investment *ith the follo*in1 cash flo*s. If the re6uired rate of return for this investment is 15.5 percent# should -ou accept the investment )ased solel- on the internal rate of return rule+ (h- or *h- not+

A. 8esE 3he I:: e/ceeds the re6uired return. ,. 8esE 3he I:: is less than the re6uired return. C. NoE 3he I:: is less than the re6uired return. .. NoE 3he I:: e/ceeds the re6uired return. 0. 8ou cannot appl- the I:: rule in this case.

9-!1

Chapter 09 - Net Present Value and Other Investment Criteria

''. ,lue (ater <-stems is anal-7in1 a project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the discountin1 approach to the modified internal rate of return if the discount rate is 1$ percent+ (h- or *h- not+

A. 8esE 3he BI:: is 1&.$9 percent. ,. 8esE 3he BI:: is 1".95 percent. C. 8esE 3he BI:: is !1.!& percent. .. NoE 3he BI:: is 5."& percent. 0. NoE 3he BI:: is 1".95 percent.

'". <hea%le- Industries is considerin1 e/pandin1 its current line of )usiness and has developed the follo*in1 e/pected cash flo*s for the project. <hould this project )e accepted )ased on the discountin1 approach to the modified internal rate of return if the discount rate is 1&.$ percent+ (h- or *h- not+

A. 8esE 3he BI:: is '.50 percent. ,. 8esE 3he BI:: is ".59 percent. C. 8esE 3he BI:: is 9.!& percent. .. NoE 3he BI:: is '.50 percent. 0. NoE 3he BI:: is ".59 percent.

9-!!

Chapter 09 - Net Present Value and Other Investment Criteria

'9. Cool (ater .rin%s is considerin1 a proposed project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the com)ined approach to the modified internal rate of return if )oth the discount rate and the reinvestment rate are 1!.' percent+ (h- or *hnot+

A. 8esE 3he BI:: is 9.91 percent. ,. 8esE 3he BI:: is 9.!& percent. C. NoE 3he BI:: is 9.91 percent. .. NoE 3he BI:: is 9.0' percent. 0. NoE 3he BI:: is 9.!& percent.

'9. ;ome .Fcor G Bore is considerin1 a proposed project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the com)ination approach to the modified internal rate of return if )oth the discount rate and the reinvestment rate are 1' percent+ (h- or *hnot+

A. 8esE 3he BI:: is 1$."9 percent. ,. 8esE 3he BI:: is 15.'$ percent. C. NoE 3he BI:: is 1!.91 percent. .. NoE 3he BI:: is 1$."9 percent. 0. NoE 3he BI:: is 15.'$ percent.

9-!&

Chapter 09 - Net Present Value and Other Investment Criteria

"0. (hat is the profita)ilit- inde/ for an investment *ith the follo*in1 cash flo*s 1iven a 1$.5 percent re6uired return+

A. 0.9$ ,. 0.99 C. 1.0! .. 1.0' 0. 1.11

"1. ,ased on the profita)ilit- inde/ rule# should a project *ith the follo*in1 cash flo*s )e accepted if the discount rate is 1$ percent+ (h- or *h- not+

A. 8esE 3he PI is 0.9'. ,. 8esE 3he PI is 1.0$. C. 8esE 3he PI is 1.09. .. NoE 3he PI is 0.9'. 0. NoE 3he PI is 1.0$.

9-!$

Chapter 09 - Net Present Value and Other Investment Criteria

"!. 8ou are considerin1 t*o independent projects )oth of *hich have )een assi1ned a discount rate of 15 percent. ,ased on the profita)ilit- inde/# *hat is -our recommendation concernin1 these projects+

A. 8ou should accept )oth projects. ,. 8ou should reject )oth projects. C. 8ou should accept project A and reject project ,. .. 8ou should accept project , and reject project A. 0. 8ou should accept project A and )e indifferent to project ,.

"&. 8ou *ould li%e to invest in the follo*in1 project.

<is# -our )oss# insists that onl- projects returnin1 at least 1.0' in toda-2s dollars for ever- 1 invested can )e accepted. <he also insists on appl-in1 a 1$ percent discount rate to all cash flo*s. ,ased on these criteria# -ou should4 A. accept the project )ecause the PI is 0.90. ,. accept the project )ecause the PI is 1.0$. C. accept the project )ecause the PI is 1.11. .. reject the project )ecause the PI is 0.90. 0. reject the project )ecause the PI is 0.9'.

9-!5

Chapter 09 - Net Present Value and Other Investment Criteria

"$. It *ill cost '#000 to ac6uire an ice cream cart. Cart sales are e/pected to )e &#'00 a -ear for three -ears. After the three -ears# the cart is e/pected to )e *orthless as the e/pected life of the refri1eration unit is onl- three -ears. (hat is the pa-)ac% period+ A. 1.$9 -ears ,. 1.'" -ears C. 1.9! -ears .. 1.95 -ears 0. !.00 -ears

"5. 8ou are considerin1 a project *ith an initial cost of "#900. (hat is the pa-)ac% period for this project if the cash inflo*s are 1#100# 1#'$0# &#900# and $#500 a -ear over the ne/t four -ears# respectivel-+ A. &.!1 -ears ,. &.!9 -ears C. &.&' -ears .. $.!1 -ears 0. $.!9 -ears

"'. A project has an initial cost of '#500. 3he cash inflo*s are 900# !#!00# &#'00# and $#100 over the ne/t four -ears# respectivel-. (hat is the pa-)ac% period+ A. 1."& -ears ,. !.51 -ears C. !.9$ -ears .. &.51 -ears 0. &.9$ -ears

"". Alicia is considerin1 addin1 to-s to her 1ift shop. <he estimates that the cost of inventor*ill )e "#500. 3he remodelin1 e/penses and shelvin1 costs are estimated at 1#500. 3osales are e/pected to produce net cash inflo*s of 1#900# !#"00# &#!00# and &#$00 over the ne/t four -ears# respectivel-. <hould Alicia add to-s to her store if she assi1ns a three--ear pa-)ac% period to this project+ (h- or *h- not+ A. NoE 3he pa-)ac% period is !.9& -ears. ,. NoE 3he pa-)ac% period is &.&9 -ears. C. 8esE 3he pa-)ac% period is !.9& -ears. .. 8esE 3he pa-)ac% period is &.01 -ears. 0. 8esE 3he pa-)ac% period is &.&9 -ears.

9-!'

Chapter 09 - Net Present Value and Other Investment Criteria

"9. A project has an initial cost of 19#$00 and produces cash inflo*s of "#!00# 9#900# and "#500 over three -ears# respectivel-. (hat is the discounted pa-)ac% period if the re6uired rate of return is 1' percent+ A. !.&1 -ears ,. !.$5 -ears C. !.55 -ears .. !.'! -ears 0. never

"9. <cott is considerin1 a project that *ill produce cash inflo*s of !#100 a -ear for $ -ears. 3he project has a 1! percent re6uired rate of return and an initial cost of 5#000. (hat is the discounted pa-)ac% period+ A. !.9" -ears ,. &.11 -ears C. &.!' -ears .. $.&9 -ears 0. never

90. HGH 0nterprises is considerin1 an investment that *ill cost &19#000. 3he investment produces no cash flo*s for the first -ear. In the second -ear# the cash inflo* is $"#000. 3his inflo* *ill increase to 199#000 and then !!'#000 for the follo*in1 t*o -ears# respectivel-# )efore ceasin1 permanentl-. 3he firm re6uires a 15.5 percent rate of return and has a re6uired discounted pa-)ac% period of three -ears. <hould the project )e accepted+ (h- or *h- not+ A. acceptE 3he discounted pa-)ac% period is !.19 -ears. ,. acceptE 3he discounted pa-)ac% period is !.&! -ears. C. acceptE 3he discounted pa-)ac% period is !.99 -ears. .. rejectE 3he discounted pa-)ac% period is !.19 -ears. 0. rejectE 3he project never pa-s )ac% on a discounted )asis.

9-!"

Chapter 09 - Net Present Value and Other Investment Criteria

91. 3he <6uare ,o/ is considerin1 t*o projects# )oth of *hich have an initial cost of &5#000 and total cash inflo*s of 50#000. 3he cash inflo*s of project A are 5#000# 10#000# 15#000# and !0#000 over the ne/t four -ears# respectivel-. 3he cash inflo*s for project , are !0#000# 15#000# 10#000# and 5#000 over the ne/t four -ears# respectivel-. (hich one of the follo*in1 statements is correct if 3he <6uare ,o/ re6uires a 1! percent rate of return and has a re6uired discounted pa-)ac% period of &.5 -ears+ A. ,oth projects should )e accepted. ,. ,oth projects should )e rejected. C. Project A should )e accepted and project , should )e rejected. .. Project A should )e rejected and project , should )e accepted. 0. 8ou should )e indifferent to acceptin1 either or )oth projects.

9!. 3he @reen Aiddle is considerin1 a project that *ill produce sales of 9"#000 a -ear for the ne/t $ -ears. 3he profit mar1in is estimated at ' percent. 3he project *ill cost 90#000 and *ill )e depreciated strai1ht-line to a )oo% value of 7ero over the life of the project. 3he firm has a re6uired accountin1 return of 11 percent. 3his project should )e IIIII )ecause the AA: is IIIII percent. A. rejectedE 10.0& ,. rejectedE 10.!5 C. rejectedE 11.'0 .. acceptedE 10.!5 0. acceptedE 11.'0

9&. A project has an initial cost of &5#000 and a &--ear life. 3he compan- uses strai1ht-line depreciation to a )oo% value of 7ero over the life of the project. 3he projected net income from the project is 1#!00# !#&00# and 1#900 a -ear for the ne/t & -ears# respectivel-. (hat is the avera1e accountin1 return+ A. 9."! percent ,. 10.10 percent C. 11.!' percent .. 1$.'9 percent 0. 15.1$ percent

9-!9

Chapter 09 - Net Present Value and Other Investment Criteria

9$. A project produces annual net income of $'#!00# 51#900# and '!#900 over its &--ear life# respectivel-. 3he initial cost of the project is '"5#000. 3his cost is depreciated strai1htline to a 7ero )oo% value over three -ears. (hat is the avera1e accountin1 rate of return if the re6uired discount rate is 1$.5 percent+ A. 15.99 percent ,. 1'.'" percent C. 19.99 percent .. !0.!5 percent 0. !&.9$ percent

95. A project has avera1e net income of 5#'00 a -ear over its '--ear life. 3he initial cost of the project is 99#000 *hich *ill )e depreciated usin1 strai1ht-line depreciation to a )oo% value of 7ero over the life of the project. 3he firm *ants to earn a minimum avera1e accountin1 return of 11.5 percent. 3he firm should IIIII the project )ecause the AA: is IIIII percent. A. acceptE 5."1 ,. acceptE 9.90 C. acceptE 11.$& .. rejectE 5."1 0. rejectE 11.$&

9'. Colin is anal-7in1 a project and has 1athered the follo*in1 data. ,ased on this data# *hat is the avera1e accountin1 rate of return+ 3he project2s assets *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project.

