978-0132757089 Chapter 11 Part 2

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21) A machine has a cost of $5,375,000. It will produce cash inflows of $1,825,000 (Year 1);

$1,775,000 (Year 2); $1,630,000 (Year 3); $1,585,000 (Year 4); and $1,650,000 (Year 5). At a

discount rate of 16.25%, what is the NPV?

A) $81,724

B) $257,106

C) $416,912

D) $190,939

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

22) A machine has a cost of $5,575,000. It will produce cash inflows of $1,825,000 (Year 1);

$1,775,000 (Year 2); $1,630,000 (Year 3); $1,585,000 (Year 4); and $1,650,000 (Year 5). At a

discount rate of 16.25%, the project should be:

A) accepted.

B) rejected.

C) discounted at a lower rate.

D) abandoned after the first year.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

23) Which of the following is the correct equation to solve for the NPV of the project that has an

initial outlay of $30,000, followed by three years of $20,000 in incremental cash inflow? Assume

a discount rate of 10%.

A) NPV = -30,000 + (3 × 20,000)/(1.10)3

B) NPV = -$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3

C) NPV = -$30,000 + $20,000/(1.01).10 + $20,000/(1.02).10 + $20,000/(1.03).10

D) NPV = -$30,000 + $20,000/(1.1).10 + $20,000(1.2).10 + $20,000(1.3).10

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

24) Project Full Moon has an initial outlay of $30,000, followed by positive cash flows of

$10,000 in year 1, $15,000 in year 2, and $15,000 in year 3. The project should be accepted if the

required rate of return is:

A) greater than 0.

B) less than 14.6%.

C) less than 16.25%.

D) greater than 12%.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

25) Which of the following is the correct equation to solve for the net present value of a project.

A) NPV = CF0 + CF1/(1 + k)1 + CF2/(1 + k)2+…CFn/(1 + k)n

B) NPV = CF0 + CF1(1 + k)1 + CF2(1 + k)2+…CFn(1 + k)n

C) NPV = CF0 – CF1/(1 + k)1 – CF2/(1 + k)2-…CFn/(1 + k)n

D) NPV = CF1/(1 + k)1 + CF2/(1 + k)2 +…CFn/(1 + k)n

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

26) WSU Inc. has various options for replacing a piece of manufacturing equipment. The present

value of costs for option Ell is $84,000. Option Ell has a useful life of 5 years; annual operating

costs were discounted at 9%. What is the equivalent annual cost?

A) $16,800

B) $21,595.77

C) $14,035.77

D) $18,312

Topic: 11.2 Net Present Value

Keywords: equivalent annual cost

Principles: Principle 1: Money Has a Time Value

27) The equivalent annual cost method is most appropriate in which of the following situations?

In each case, assume that several mutually exclusive options are available.

A) Introducing a new product line

B) Adding another store to a chain of retail stores

C) Installation of federally mandated safety equipment

D) Equipment to reduce production costs

Topic: 11.2 Net Present Value

Keywords: equivalent annual cost

Principles: Principle 1: Money Has a Time Value

28) The required rate of return represents the cost of capital for a project.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

29) The higher the discount rate, the greater the importance of the early cash flows.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

30) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of

$14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth year? Use

a 10% discount rate. Would you accept the project?

5 8,000 .621 4,968

Present value cash flow$43,598

Initial outlay 45,000

Net present value $-1,402

Project should be rejected.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

31) Dieyard Battery Recyclers is considering a project with the following cash flows:

Initial outlay = $13,000

Cash flows: Year 1 = $5,000

Year 2 = $3,000

Year 3 = $9,000

If the appropriate discount rate is 15%, compute the NPV of this project.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

32) Two projects are under consideration by the same company at the same time. Project Alpha

has a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12

million and also an estimated useful life of 10 years. What should the company’s decision be

a) if the project’s involve unrelated expansion decisions or

b) if the project’s are mutually exclusive because they would have to occupy the same space?

Topic: 11.2 Net Present Value

Keywords: independent investment project

Principles: Principle 1: Money Has a Time Value

33) Dudster Manufacturing has 2 options for installing legally required safety equipment. Option

Ex has an initial cost of $25,000 and annual operating costs over 3 years of $5,000, $5,250,

$5,600. Option WYE has an initial cost of $40,000 and annual operating costs of $4,000, $4,200,

$4,450, $4,750, $5,100. Whether Dudster chooses Ex or Wye, the equipment is always needed

and must be replaced at the end of its useful life. Which choice is least expensive over the long

run? Use a discount rate of 9%.

14,736.71, FV = 0. Project Wye has the lower EAC (PMT) and should be selected.

Topic: 11.2 Net Present Value

Keywords: equivalent annual cost

34) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of

$14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth year? Use

a discount rate of 8%. Would you accept or reject the investment?

5 8,000 .681 5,448

Present value of cash flows$45,700

Initial outlay $45,000

Net present value $ 700

The project is acceptable.

Topic: 11.2 Net Present Value

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

1) Webley Corp. is considering two expansion options, but does not have enough capital to

undertake both, Project W requires an investment of $100,000 and has an NPV of $10,000.

Project D requires an investment of $80,000 and has an NPV of $8,200. If Webley use the

profitability index to decide, it should:

A) choose D because it has a higher profitability index.