A. '.9$ percent ,. 1&.99 percent C. 15.'' percent .. !"."5 percent 0. &1.&1 percent

9-!9

Chapter 09 - Net Present Value and Other Investment Criteria

9". 8ou are anal-7in1 the follo*in1 t*o mutuall- e/clusive projects and have developed the follo*in1 information. (hat is the crossover rate+

A. 1&.1" percent ,. 1&.&& percent C. 1$.&! percent .. 1$.9' percent 0. 15.!0 percent

99. ,oston Chic%en is considerin1 t*o mutuall- e/clusive projects *ith the follo*in1 cash flo*s. (hat is the crossover rate+ If the re6uired rate of return is lo*er than the crossover rate# *hich project should )e accepted+

A. 1$."! percentE A ,. 1$."! percentE , C. 15.99 percentE A .. 15.99 percentE , 0. 1'.09 percentE ,

9-&0

Chapter 09 - Net Present Value and Other Investment Criteria

99. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the profita)ilit- inde/ of IIIII for this project# -ou should IIIII the project. A. 0.9&E accept ,. 1.0!E accept C. 1.0"E accept .. 0.9&E reject 0. 1.0"E reject

9-&1

Chapter 09 - Net Present Value and Other Investment Criteria

90. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the internal rate of return of IIIII percent for this project# -ou should IIIII the project. A. 1$.'"E accept ,. 1".91E accept C. 1$.'"E reject .. 1".91E reject 0. 19.$'E reject

9-&!

Chapter 09 - Net Present Value and Other Investment Criteria

91. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the net present value of IIIII# -ou should IIIII the project. A. - 15#0&0."5E reject ,. - 1!#995.9$E reject C. - 9#!9&.'0E accept .. 9#!9&.'0E accept 0. 1!#995.9$E accept

9!. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the pa-)ac% period of IIIII -ears for this project# -ou should IIIII the project. A. !."9E accept ,. &."9E accept C. !.$'E reject .. !."9E reject 0. &."9E reject

9-&&

Chapter 09 - Net Present Value and Other Investment Criteria

9&. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on net present value anal-sis+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on net present value anal-sis.

9-&$

Chapter 09 - Net Present Value and Other Investment Criteria

9$. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on I:: anal-sis+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on internal rate of return anal-sis.

9-&5

Chapter 09 - Net Present Value and Other Investment Criteria

95. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on pa-)ac% anal-sis+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on pa-)ac% anal-sis.

9-&'

Chapter 09 - Net Present Value and Other Investment Criteria

9'. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on the profita)ilit- inde/+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on the profita)ilit- inde/.

9-&"

Chapter 09 - Net Present Value and Other Investment Criteria

9". 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on the avera1e accountin1 return+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on the information provided.

99. Botor Cit- Productions sells ori1inal automotive art on a prepaid )asis as each piece is uni6uel- desi1ned to the customer2s specifications. Aor one project# the cash flo*s are estimated as follo*s. ,ased on the internal rate of return =I::?# should this project )e accepted if the re6uired return is 9 percent+

A. Accept the project. ,. :eject the project. C. 3he I:: cannot )e used to evaluate this t-pe of project. .. 3he firm should )e indifferent to either acceptin1 or rejectin1 this project. 0. Insufficient information is provided to ma%e a decision )ased on I::.

9-&9

Chapter 09 - Net Present Value and Other Investment Criteria

99. :osa2s .esi1ner @o*ns creates e/6uisite 1o*ns for special occasions on a prepaid )asis onl-. 3he re6uired return is 9 percent. :osa has estimated the cash flo*s for one 1o*n as follo*s. <hould :osa sell this 1o*n at the price she is currentl- considerin1 )ased on the estimated internal rate of return =I::?+

A. :osa should sell the 1o*n for 155#000. ,. :ose can sell the 1o*n for as little as 15&#919 and still earn her re6uired return. C. 3he 1o*n must )e sold for a minimum price of 1"5#9!' if :osa is to earn her re6uired return. .. 3he I:: decision rule cannot )e applied to this project. 0. Insufficient information is provided to ma%e a decision )ased on I::.

Essay Questions

100. 3he profita)ilit- inde/ =PI? of a project is 1.0. (hat do -ou %no* a)out the project2s net present value =NPV? and its internal rate of return =I::?+

101. 0/plain ho* the internal rate of return =I::? decision rule is applied to projects *ith financin1 t-pe cash flo*s.

9-&9

Chapter 09 - Net Present Value and Other Investment Criteria

10!. 0/plain the differences and similarities )et*een net present value =NPV? and the profita)ilit- inde/.

10&. ;o* does the net present value =NPV? decision rule relate to the primar- 1oal of financial mana1ement# *hich is creatin1 *ealth for shareholders+

Multiple Choice Questions

10$. An investment project provides cash flo*s of 1#190 per -ear for 10 -ears. If the initial cost is 9#000# *hat is the pa-)ac% period+ A. &.&' -ears ,. 5.!9 -ears C. '."! -ears .. 9.1& -ears 0. never

105. An investment project costs !1#500 and has annual cash flo*s of $#!00 for ' -ears. If the discount rate is !0 percent# *hat is the discounted pa-)ac% period+ A. $.$1 -ears ,. $.'" -ears C. 5.1! -ears .. 5.$0 -ears 0. never

9-$0

Chapter 09 - Net Present Value and Other Investment Criteria

10'. 8ou2re tr-in1 to determine *hether to e/pand -our )usiness )- )uildin1 a ne* manufacturin1 plant. 3he plant has an installation cost of 1! million# *hich *ill )e depreciated strai1ht-line to 7ero over its $--ear life. 3he plant has projected net income of 1#095#000# 90!#000# 1#$1!#000# and 1#"!$#000 over these $ -ears. (hat is the avera1e accountin1 return+ A. 10."0 percent ,. 15.'& percent C. 19.9" percent .. !1.&9 percent 0. !&.05 percent

10". A firm evaluates all of its projects )- appl-in1 the I:: rule. 3he re6uired return for the follo*in1 project is !1 percent. 3he I:: is IIIII percent and the firm should IIIIII the project.

A. !&.'" percentE reject ,. !$.!' percentE accept C. !$.!' percentE reject .. !'.&0 percentE accept 0. !'.&0 percentE reject

9-$1

Chapter 09 - Net Present Value and Other Investment Criteria

109. A firm evaluates all of its projects )- usin1 the NPV decision rule. At a re6uired return of 1$ percent# the NPV for the follo*in1 project is IIIII and the firm should IIIII the project.

A. ,. C. .. 0.

5#'9$.!!E reject "#!'$.95E accept "#!'$.95E reject 9#'1'.9&E accept 9#'1'.9&E reject

109. A project that provides annual cash flo*s of 1!#'00 for 1! -ears costs '"#150 toda-. At *hat rate *ould -ou )e indifferent )et*een acceptin1 the project and rejectin1 it+ A. 15.!9 percent ,. 15.$0 percent C. 15.51 percent .. 15.'! percent 0. 15."$ percent

9-$!

Chapter 09 - Net Present Value and Other Investment Criteria

110. ;un1r- ;oa1ie2s has identified the follo*in1 t*o mutuall- e/clusive projects4

At *hat rate *ould -ou )e indifferent )et*een these t*o projects+ A. 1".&$ percent ,. 1"."! percent C. 19.$1 percent .. 19.'9 percent 0. !0.!9 percent

111. Consider the follo*in1 t*o mutuall- e/clusive projects4

(hat is the crossover rate for these t*o projects+ A. '.!9 percent ,. '.$9 percent C. '."1 percent .. '."5 percent 0. '.9$ percent

9-$&

Chapter 09 - Net Present Value and Other Investment Criteria

11!. 3he relevant discount rate for the follo*in1 set of cash flo*s is 1$ percent. (hat is the profita)ilit- inde/+

A. 0.99 ,. 0.9& C. 0.99 .. 1.0& 0. 1.0"

11&. Consider the follo*in1 t*o mutuall- e/clusive projects4

3he re6uired return is 15 percent for )oth projects. (hich one of the follo*in1 statements related to these projects is correct+ A. ,ecause )oth the I:: and the PI impl- acceptin1 Project ,# that project should )e accepted. ,. 3he profita)ilit- rule implies acceptin1 Project A. C. 3he I:: decision rule should )e used as the )asis for selectin1 the project in this situation. .. Onl- NPV implies acceptin1 Project A. 0. NPV# I::# and PI all impl- acceptin1 Project A.

9-$$

Chapter 09 - Net Present Value and Other Investment Criteria

11$. An investment project has an installed cost of 519#!9". 3he cash flo*s over the $--ear life of the investment are projected to )e !9"#'&'# !0&#$9'# 10&#90!# and 9!#55'# respectivel-. (hat is the NPV of this project if the discount rate is 7ero percent+ A. $"#&0' ,. "!#$19 C. 91#110 .. 1!9#$15 0. 1'9#19&

115. 3he 3a/i Co. is evaluatin1 a project *ith the follo*in1 cash flo*s4

3he compan- uses a 10 percent interest rate on all of its projects. (hat is the BI:: usin1 the discounted approach+ A. 1&.!5 percent ,. 1$.09 percent C. 1'.$0 percent .. 1".1" percent 0. 19.!& percent

9-$5

Chapter 09 - Net Present Value and Other Investment Criteria

11'. 3he Chandler @roup *ants to set up a private cemeter- )usiness. Accordin1 to the CAO# ,arr- B. .eep# )usiness is Jloo%in1 upJ. As a result# the cemeter- project *ill provide a net cash inflo* of 5"#000 for the firm durin1 the first -ear# and the cash flo*s are projected to 1ro* at a rate of " percent per -ear forever. 3he project re6uires an initial investment of "59#000. 3he firm re6uires a 1$ percent return on such underta%in1s. 3he compan- is some*hat unsure a)out the assumption of a " percent 1ro*th rate in its cash flo*s. At *hat constant rate of 1ro*th *ould the compan- just )rea% even+ A. $.$9 percent ,. 5.!9 percent C. 5.'1 percent .. '.$9 percent 0. '."5 percent

9-$'

Chapter 09 - Net Present Value and Other Investment Criteria

Chapter 09 Net Present Value and Other Investment Criteria Ans*er De-

Multiple Choice Questions

1. A project has an initial cost of !"#$00 and a mar%et value of &!#'00. (hat is the difference )et*een these t*o values called+ A. net present value ,. internal return C. pa-)ac% value .. profita)ilit- inde/ 0. discounted pa-)ac% :efer to section 9.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

!. (hich one of the follo*in1 methods of project anal-sis is defined as computin1 the value of a project )ased upon the present value of the project2s anticipated cash flo*s+ A. constant dividend 1ro*th model . discounted cash flo* valuation C. avera1e accountin1 return .. e/pected earnin1s model 0. internal rate of return :efer to section 9.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Discounted cas( flow !aluation

9-$"

Chapter 09 - Net Present Value and Other Investment Criteria

&. 3he len1th of time a firm must *ait to recoup the mone- it has invested in a project is called the4 A. internal return period. . pa-)ac% period. C. profita)ilit- period. .. discounted cash period. 0. valuation period. :efer to section 9.!

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

$. 3he len1th of time a firm must *ait to recoup# in present value terms# the mone- it has in invested in a project is referred to as the4 A. net present value period. ,. internal return period. C. pa-)ac% period. .. discounted profita)ilit- period. E. discounted pa-)ac% period. :efer to section 9.&

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+ 'eriod

9-$9

Chapter 09 - Net Present Value and Other Investment Criteria

5. A project2s avera1e net income divided )- its avera1e )oo% value is referred to as the project2s avera1e4 A. net present value. ,. internal rate of return. C. accountin1 return. .. profita)ilit- inde/. 0. pa-)ac% period. :efer to section 9.$

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

'. 3he internal rate of return is defined as the4 A. ma/imum rate of return a firm e/pects to earn on a project. ,. rate of return a project *ill 1enerate if the project in financed solel- *ith internal funds. C. discount rate that e6uates the net cash inflo*s of a project to 7ero. !. discount rate *hich causes the net present value of a project to e6ual 7ero. 0. discount rate that causes the profita)ilit- inde/ for a project to e6ual 7ero. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-$9

Chapter 09 - Net Present Value and Other Investment Criteria

". 8ou are vie*in1 a 1raph that plots the NPVs of a project to various discount rates that could )e applied to the project2s cash flo*s. (hat is the name 1iven to this 1raph+ A. project tract ,. projected ris% profile C. NPV profile .. NPV route 0. present value se6uence :efer to section 9.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: N*0 'rofile

9. 3here are t*o distinct discount rates at *hich a particular project *ill have a 7ero net present value. In this situation# the project is said to4 A. have t*o net present value profiles. ,. have operational am)i1uit-. C. create a mutuall- e/clusive investment decision. .. produce multiple economies of scale. E. have multiple rates of return. :efer to section 9.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1ulti'le rates of return

9-50

Chapter 09 - Net Present Value and Other Investment Criteria

9. If a firm accepts Project A it *ill not )e feasi)le to also accept Project , )ecause )oth projects *ould re6uire the simultaneous and e/clusive use of the same piece of machiner-. 3hese projects are considered to )e4 A. independent. ,. interdependent. C. mutuall- e/clusive. .. economicall- scaled. 0. operationall- distinct. :efer to section 9.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e

10. 3he present value of an investment2s future cash flo*s divided )- the initial cost of the investment is called the4 A. net present value. ,. internal rate of return. C. avera1e accountin1 return. !. profita)ilit- inde/. 0. profile period. :efer to section 9.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-51

Chapter 09 - Net Present Value and Other Investment Criteria

11. A project has a net present value of 7ero. (hich one of the follo*in1 )est descri)es this project+ A. 3he project has a 7ero percent rate of return. ,. 3he project re6uires no initial cash investment. C. 3he project has no cash flo*s. .. 3he summation of all of the project2s cash flo*s is 7ero. E. 3he project2s cash inflo*s e6ual its cash outflo*s in current dollar terms. :efer to section 9.1

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

1!. (hich one of the follo*in1 *ill decrease the net present value of a project+ A. increasin1 the value of each of the project2s discounted cash inflo*s ,. movin1 each of the cash inflo*s )ac% to a later time period C. decreasin1 the re6uired discount rate !. increasin1 the project2s initial cost at time 7ero 0. increasin1 the amount of the final cash inflo* :efer to section 9.1

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-5!

Chapter 09 - Net Present Value and Other Investment Criteria

1&. (hich one of the follo*in1 methods determines the amount of the chan1e a proposed project *ill have on the value of a firm+ A. net present value ,. discounted pa-)ac% C. internal rate of return .. profita)ilit- inde/ 0. pa-)ac% :efer to section 9.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

1$. If a project has a net present value e6ual to 7ero# then4 A. the total of the cash inflo*s must e6ual the initial cost of the project. . the project earns a return e/actl- e6ual to the discount rate. C. a decrease in the project2s initial cost *ill cause the project to have a ne1ative NPV. .. an- dela- in receivin1 the projected cash inflo*s *ill cause the project to have a positive NPV. 0. the project2s PI must )e also )e e6ual to 7ero. :efer to sections 9.1 and 9.'

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ and "#3 Section: "%$ and "%4 &o'ic: Net 'resent !alue and 'rofitability inde2

9-5&

Chapter 09 - Net Present Value and Other Investment Criteria

15. :ossiter :estaurants is anal-7in1 a project that re6uires 190#000 of fi/ed assets. (hen the project ends# those assets are e/pected to have an afterta/ salva1e value of $5#000. ;o* is the $5#000 salva1e value handled *hen computin1 the net present value of the project+ A. reduction in the cash outflo* at time 7ero . cash inflo* in the final -ear of the project C. cash inflo* for the -ear follo*in1 the final -ear of the project .. cash inflo* prorated over the life of the project 0. not included in the net present value :efer to section 9.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue and sal!age !alue

1'. (hich one of the follo*in1 increases the net present value of a project+ A. an increase in the re6uired rate of return ,. an increase in the initial capital re6uirement C. a deferment of some cash inflo*s until a later -ear !. an increase in the afterta/ salva1e value of the fi/ed assets 0. a reduction in the final cash inflo* :efer to section 9.1

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-5$

Chapter 09 - Net Present Value and Other Investment Criteria

1". Net present value4 A. is the )est method of anal-7in1 mutuall- e/clusive projects. ,. is less useful than the internal rate of return *hen comparin1 different si7ed projects. C. is the easiest method of evaluation for non-financial mana1ers to use. .. is less useful than the profita)ilit- inde/ *hen comparin1 mutuall- e/clusive projects. 0. is ver- similar in its methodolo1- to the avera1e accountin1 return. :efer to section 9.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

19. (hich one of the follo*in1 is a project acceptance indicator 1iven an independent project *ith investin1 t-pe cash flo*s+ A. profita)ilit- inde/ less than 1.0 ,. project2s internal rate of return less than the re6uired return C. discounted pa-)ac% period 1reater than re6uirement .. avera1e accountin1 return that is less than the internal rate of return E. modified internal rate of return that e/ceeds the re6uired return :efer to sections 9.& throu1h 9.'

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%, t(roug( "%4 &o'ic: Decision rules

9-55

Chapter 09 - Net Present Value and Other Investment Criteria

19. (h- is pa-)ac% often used as the sole method of anal-7in1 a proposed small project+ A. Pa-)ac% considers the time value of mone-. ,. All relevant cash flo*s are included in the pa-)ac% anal-sis. C. It is the onl- method *here the )enefits of the anal-sis out*ei1h the costs of that anal-sis. .. Pa-)ac% is the most desira)le of the various financial methods of anal-sis. 0. Pa-)ac% is focused on the lon1-term impact of a project. :efer to section 9.!

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+

!0. (hich of the follo*in1 are advanta1es of the pa-)ac% method of project anal-sis+ I. *or%s *ell for research and development projects II. li6uidit- )ias III. ease of use IV. ar)itrar- cutoff point A. I and II onl,. I and III onlC. II and III onl.. II and IV onl0. II# III# and IV onl:efer to section 9.!

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ ad!antages

9-5'

Chapter 09 - Net Present Value and Other Investment Criteria

!1. <amuelson 0lectronics has a re6uired pa-)ac% period of three -ears for all of its projects. Currentl-# the firm is anal-7in1 t*o independent projects. Project A has an e/pected pa-)ac% period of !.9 -ears and a net present value of '#900. Project , has an e/pected pa-)ac% period of &.1 -ears *ith a net present value of !9#$00. (hich projects should )e accepted )ased on the pa-)ac% decision rule+ A. Project A onl,. Project , onlC. ,oth A and , .. Neither A nor , 0. Ans*er cannot )e determined )ased on the information 1iven. :efer to section 9.!