B) choose W because it has a higher profitability index.

C) choose D because it has a lower profitability index.

D) choose W because it has a higher profitability index.

Topic: 11.3 Other Investment Criteria

Keywords: profitability index

Principles: Principle 1: Money Has a Time Value

2) If a project has a profitability index greater than 1,

A) the npv will also be positive.

B) the irr will be higher than the required rate of return.

C) the present value of future cash flows will exceed the amount invested in the project.

D) all of the above.

Topic: 11.3 Other Investment Criteria

Keywords: profitability index

Principles: Principle 1: Money Has a Time Value

3) A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of

$6,996.46. What is the IRR for the project (round to the nearest percent)?

A) 16%

B) 13%

C) 21%

D) 15%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

4) Given the following annual net cash flows, determine the IRR to the nearest whole percent of

a project with an initial outlay of $1,520.

3 $500

A) 48%

B) 40%

C) 32%

D) 28%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

1 2 3 4

-$4,000 $1,546.17 $1,546.17 $1,546.17 $1,546.17

The IRR (to the nearest whole percent) is:

A) 10%.

B) 18%.

C) 20%.

D) 16%.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

6) Your company is considering a project with the following cash flows:

Initial outlay = $1,748.80

Cash flows Years 1-6 = $500

Compute the IRR on the project.

A) 9%

B) 11%

C) 18%

D) 24%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

7) Project Black Swan requires an initial investment of $115,000. It has positive cash flows of

$140,000 for each of the next two years. Because of major demolition and environmental clean-

up costs, cash flow for the third and final year of the project is $(170,000). If the company ‘s

required rate of return is 12%, the project should be:

A) rejected because the IRR is less than 12%.

B) accepted because the NPV is positive at 16%.

C) the project is unacceptable at any discount rate.

D) rejected because there may be more than one IRR.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

8) Project Black Swan requires an initial investment of $115,000. It has positive cash flows of

$140,000 for each of the next two years. Because of major demolition and environmental clean-

up costs, cash flow for the third and final year of the project is $(170,000).

A) All possible IRR’s for this project are negative.

B) It is not possible to compute an IRR for this project.

C) The project is unacceptable at any required rate of return.

D) This project might have more than one IRR.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

9) Compute the payback period for a project with the following cash flows, if the company’s

discount rate is 12%.

Initial outlay = $450

Cash flows: Year 1 = $325

Year 2 = $65

Year 3 = $100

A) 3.43 years

B) 3.17 years

C) 2.88 years

D) 2.6 years

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

10) Project Black Swan requires an initial investment of $115,000. It has positive cash flows of

$140,000 for each of the next two years. Because of major demolition and environmental clean-

up costs, cash flow for the third and final year of the project is $(170,000).

A) All possible IRR’s for this project are negative.

B) It is not possible to compute an IRR for this project.

C) This project might have more than one IRR, but only one MIRR.

D) The project is unacceptable at any required rate of return. This project might have more than

one IRR.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

11) Project Black Swan requires an initial investment of $115,000. It has positive cash flows of

$140,000 for each of the next two years. Because of major demolition and environmental clean-

up costs, cash flow for the third and final year of the project is $(170,000). The company accepts

all projects with a payback period of 2 years or less.

A) The payback rule would reject this project because of its risks are too high.

B) The payback rule would reject this project because all negative cash flows are added together.

C) If strictly applied, the payback rule would reject this project.

D) If strictly applied, the payback rule would accept this project.

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

12) Consider a project with the following cash flows:

After-Tax After-Tax

Accounting Cash Flow

3 $200 $1,200

Initial outlay = $1,500

Terminal cash flow = 0

Compute the profitability index if the company’s discount rate is 10%.

A) 15.8

B) 1.61

C) 1.81

D) 0.62

Topic: 11.3 Other Investment Criteria

Keywords: profitability index

Principles: Principle 1: Money Has a Time Value

13) Manheim Candles is considering a project with the following incremental cash flows.

3 $30,000

Calculate the project’s MIRR. (Round to the nearest whole percentage.)

A) 31%

B) 47%

C) 53%

D) 61%

Topic: 11.3 Other Investment Criteria

Keywords: modified internal rate of return

Principles: Principle 1: Money Has a Time Value

14) Project H requires an initial investment of $100,000 and produces annual cash flows of

$50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and the

produces annual cash flows of $30,000, $40,000, and $50,000. The projects are mutually

exclusive. The company accepts projects with payback periods of 3 years or less.

A) Project H will be accepted.

B) Project T will be accepted.

C) H and T will both be accepted.

D) Neither projected will be accepted.

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

15) A new forklift under consideration by Home Warehouse requires an initial investment of

$100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the

following will not change if the required rate of return is increased from 10% to 12%.

A) The net present value.

B) The internal rate of return.

C) The profitability index.

D) The modified internal rate of return.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

16) Project Ell requires an initial investment of $50,000 and the produces annual cash flows of

$30,000, $25,000, and $15,000. Project Ess requires an initial investment of $60,000 and then

produces annual cash flows of $25,000 per year for the next ten years. The company ranks

projects by their payback periods.

A) Projects with unequal lives cannot be ranked using the payback method.

B) Ess will be ranked higher than Ell.

C) Ell and Ess will be ranked equally.

D) Ell will be ranked higher than Ess.

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value