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ decision rule

!!. A project has a re6uired pa-)ac% period of three -ears. (hich one of the follo*in1 statements is correct concernin1 the pa-)ac% anal-sis of this project+ A. 3he cash flo*s in each of the three -ears must e/ceed one-third of the project2s initial cost if the project is to )e accepted. ,. 3he cash flo* in -ear three is i1nored. C. 3he project2s cash flo* in -ear three is discounted )- a factor of =1 > :?&. !. 3he cash flo* in -ear t*o is valued just as hi1hl- as the cash flo* in -ear one. 0. 3he project is accepta)le *henever the pa-)ac% period e/ceeds three -ears. :efer to section 9.!

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+

9-5"

Chapter 09 - Net Present Value and Other Investment Criteria

!&. A project has a discounted pa-)ac% period that is e6ual to the re6uired pa-)ac% period. @iven this# *hich of the follo*in1 statements must )e true+ I. 3he project must also )e accepta)le under the pa-)ac% rule. II. 3he project must have a profita)ilit- inde/ that is e6ual to or 1reater than 1.0. III. 3he project must have a 7ero net present value. IV. 3he project2s internal rate of return must e6ual the re6uired return. A. I onl. I and II onlC. II and III onl.. I# III# and IV onl0. I# II# III# and IV :efer to section 9.&

AACSB: N/A Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

!$. (hich one of the follo*in1 statements related to pa-)ac% and discounted pa-)ac% is correct+ A. Pa-)ac% is a )etter method of anal-sis than is discounted pa-)ac%. ,. .iscounted pa-)ac% is used more fre6uentl- in )usiness than is pa-)ac%. C. .iscounted pa-)ac% does not re6uire a cutoff point li%e the pa-)ac% method does. .. .iscounted pa-)ac% is )iased to*ards lon1-term projects *hile pa-)ac% is )iased to*ards short-term projects. E. Pa-)ac% is used more fre6uentl- even thou1h discounted pa-)ac% is a )etter method. :efer to sections 9.! and 9.&

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) and "#, Section: "%) and "%, &o'ic: *aybac+ and discounted 'aybac+

9-59

Chapter 09 - Net Present Value and Other Investment Criteria

!5. Appl-in1 the discounted pa-)ac% decision rule to all projects ma- cause4 A. some positive net present value projects to )e rejected. ,. the most li6uid projects to )e rejected in favor of the less li6uid projects. C. projects to )e incorrectl- accepted due to i1norin1 the time value of mone-. .. a firm to )ecome more lon1-term focused. 0. some projects to )e accepted *hich *ould other*ise )e rejected under the pa-)ac% rule. :efer to section 9.&

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

!'. (hich one of the follo*in1 correctl- applies to the avera1e accountin1 rate of return+ A. It considers the time value of mone-. ,. It measures net income as a percenta1e of the sales 1enerated )- a project. C. It is the )est method of anal-7in1 mutuall- e/clusive projects from a financial point of vie*. .. It is the primar- methodolo1- used in anal-7in1 independent projects. E. It can )e compared to the return on assets ratio. :efer to section 9.$

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-59

Chapter 09 - Net Present Value and Other Investment Criteria

!". (hich one of the follo*in1 is an advanta1e of the avera1e accountin1 return method of anal-sis+ A. eas- availa)ilit- of information needed for the computation ,. inclusion of time value of mone- considerations C. the use of a cutoff rate as a )enchmar% .. the use of pre-ta/ income in the computation 0. use of real# versus nominal# avera1e income :efer to section 9.$

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

!9. (hich of the follo*in1 are considered *ea%nesses in the avera1e accountin1 return method of project anal-sis+ I. e/clusion of time value of mone- considerations II. need of a cutoff rate III. easil- o)taina)le information for computation IV. )ased on accountin1 values A. I onl,. I and IV onlC. II and III onl!. I# II# and IV onl0. I# II# III# and IV :efer to section 9.$

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-'0

Chapter 09 - Net Present Value and Other Investment Criteria

!9. (hich one of the follo*in1 statements related to the internal rate of return =I::? is correct+ A. 3he I:: -ields the same accept and reject decisions as the net present value method 1iven mutuall- e/clusive projects. ,. A project *ith an I:: e6ual to the re6uired return *ould reduce the value of a firm if accepted. C. 3he I:: is e6ual to the re6uired return *hen the net present value is e6ual to 7ero. .. Ainancin1 t-pe projects should )e accepted if the I:: e/ceeds the re6uired return. 0. 3he avera1e accountin1 return is a )etter method of anal-sis than the I:: from a financial point of vie*. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

&0. 3he internal rate of return4 A. ma- produce multiple rates of return *hen cash flo*s are conventional. ,. is )est used *hen comparin1 mutuall- e/clusive projects. C. is rarel- used in the )usiness *orld toda-. .. is principall- used to evaluate small dollar projects. E. is eas- to understand. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-'1

Chapter 09 - Net Present Value and Other Investment Criteria

&1. 3edder Binin1 has anal-7ed a proposed e/pansion project and determined that the internal rate of return is lo*er than the firm desires. (hich one of the follo*in1 chan1es to the project *ould )e most e/pected to increase the project2s internal rate of return+ A. decreasin1 the re6uired discount rate ,. increasin1 the initial investment in fi/ed assets C. condensin1 the firm2s cash inflo*s into fe*er -ears *ithout lo*erin1 the total amount of those inflo*s .. eliminatin1 the salva1e value 0. decreasin1 the amount of the final cash inflo* :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

&!. 3he internal rate of return is4 A. the discount rate that ma%es the net present value of a project e6ual to the initial cash outla-. ,. e6uivalent to the discount rate that ma%es the net present value e6ual to one. C. tedious to compute *ithout the use of either a financial calculator or a computer. .. hi1hl- dependent upon the current interest rates offered in the mar%etplace. 0. a )etter methodolo1- than net present value *hen dealin1 *ith unconventional cash flo*s. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-'!

Chapter 09 - Net Present Value and Other Investment Criteria

&&. (hich of the follo*in1 statements related to the internal rate of return =I::? are correct+ I. 3he I:: method of anal-sis can )e adapted to handle non-conventional cash flo*s. II. 3he I:: that causes the net present value of the differences )et*een t*o project2s cash flo*s to e6ual 7ero is called the crossover rate. III. 3he I:: tends to )e used more than net present value simpl- )ecause its results are easier to comprehend. IV. ,oth the timin1 and the amount of a project2s cash flo*s affect the value of the project2s I::. A. I and II onl,. III and IV onlC. I# II# and III onl.. II# III# and IV onlE. I# II# III# and IV :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

&$. .ou1lass Interiors is considerin1 t*o mutuall- e/clusive projects and have determined that the crossover rate for these projects is 11." percent. Project A has an internal rate of return =I::? of 15.& percent and Project , has an I:: of 1'.5 percent. @iven this information# *hich one of the follo*in1 statements is correct+ A. Project A should )e accepted as its I:: is closer to the crossover point than is Project ,2s I::. ,. Project , should )e accepted as it has the hi1her I::. C. ,oth projects should )e accepted as )oth of the project2s I::s e/ceed the crossover rate. .. Neither project should )e accepted since )oth of the project2s I::s e/ceed the crossover rate. E. 8ou cannot determine *hich project should )e accepted 1iven the information provided. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-'&

Chapter 09 - Net Present Value and Other Investment Criteria

&5. 8ou are comparin1 t*o mutuall- e/clusive projects. 3he crossover point is 1!.& percent. 8ou have determined that -ou should accept project A if the re6uired return is 1&.1 percent. 3his implies -ou should4 A. al*a-s accept project A. ,. )e indifferent to the projects at an- discount rate a)ove 1&.1 percent. C. al*a-s accept project A if the re6uired return e/ceeds the crossover rate. .. accept project , onl- *hen the re6uired return is e6ual to the crossover rate. 0. accept project , if the re6uired return is less than 1&.1 percent. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er rate

&'. @raphin1 the crossover point helps e/plain4 A. *h- one project is al*a-s superior to another project. . ho* decisions concernin1 mutuall- e/clusive projects are derived. C. ho* the duration of a project affects the decision as to *hich project to accept. .. ho* the net present value and the initial cash outflo* of a project are related. 0. ho* the profita)ilit- inde/ and the net present value are related. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er 'oint

9-'$

Chapter 09 - Net Present Value and Other Investment Criteria

&". A project *ith financin1 t-pe cash flo*s is t-pified )- a project that has *hich one of the follo*in1 characteristics+ A. conventional cash flo*s ,. cash flo*s that e/tend )e-ond the accepta)le pa-)ac% period C. a -ear or more in the middle of a project *here the cash flo*s are e6ual to 7ero !. a cash inflo* at time 7ero 0. cash inflo*s *hich are e6ual in amount :efer to section 9.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 5inancing cas( flows

&9. (hich of the follo*in1 statements 1enerall- appl- to the cash flo*s of a financin1 t-pe project+ I. nonconventional cash flo*s II. cash outflo*s e/ceed cash inflo*s prior to an- time value adjustments III. cash for services rendered is received prior to the cash that is spent providin1 the services IV. the total of all cash flo*s must e6ual 7ero on an unadjusted )asis A. I onl,. I and III onlC. II and IV onl!. I# II# and III onl0. I# II# III# and IV :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: 5inancing cas( flows

9-'5

Chapter 09 - Net Present Value and Other Investment Criteria

&9. (hich one of the follo*in1 statements is correct in relation to independent projects+ A. 3he internal rate of return cannot )e used to determine the accepta)ilit- of a project that has financin1 t-pe cash flo*s. . A project *ith investin1 t-pe cash flo*s is accepta)le if its internal rate of return e/ceeds the re6uired return. C. A project *ith financin1 t-pe cash flo*s is accepta)le if its internal rate of return e/ceeds the re6uired return. .. 3he net present value profile is upslopin1 for projects *ith )oth investin1 and financin1 t-pe cash flo*s. 0. Projects *ith financin1 t-pe cash flo*s are accepta)le onl- *hen the internal rate of return is ne1ative. :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: 5inancing cas( flows

$0. 3he profita)ilit- inde/ is most closel- related to *hich one of the follo*in1+ A. pa-)ac% ,. discounted pa-)ac% C. avera1e accountin1 return !. net present value 0. modified internal rate of return :efer to section 9.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-''

Chapter 09 - Net Present Value and Other Investment Criteria

$1. :o1er2s Beat Bar%et is considerin1 t*o independent projects. 3he profita)ilit- inde/ decision rule indicates that )oth projects should )e accepted. 3his result most li%el- does *hich one of the follo*in1+ A. conflicts *ith the results of the net present value decision rule . assumes the firm has sufficient funds to underta%e )oth projects C. a1rees *ith the decision that *ould also appl- if the projects *ere mutuall- e/clusive .. )ases the acceptCreject decision on the same varia)les as the avera1e accountin1 return 0. fails to provide useful information as the firm must reject at least one of the projects :efer to section 9.'

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

$!. (hich one of the follo*in1 methods of anal-sis provides the )est information on the cost)enefit aspects of a project+ A. net present value ,. pa-)ac% C. internal rate of return .. avera1e accountin1 return E. profita)ilit- inde/ :efer to section 9.'

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-'"

Chapter 09 - Net Present Value and Other Investment Criteria

$&. (hen the present value of the cash inflo*s e/ceeds the initial cost of a project# then the project should )e4 A. accepted )ecause the internal rate of return is positive. . accepted )ecause the profita)ilit- inde/ is 1reater than 1. C. accepted )ecause the profita)ilit- inde/ is ne1ative. .. rejected )ecause the internal rate of return is ne1ative. 0. rejected )ecause the net present value is ne1ative. :efer to section 9.'

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

$$. (hich one of the follo*in1 is the )est e/ample of t*o mutuall- e/clusive projects+ A. )uildin1 a retail store that is attached to a *holesale outlet ,. producin1 )oth plastic for%s and spoons on the same assem)l- line at the same time C. usin1 an empt- *arehouse to store )oth ra* materials and finished 1oods .. promotin1 t*o products durin1 the same television commercial E. *aitin1 until a machine finishes moldin1 Product A )efore )ein1 a)le to mold Product , :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e 'ro ects

9-'9

Chapter 09 - Net Present Value and Other Investment Criteria

$5. <outhern Chic%en is considerin1 t*o projects. Project A consists of creatin1 an outdoor eatin1 area on the unused portion of the restaurant2s propert-. Project , *ould use that outdoor space for creatin1 a drive-thru service *indo*. (hen tr-in1 to decide *hich project to accept# the firm should rel- most heavil- on *hich one of the follo*in1 anal-tical methods+ A. profita)ilit- inde/ ,. internal rate of return C. pa-)ac% !. net present value 0. accountin1 rate of return :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e 'ro ects

$'. Butuall- e/clusive projects are )est defined as competin1 projects *hich4 A. *ould commence on the same da-. ,. have the same initial start-up costs. C. )oth re6uire the total use of the same limited resource. .. )oth have ne1ative cash outflo*s at time 7ero. 0. have the same life span. :efer to section 9.5

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e 'ro ects

9-'9

Chapter 09 - Net Present Value and Other Investment Criteria

$". 3he final decision on *hich one of t*o mutuall- e/clusive projects to accept ultimateldepends upon *hich one of the follo*in1+ A. initial cost of each project ,. timin1 of the cash inflo*s C. total cash inflo*s of each project !. re6uired rate of return 0. len1th of each project2s life :efer to section 9.5

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e 'ro ects

$9. Isaac has anal-7ed t*o mutuall- e/clusive projects of similar si7e and has compiled the follo*in1 information )ased on his anal-sis. ,oth projects have &- -ear lives.

Isaac has )een as%ed for his )est recommendation 1iven this information. ;is recommendation should )e to accept4 A. )oth projects. ,. project , )ecause it has the shortest pa-)ac% period. C. project , and reject project A )ased on their net present values. .. project A and reject project , )ased on their avera1e accountin1 returns. 0. neither project. :efer to section 9.5

AACSB: N/A Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: 1utually e2clusi!e 'ro ects

9-"0

Chapter 09 - Net Present Value and Other Investment Criteria

$9. (hich one of the follo*in1 statements *ould 1enerall- )e considered as accurate 1iven independent projects *ith conventional cash flo*s+ A. 3he internal rate of return decision ma- contradict the net present value decision. ,. ,usiness practice dictates that independent projects should have three distinct accept indicators )efore a project is actuall- implemented. C. 3he pa-)ac% decision rule could override the net present value decision rule should cash availa)ilit- )e limited. .. 3he profita)ilit- inde/ rule cannot )e applied in this situation. 0. 3he projects cannot )e accepted unless the avera1e accountin1 return decision rulin1 is positive. :efer to section 9."

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%3 &o'ic: /nde'endent 'ro ects

50. In actual practice# mana1ers fre6uentl- use the4 I. avera1e accountin1 return method )ecause the information is so readil- availa)le. II. internal rate of return )ecause the results are eas- to communicate and understand. III. discounted pa-)ac% )ecause of its simplicit-. IV. net present value )ecause it is considered )- man- to )e the )est method of anal-sis. A. I and III onl,. II and III onlC. I# II# and IV onl.. II# III# and IV onl0. I# II# III# and IV :efer to section 9."

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%3 &o'ic: Ca'ital budgeting 'ractice

9-"1

Chapter 09 - Net Present Value and Other Investment Criteria

51. Dristi *ants to start trainin1 her most junior assistant# Am-# in the art of project anal-sis. Am- has just started colle1e and has no e/perience or )ac%1round in )usiness finance. 3o 1et her started# Dristi is 1oin1 to assi1n the responsi)ilit- for all projects that have initial costs less than 1#000 to Am- to anal-7e. (hich method is Dristi most apt to as% Am- to use in ma%in1 her initial decisions+ A. discounted pa-)ac% ,. profita)ilit- inde/ C. internal rate of return !. pa-)ac% 0. avera1e accountin1 return :efer to section 9."

AACSB: N/A Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%3 &o'ic: Ca'ital budgeting 'ractice

5!. (hich t*o methods of project anal-sis *ere the most *idel- used )- C0O2s as of 1999+ A. net present value and pa-)ac% ,. internal rate of return and pa-)ac% C. net present value and avera1e accountin1 return !. internal rate of return and net present value 0. pa-)ac% and avera1e accountin1 return :efer to section 9."

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%3 &o'ic: Ca'ital budgeting 'ractice

9-"!

Chapter 09 - Net Present Value and Other Investment Criteria

5&. (hich t*o methods of project anal-sis are the most )iased to*ards short-term projects+ A. net present value and internal rate of return ,. internal rate of return and profita)ilit- inde/ C. pa-)ac% and discounted pa-)ac% .. net present value and discounted pa-)ac% 0. discounted pa-)ac% and profita)ilit- inde/ :efer to section 9."

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%3 &o'ic: Ca'ital budgeting met(ods

5$. (estern ,eef 0/porters is considerin1 a project that has an NPV of &!#'00# an I:: of 15.1 percent# and a pa-)ac% period of &.! -ears. 3he re6uired return is 1$.5 percent and the re6uired pa-)ac% period is &.0 -ears. (hich one of the follo*in1 statements correctl- applies to this project+ A. 3he net present value indicates accept *hile the internal rate of return indicates reject. ,. Pa-)ac% indicates acceptance. C. 3he pa-)ac% decision rule could override the accept decision indicated )- the net present value. .. 3he pa-)ac% rule *ill automaticall- )e i1nored since )oth the net present value and the internal rate of return indicate an accept decision. 0. 3he net present value decision rule is the onl- rule that matters *hen ma%in1 the final decision. :efer to section 9."

AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%3 &o'ic: Ca'ital budgeting 'ractice

9-"&

Chapter 09 - Net Present Value and Other Investment Criteria

55. 8ou are considerin1 a project *ith conventional cash flo*s and the follo*in1 characteristics4

(hich of the follo*in1 statements is correct 1iven this information+ I. 3he discount rate used in computin1 the net present value *as less than 11.'& percent. II. 3he discounted pa-)ac% period must )e less than !.99 -ears. III. 3he discount rate used in the computation of the profita)ilit- ratio *as 11.'& percent. IV. 3his project should )e accepted as the internal rate of return e/ceeds the re6uired return. A. I and II onl,. III and IV onlC. I# II# and IV onl.. II# III# and IV onl0. I# II# III# and IV :efer to section 9."

AACSB: N/A Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$ Section: "%3 &o'ic: Ca'ital budgeting met(ods

9-"$

Chapter 09 - Net Present Value and Other Investment Criteria

5'. (hich of the follo*in1 are definite indicators of an accept decision for an independent project *ith conventional cash flo*s+ I. positive net present value II. profita)ilit- inde/ 1reater than 7ero III. internal rate of return 1reater than the re6uired rate IV. positive internal rate of return A. I and III onl,. II and IV onlC. I# II# and III onl.. II# III# and IV onl0. I# II# III# and IV :efer to section 9."

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%3 &o'ic: Ca'ital budgeting met(ods

9-"5

Chapter 09 - Net Present Value and Other Investment Criteria

5". (hat is the net present value of a project *ith the follo*in1 cash flo*s if the re6uired rate of return is 1! percent+

A. - 1#5"$.$1 ,. - 1#!09.19 C. - 9$!.1! .. "!9.09 0. 1#&11.1'

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-"'

Chapter 09 - Net Present Value and Other Investment Criteria

59. (hat is the net present value of a project that has an initial cash outflo* of &$#900 and the follo*in1 cash inflo*s+ 3he re6uired return is 15.&5 percent.

A. - &#&9&.!5 ,. - !#"9$.'! C. - !#$91.5& .. 5!#&11.09 0. ''#$1'."5

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-""

Chapter 09 - Net Present Value and Other Investment Criteria

59. A project *ill produce cash inflo*s of &#!00 a -ear for $ -ears *ith a final cash inflo* of 5#"00 in -ear 5. 3he project2s initial cost is 9#500. (hat is the net present value of this project if the re6uired rate of return is 1' percent+ A. - &11.0! . !#1'9.0! C. $#'50.11 .. 9#199.99 0. !1#1'9.0!

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-"9

Chapter 09 - Net Present Value and Other Investment Criteria

'0. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. 3he re6uired rate of return is 1$.' percent for project A and 1&.9 percent for project ,. (hich project should -ou accept and *h-+

A. project AE )ecause it has the hi1her re6uired rate of return . project AE )ecause its NPV is a)out $#900 more than the NPV of project , C. project ,E )ecause it has the lar1est total cash inflo* .. project ,E )ecause it has the lar1est cash inflo* in -ear one 0. project ,E )ecause it has the lo*er re6uired return

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-"9

Chapter 09 - Net Present Value and Other Investment Criteria

'1. 8ou are considerin1 t*o mutuall- e/clusive projects *ith the follo*in1 cash flo*s. (hich project=s? should -ou accept if the discount rate is 9.5 percent+ (hat if the discount rate is 1& percent+

A. accept project A as it al*a-s has the hi1her NPV ,. accept project , as it al*a-s has the hi1her NPV C. accept A at 9.5 percent and , at 1& percent .. accept , at 9.5 percent and A at 1& percent E. accept , at 9.5 percent and neither at 1& percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-90

Chapter 09 - Net Present Value and Other Investment Criteria

'!. .a- Interiors is considerin1 a project *ith the follo*in1 cash flo*s. (hat is the I:: of this project+

A. '.$! percent . ".0& percent C. ".$9 percent .. 9.!! percent 0. 9.5' percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-91

Chapter 09 - Net Present Value and Other Investment Criteria

'&. An investment has the follo*in1 cash flo*s and a re6uired return of 1& percent. ,ased on I::# should this project )e accepted+ (h- or *h- not+

A. NoE 3he I:: e/ceeds the re6uired return )- a)out 0.0' percent. ,. NoE 3he I:: is less than the re6uired return )- a)out 0.9$ percent. C. 8esE 3he I:: e/ceeds the re6uired return )- a)out 0.0' percent. .. 8esE 3he I:: e/ceeds the re6uired return )- a)out 0.9$ percent. 0. 8esE 3he I:: is less than the re6uired return )- a)out 0.0' percent.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-9!

Chapter 09 - Net Present Value and Other Investment Criteria

'$. 8ou are considerin1 t*o independent projects *ith the follo*in1 cash flo*s. 3he re6uired return for )oth projects is 1' percent. @iven this information# *hich one of the follo*in1 statements is correct+

A. 8ou should accept Project A and reject Project , )ased on their respective NPVs. ,. 8ou should accept Project , and reject Project A )ased on their respective NPVs. C. 8ou should accept Project A and reject Project , )ased on their respective I::s. .. 8ou should accept Project , and reject Project A )ased on their respective I::s. E. 8ou should accept )oth projects )ased on )oth the NPV and I:: decision rules.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ and "#. Section: "%$ and "%. &o'ic: Net 'resent !alue and internal rate of return

9-9&

Chapter 09 - Net Present Value and Other Investment Criteria

'5. 8ou are considerin1 an investment *ith the follo*in1 cash flo*s. If the re6uired rate of return for this investment is 15.5 percent# should -ou accept the investment )ased solel- on the internal rate of return rule+ (h- or *h- not+

A. 8esE 3he I:: e/ceeds the re6uired return. ,. 8esE 3he I:: is less than the re6uired return. C. NoE 3he I:: is less than the re6uired return. .. NoE 3he I:: e/ceeds the re6uired return. E. 8ou cannot appl- the I:: rule in this case. <ince the cash flo* direction chan1es t*ice# there are t*o I::s. 3hus# the I:: rule cannot )e used to determine acceptance or rejection.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-9$

Chapter 09 - Net Present Value and Other Investment Criteria

''. ,lue (ater <-stems is anal-7in1 a project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the discountin1 approach to the modified internal rate of return if the discount rate is 1$ percent+ (h- or *h- not+

A. 8esE 3he BI:: is 1&.$9 percent. . 8esE 3he BI:: is 1".95 percent. C. 8esE 3he BI:: is !1.!& percent. .. NoE 3he BI:: is 5."& percent. 0. NoE 3he BI:: is 1".95 percent. 3he modified cash flo*s *ill )e4

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%. &o'ic: 1odified internal rate of return

9-95

Chapter 09 - Net Present Value and Other Investment Criteria

'". <hea%le- Industries is considerin1 e/pandin1 its current line of )usiness and has developed the follo*in1 e/pected cash flo*s for the project. <hould this project )e accepted )ased on the discountin1 approach to the modified internal rate of return if the discount rate is 1&.$ percent+ (h- or *h- not+

A. 8esE 3he BI:: is '.50 percent. ,. 8esE 3he BI:: is ".59 percent. C. 8esE 3he BI:: is 9.!& percent. .. NoE 3he BI:: is '.50 percent. E. NoE 3he BI:: is ".59 percent.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%. &o'ic: 1odified internal rate of return

9-9'

Chapter 09 - Net Present Value and Other Investment Criteria

'9. Cool (ater .rin%s is considerin1 a proposed project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the com)ined approach to the modified internal rate of return if )oth the discount rate and the reinvestment rate are 1!.' percent+ (h- or *hnot+

A. 8esE 3he BI:: is 9.91 percent. ,. 8esE 3he BI:: is 9.!& percent. C. NoE 3he BI:: is 9.91 percent. .. NoE 3he BI:: is 9.0' percent. 0. NoE 3he BI:: is 9.!& percent.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%. &o'ic: 1odified internal rate of return

9-9"

Chapter 09 - Net Present Value and Other Investment Criteria

'9. ;ome .Fcor G Bore is considerin1 a proposed project *ith the follo*in1 cash flo*s. <hould this project )e accepted )ased on the com)ination approach to the modified internal rate of return if )oth the discount rate and the reinvestment rate are 1' percent+ (h- or *hnot+

A. 8esE 3he BI:: is 1$."9 percent. ,. 8esE 3he BI:: is 15.'$ percent. C. NoE 3he BI:: is 1!.91 percent. .. NoE 3he BI:: is 1$."9 percent. E. NoE 3he BI:: is 15.'$ percent.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%. &o'ic: 1odified internal rate of return

9-99

Chapter 09 - Net Present Value and Other Investment Criteria

"0. (hat is the profita)ilit- inde/ for an investment *ith the follo*in1 cash flo*s 1iven a 1$.5 percent re6uired return+

A. 0.9$ ,. 0.99 C. 1.0! .. 1.0' 0. 1.11

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-99

Chapter 09 - Net Present Value and Other Investment Criteria

"1. ,ased on the profita)ilit- inde/ rule# should a project *ith the follo*in1 cash flo*s )e accepted if the discount rate is 1$ percent+ (h- or *h- not+

A. 8esE 3he PI is 0.9'. . 8esE 3he PI is 1.0$. C. 8esE 3he PI is 1.09. .. NoE 3he PI is 0.9'. 0. NoE 3he PI is 1.0$.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-90

Chapter 09 - Net Present Value and Other Investment Criteria

"!. 8ou are considerin1 t*o independent projects )oth of *hich have )een assi1ned a discount rate of 15 percent. ,ased on the profita)ilit- inde/# *hat is -our recommendation concernin1 these projects+

A. 8ou should accept )oth projects. ,. 8ou should reject )oth projects. C. 8ou should accept project A and reject project ,. .. 8ou should accept project , and reject project A. 0. 8ou should accept project A and )e indifferent to project ,.

AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-91

Chapter 09 - Net Present Value and Other Investment Criteria

"&. 8ou *ould li%e to invest in the follo*in1 project.

<is# -our )oss# insists that onl- projects returnin1 at least 1.0' in toda-2s dollars for ever- 1 invested can )e accepted. <he also insists on appl-in1 a 1$ percent discount rate to all cash flo*s. ,ased on these criteria# -ou should4 A. accept the project )ecause the PI is 0.90. ,. accept the project )ecause the PI is 1.0$. C. accept the project )ecause the PI is 1.11. .. reject the project )ecause the PI is 0.90. 0. reject the project )ecause the PI is 0.9'.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-9!

Chapter 09 - Net Present Value and Other Investment Criteria

"$. It *ill cost '#000 to ac6uire an ice cream cart. Cart sales are e/pected to )e &#'00 a -ear for three -ears. After the three -ears# the cart is e/pected to )e *orthless as the e/pected life of the refri1eration unit is onl- three -ears. (hat is the pa-)ac% period+ A. 1.$9 -ears . 1.'" -ears C. 1.9! -ears .. 1.95 -ears 0. !.00 -ears Pa-)ac% period K '#000C &#'00 K 1.'" -ears

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

"5. 8ou are considerin1 a project *ith an initial cost of "#900. (hat is the pa-)ac% period for this project if the cash inflo*s are 1#100# 1#'$0# &#900# and $#500 a -ear over the ne/t four -ears# respectivel-+ A. &.!1 -ears . &.!9 -ears C. &.&' -ears .. $.!1 -ears 0. $.!9 -ears

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

9-9&

Chapter 09 - Net Present Value and Other Investment Criteria

"'. A project has an initial cost of '#500. 3he cash inflo*s are 900# !#!00# &#'00# and $#100 over the ne/t four -ears# respectivel-. (hat is the pa-)ac% period+ A. 1."& -ears ,. !.51 -ears C. !.9$ -ears .. &.51 -ears 0. &.9$ -ears

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

"". Alicia is considerin1 addin1 to-s to her 1ift shop. <he estimates that the cost of inventor*ill )e "#500. 3he remodelin1 e/penses and shelvin1 costs are estimated at 1#500. 3osales are e/pected to produce net cash inflo*s of 1#900# !#"00# &#!00# and &#$00 over the ne/t four -ears# respectivel-. <hould Alicia add to-s to her store if she assi1ns a three--ear pa-)ac% period to this project+ (h- or *h- not+ A. NoE 3he pa-)ac% period is !.9& -ears. . NoE 3he pa-)ac% period is &.&9 -ears. C. 8esE 3he pa-)ac% period is !.9& -ears. .. 8esE 3he pa-)ac% period is &.01 -ears. 0. 8esE 3he pa-)ac% period is &.&9 -ears.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

9-9$

Chapter 09 - Net Present Value and Other Investment Criteria

"9. A project has an initial cost of 19#$00 and produces cash inflo*s of "#!00# 9#900# and "#500 over three -ears# respectivel-. (hat is the discounted pa-)ac% period if the re6uired rate of return is 1' percent+ A. !.&1 -ears ,. !.$5 -ears C. !.55 -ears .. !.'! -ears E. never

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

9-95

Chapter 09 - Net Present Value and Other Investment Criteria

"9. <cott is considerin1 a project that *ill produce cash inflo*s of !#100 a -ear for $ -ears. 3he project has a 1! percent re6uired rate of return and an initial cost of 5#000. (hat is the discounted pa-)ac% period+ A. !.9" -ears ,. &.11 -ears C. &.!' -ears .. $.&9 -ears 0. never

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

9-9'

Chapter 09 - Net Present Value and Other Investment Criteria

90. HGH 0nterprises is considerin1 an investment that *ill cost &19#000. 3he investment produces no cash flo*s for the first -ear. In the second -ear# the cash inflo* is $"#000. 3his inflo* *ill increase to 199#000 and then !!'#000 for the follo*in1 t*o -ears# respectivel-# )efore ceasin1 permanentl-. 3he firm re6uires a 15.5 percent rate of return and has a re6uired discounted pa-)ac% period of three -ears. <hould the project )e accepted+ (h- or *h- not+ A. acceptE 3he discounted pa-)ac% period is !.19 -ears. ,. acceptE 3he discounted pa-)ac% period is !.&! -ears. C. acceptE 3he discounted pa-)ac% period is !.99 -ears. .. rejectE 3he discounted pa-)ac% period is !.19 -ears. E. rejectE 3he project never pa-s )ac% on a discounted )asis.

3he project should )e rejected )ecause it never pa-s )ac% on a discounted )asis.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

9-9"

Chapter 09 - Net Present Value and Other Investment Criteria

91. 3he <6uare ,o/ is considerin1 t*o projects# )oth of *hich have an initial cost of &5#000 and total cash inflo*s of 50#000. 3he cash inflo*s of project A are 5#000# 10#000# 15#000# and !0#000 over the ne/t four -ears# respectivel-. 3he cash inflo*s for project , are !0#000# 15#000# 10#000# and 5#000 over the ne/t four -ears# respectivel-. (hich one of the follo*in1 statements is correct if 3he <6uare ,o/ re6uires a 1! percent rate of return and has a re6uired discounted pa-)ac% period of &.5 -ears+ A. ,oth projects should )e accepted. ,. ,oth projects should )e rejected. C. Project A should )e accepted and project , should )e rejected. !. Project A should )e rejected and project , should )e accepted. 0. 8ou should )e indifferent to acceptin1 either or )oth projects.

AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

9-99

Chapter 09 - Net Present Value and Other Investment Criteria

9!. 3he @reen Aiddle is considerin1 a project that *ill produce sales of 9"#000 a -ear for the ne/t $ -ears. 3he profit mar1in is estimated at ' percent. 3he project *ill cost 90#000 and *ill )e depreciated strai1ht-line to a )oo% value of 7ero over the life of the project. 3he firm has a re6uired accountin1 return of 11 percent. 3his project should )e IIIII )ecause the AA: is IIIII percent. A. rejectedE 10.0& ,. rejectedE 10.!5 C. rejectedE 11.'0 .. acceptedE 10.!5 E. acceptedE 11.'0

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9&. A project has an initial cost of &5#000 and a &--ear life. 3he compan- uses strai1ht-line depreciation to a )oo% value of 7ero over the life of the project. 3he projected net income from the project is 1#!00# !#&00# and 1#900 a -ear for the ne/t & -ears# respectivel-. (hat is the avera1e accountin1 return+ A. 9."! percent . 10.10 percent C. 11.!' percent .. 1$.'9 percent 0. 15.1$ percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-99

Chapter 09 - Net Present Value and Other Investment Criteria

9$. A project produces annual net income of $'#!00# 51#900# and '!#900 over its &--ear life# respectivel-. 3he initial cost of the project is '"5#000. 3his cost is depreciated strai1htline to a 7ero )oo% value over three -ears. (hat is the avera1e accountin1 rate of return if the re6uired discount rate is 1$.5 percent+ A. 15.99 percent ,. 1'.'" percent C. 19.99 percent .. !0.!5 percent 0. !&.9$ percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

95. A project has avera1e net income of 5#'00 a -ear over its '--ear life. 3he initial cost of the project is 99#000 *hich *ill )e depreciated usin1 strai1ht-line depreciation to a )oo% value of 7ero over the life of the project. 3he firm *ants to earn a minimum avera1e accountin1 return of 11.5 percent. 3he firm should IIIII the project )ecause the AA: is IIIII percent. A. acceptE 5."1 ,. acceptE 9.90 C. acceptE 11.$& .. rejectE 5."1 E. rejectE 11.$&

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-100

Chapter 09 - Net Present Value and Other Investment Criteria

9'. Colin is anal-7in1 a project and has 1athered the follo*in1 data. ,ased on this data# *hat is the avera1e accountin1 rate of return+ 3he project2s assets *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project.

A. '.9$ percent . 1&.99 percent C. 15.'' percent .. !"."5 percent 0. &1.&1 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-101

Chapter 09 - Net Present Value and Other Investment Criteria

9". 8ou are anal-7in1 the follo*in1 t*o mutuall- e/clusive projects and have developed the follo*in1 information. (hat is the crossover rate+

A. 1&.1" percent ,. 1&.&& percent C. 1$.&! percent !. 1$.9' percent 0. 15.!0 percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er rate

9-10!

Chapter 09 - Net Present Value and Other Investment Criteria

99. ,oston Chic%en is considerin1 t*o mutuall- e/clusive projects *ith the follo*in1 cash flo*s. (hat is the crossover rate+ If the re6uired rate of return is lo*er than the crossover rate# *hich project should )e accepted+

A. 1$."! percentE A ,. 1$."! percentE , C. 15.99 percentE A .. 15.99 percentE , 0. 1'.09 percentE ,

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er rate

9-10&

Chapter 09 - Net Present Value and Other Investment Criteria

99. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the profita)ilit- inde/ of IIIII for this project# -ou should IIIII the project. A. 0.9&E accept ,. 1.0!E accept C. 1.0"E accept .. 0.9&E reject 0. 1.0"E reject

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2 rule

9-10$

Chapter 09 - Net Present Value and Other Investment Criteria

90. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the internal rate of return of IIIII percent for this project# -ou should IIIII the project. A. 1$.'"E accept . 1".91E accept C. 1$.'"E reject .. 1".91E reject 0. 19.$'E reject

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return rule

9-105

Chapter 09 - Net Present Value and Other Investment Criteria

91. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the net present value of IIIII# -ou should IIIII the project. A. - 15#0&0."5E reject ,. - 1!#995.9$E reject C. - 9#!9&.'0E accept .. 9#!9&.'0E accept E. 1!#995.9$E accept

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue rule

9-10'

Chapter 09 - Net Present Value and Other Investment Criteria

9!. 8ou are anal-7in1 a project and have 1athered the follo*in1 data4

,ased on the pa-)ac% period of IIIII -ears for this project# -ou should IIIII the project. A. !."9E accept ,. &."9E accept C. !.$'E reject !. !."9E reject 0. &."9E reject

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ rule

9-10"

Chapter 09 - Net Present Value and Other Investment Criteria

9&. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on net present value anal-sis+ A. accept Project A and reject Project , . reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on net present value anal-sis.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-109

Chapter 09 - Net Present Value and Other Investment Criteria

9$. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on I:: anal-sis+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , E. 8ou cannot ma%e this decision )ased on internal rate of return anal-sis. ,ecause these are mutuall- e/clusive projects -ou should not appl- the I:: rule.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-109

Chapter 09 - Net Present Value and Other Investment Criteria

95. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on pa-)ac% anal-sis+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , 0. 8ou cannot ma%e this decision )ased on pa-)ac% anal-sis.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+ 'eriod

9-110

Chapter 09 - Net Present Value and Other Investment Criteria

9'. 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on the profita)ilit- inde/+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , E. 8ou cannot ma%e this decision )ased on the profita)ilit- inde/. ,ecause these are mutuall- e/clusive projects# the PI rule should not )e applied.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-111

Chapter 09 - Net Present Value and Other Investment Criteria

9". 8ou are considerin1 the follo*in1 t*o mutuall- e/clusive projects. ,oth projects *ill )e depreciated usin1 strai1ht-line depreciation to a 7ero )oo% value over the life of the project. Neither project has an- salva1e value.

<hould -ou accept or reject these projects )ased on the avera1e accountin1 return+ A. accept Project A and reject Project , ,. reject Project A and accept Project , C. accept )oth Projects A and , .. reject )oth Projects A and , E. 8ou cannot ma%e this decision )ased on the information provided. 3he AA: cannot )e computed )ecause the net income *as not provided.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-11!

Chapter 09 - Net Present Value and Other Investment Criteria

99. Botor Cit- Productions sells ori1inal automotive art on a prepaid )asis as each piece is uni6uel- desi1ned to the customer2s specifications. Aor one project# the cash flo*s are estimated as follo*s. ,ased on the internal rate of return =I::?# should this project )e accepted if the re6uired return is 9 percent+

A. Accept the project. ,. :eject the project. C. 3he I:: cannot )e used to evaluate this t-pe of project. .. 3he firm should )e indifferent to either acceptin1 or rejectin1 this project. 0. Insufficient information is provided to ma%e a decision )ased on I::. 5#500 L 5#900C=1 > I::? K 0E I:: K ".!" percent

AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: /66 and financing cas( flows

9-11&

Chapter 09 - Net Present Value and Other Investment Criteria

99. :osa2s .esi1ner @o*ns creates e/6uisite 1o*ns for special occasions on a prepaid )asis onl-. 3he re6uired return is 9 percent. :osa has estimated the cash flo*s for one 1o*n as follo*s. <hould :osa sell this 1o*n at the price she is currentl- considerin1 )ased on the estimated internal rate of return =I::?+

A. :osa should sell the 1o*n for 155#000. ,. :ose can sell the 1o*n for as little as 15&#919 and still earn her re6uired return. C. 3he 1o*n must )e sold for a minimum price of 1"5#9!' if :osa is to earn her re6uired return. .. 3he I:: decision rule cannot )e applied to this project. 0. Insufficient information is provided to ma%e a decision )ased on I::. 1'5#000 L 190#000C=1 > I::? K 0E I:: K 15.15 percent

AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#. Section: "%. &o'ic: /66 and financing cas( flows

Essay Questions

100. 3he profita)ilit- inde/ =PI? of a project is 1.0. (hat do -ou %no* a)out the project2s net present value =NPV? and its internal rate of return =I::?+ If the PI is e6ual to 1.0# then the NPV K 0 and the I:: K :e6uired return.

AACSB: 6eflecti!e t(in+ing Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%3 &o'ic: *rofitability inde2

9-11$

Chapter 09 - Net Present Value and Other Investment Criteria

101. 0/plain ho* the internal rate of return =I::? decision rule is applied to projects *ith financin1 t-pe cash flo*s. Aor financin1 t-pe projects# the decision rule is reversed so that projects are accepted *hen the project2s I:: is less than the re6uired rate of return and rejected *hen the project2s I:: is 1reater than the re6uired return.

AACSB: 6eflecti!e t(in+ing Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return and financing cas( flows

10!. 0/plain the differences and similarities )et*een net present value =NPV? and the profita)ilit- inde/. 3he NPV and PI )oth consider the time value of mone- and result in the same accept or reject decision *hen considerin1 an independent project. 3he main difference )et*een the t*o is that the PI ma- )e useful in determinin1 *hich projects to accept if funds are limitedE ho*ever# the PI ma- lead to incorrect decisions *hen considerin1 mutuall- e/clusive investments.

AACSB: 6eflecti!e t(in+ing Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ and "#3 Section: "%3 &o'ic: *rofitability inde2 and net 'resent !alue

9-115

Chapter 09 - Net Present Value and Other Investment Criteria

10&. ;o* does the net present value =NPV? decision rule relate to the primar- 1oal of financial mana1ement# *hich is creatin1 *ealth for shareholders+ 3he NPV rule states that a project should )e accepted if the NPV is positive and rejected if the NPV is ne1ative. 3his ali1ns *ith the 1oal of creatin1 *ealth for a firm2s shareholders as onlprojects *hich create *ealth are approved for acceptance. Bana1ers are indifferent to projects *ith 7ero NPVs# *hich is o%a- )ecause such projects neither create nor destro- shareholder *ealth.

AACSB: 6eflecti!e t(in+ing Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

Multiple Choice Questions

10$. An investment project provides cash flo*s of 1#190 per -ear for 10 -ears. If the initial cost is 9#000# *hat is the pa-)ac% period+ A. &.&' -ears ,. 5.!9 -ears C. '."! -ears .. 9.1& -ears 0. never Pa-)ac% K 9#000C 1#190 K '."! -ears

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%) &o'ic: *aybac+

9-11'

Chapter 09 - Net Present Value and Other Investment Criteria

105. An investment project costs !1#500 and has annual cash flo*s of $#!00 for ' -ears. If the discount rate is !0 percent# *hat is the discounted pa-)ac% period+ A. $.$1 -ears ,. $.'" -ears C. 5.1! -ears .. 5.$0 -ears E. never

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#, Section: "%, &o'ic: Discounted 'aybac+

10'. 8ou2re tr-in1 to determine *hether to e/pand -our )usiness )- )uildin1 a ne* manufacturin1 plant. 3he plant has an installation cost of 1! million# *hich *ill )e depreciated strai1ht-line to 7ero over its $--ear life. 3he plant has projected net income of 1#095#000# 90!#000# 1#$1!#000# and 1#"!$#000 over these $ -ears. (hat is the avera1e accountin1 return+ A. 10."0 percent ,. 15.'& percent C. 19.9" percent !. !1.&9 percent 0. !&.05 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage accounting return

9-11"

Chapter 09 - Net Present Value and Other Investment Criteria

10". A firm evaluates all of its projects )- appl-in1 the I:: rule. 3he re6uired return for the follo*in1 project is !1 percent. 3he I:: is IIIII percent and the firm should IIIIII the project.

A. !&.'" percentE reject ,. !$.!' percentE accept C. !$.!' percentE reject !. !'.&0 percentE accept 0. !'.&0 percentE reject

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-119

Chapter 09 - Net Present Value and Other Investment Criteria

109. A firm evaluates all of its projects )- usin1 the NPV decision rule. At a re6uired return of 1$ percent# the NPV for the follo*in1 project is IIIII and the firm should IIIII the project.

A. . C. .. 0.

5#'9$.!!E reject "#!'$.95E accept "#!'$.95E reject 9#'1'.9&E accept 9#'1'.9&E reject

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-119

Chapter 09 - Net Present Value and Other Investment Criteria

109. A project that provides annual cash flo*s of 1!#'00 for 1! -ears costs '"#150 toda-. At *hat rate *ould -ou )e indifferent )et*een acceptin1 the project and rejectin1 it+ A. 15.!9 percent . 15.$0 percent C. 15.51 percent .. 15.'! percent 0. 15."$ percent

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-1!0

Chapter 09 - Net Present Value and Other Investment Criteria

110. ;un1r- ;oa1ie2s has identified the follo*in1 t*o mutuall- e/clusive projects4

At *hat rate *ould -ou )e indifferent )et*een these t*o projects+ A. 1".&$ percent ,. 1"."! percent C. 19.$1 percent !. 19.'9 percent 0. !0.!9 percent 3he crossover rate is the I:: of the differences )et*een t*o sets of cash flo*s.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er rate

9-1!1

Chapter 09 - Net Present Value and Other Investment Criteria

111. Consider the follo*in1 t*o mutuall- e/clusive projects4

(hat is the crossover rate for these t*o projects+ A. '.!9 percent ,. '.$9 percent C. '."1 percent .. '."5 percent 0. '.9$ percent 3he crossover rate is the I:: of the differences )et*een t*o sets of cash flo*s.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#. Section: "%. &o'ic: Crosso!er rate

9-1!!

Chapter 09 - Net Present Value and Other Investment Criteria

11!. 3he relevant discount rate for the follo*in1 set of cash flo*s is 1$ percent. (hat is the profita)ilit- inde/+

A. 0.99 . 0.9& C. 0.99 .. 1.0& 0. 1.0"

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#3 Section: "%4 &o'ic: *rofitability inde2

9-1!&

Chapter 09 - Net Present Value and Other Investment Criteria

11&. Consider the follo*in1 t*o mutuall- e/clusive projects4

3he re6uired return is 15 percent for )oth projects. (hich one of the follo*in1 statements related to these projects is correct+ A. ,ecause )oth the I:: and the PI impl- acceptin1 Project ,# that project should )e accepted. ,. 3he profita)ilit- rule implies acceptin1 Project A. C. 3he I:: decision rule should )e used as the )asis for selectin1 the project in this situation. !. Onl- NPV implies acceptin1 Project A. 0. NPV# I::# and PI all impl- acceptin1 Project A.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Learning Ob ecti!e: "#. Learning Ob ecti!e: "#3 Section: "%$7 "%. and "%4 &o'ic: Decision rules

9-1!$

Chapter 09 - Net Present Value and Other Investment Criteria

11$. An investment project has an installed cost of 519#!9". 3he cash flo*s over the $--ear life of the investment are projected to )e !9"#'&'# !0&#$9'# 10&#90!# and 9!#55'# respectivel-. (hat is the NPV of this project if the discount rate is 7ero percent+ A. $"#&0' ,. "!#$19 C. 91#110 .. 1!9#$15 E. 1'9#19& NPV K - 519#!9" > !9"#'&' > !0&#$9' > 10&#90! > 9!#55' K 1'9#19&

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net 'resent !alue

9-1!5

Chapter 09 - Net Present Value and Other Investment Criteria

115. 3he 3a/i Co. is evaluatin1 a project *ith the follo*in1 cash flo*s4

3he compan- uses a 10 percent interest rate on all of its projects. (hat is the BI:: usin1 the discounted approach+ A. 1&.!5 percent ,. 1$.09 percent C. 1'.$0 percent !. 1".1" percent 0. 19.!& percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#4 Section: "%. &o'ic: 1odified internal rate of return

9-1!'

Chapter 09 - Net Present Value and Other Investment Criteria

11'. 3he Chandler @roup *ants to set up a private cemeter- )usiness. Accordin1 to the CAO# ,arr- B. .eep# )usiness is Jloo%in1 upJ. As a result# the cemeter- project *ill provide a net cash inflo* of 5"#000 for the firm durin1 the first -ear# and the cash flo*s are projected to 1ro* at a rate of " percent per -ear forever. 3he project re6uires an initial investment of "59#000. 3he firm re6uires a 1$ percent return on such underta%in1s. 3he compan- is some*hat unsure a)out the assumption of a " percent 1ro*th rate in its cash flo*s. At *hat constant rate of 1ro*th *ould the compan- just )rea% even+ A. $.$9 percent ,. 5.!9 percent C. 5.'1 percent !. '.$9 percent 0. '."5 percent 3he minimum 1ro*th rate is the I:: as that is the rate that produces a 7ero NPV.

AACSB: Analytic Bloom's: Analysis Difficulty: C(allenge Learning Ob ecti!e: "#. Section: "%. &o'ic: /nternal rate of return

9-1!"

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