978-0132757089 Chapter 11 Part 3

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17) Which of the following series of cash flows could have more than one IRR? (Negative cash

flows are in parentheses.)

A) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX

B) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)

C) $X,XXX, $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)

D) $XX,XXX, $X,XXX , $X,XXX, $X,XXX

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

Use the following information to answer the following question(s).

Below are the expected after-tax cash flows for Projects Y and Z. Both projects have an initial

cash outlay of $20,000 and a required rate of return of 17%.

Project Y Project Z

Year 1 $12,000 $10,000

Year 2 $8,000 $10,000

Year 3 $6,000 0

Year 4 $2,000 0

Year 5 $2,000 0

18) Payback for Project Y is:

A) two years.

B) one year.

C) three years.

D) four years.

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

19) What is payback for Project Z?

A) Two years

B) One year

C) Zero years

D) Project Z does not payback the original investment.

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

20) MacHinery Manufacturing Company is considering a three-year project that has a cost of

$75,000. The project will generate after-tax cash flows of $33,100 in Year 1, $31,500 in Year 2,

and $31,200 in Year 3. Assume that the firm’s proper rate of discount is 10% and that the firm’s

tax rate is 40%. What is the project’s payback?

A) 0.33 years

B) 1.22 years

C) 2.33 years

D) Three years

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 1: Money Has a Time Value

21) MacHinery Manufacturing Company is considering a three-year project that has a cost of

$75,000. The project will generate after-tax cash flows of $33,100 in Year 1, $31,500 in Year 2,

and $31,200 in Year 3. Assume that the appropriate discount rate is 10% and that the firm’s tax

rate is 40%. What is the project’s discounted payback period?

A) 2.81 years

B) 2.33 years

C) 1.22 years

D) The project never reaches payback.

Topic: 11.3 Other Investment Criteria

Keywords: discounted payback period

Principles: Principle 1: Money Has a Time Value

22) Analysis of a machine indicates that it has a cost of $5,375,000. The machine is expected to

produce cash inflows of $1,825,000 in Year 1; $1,775,000 in Year 2; $1,630,000 in Year 3;

$1,585,000 in Year 4; and $1,650,000 in Year 5. What is the machine’s IRR?

A) 12.16%

B) 17.81%

C) 23.00%

D) 11.11%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

Use the following information to answer the following question(s).

Topic: 11.3 Other Investment Criteria

Keywords: discounted payback period

Principles: Principle 1: Money Has a Time Value

24) You are considering investing in a project with the following year-end after-tax cash flows:

Year 1: $5,000

Year 2: $3,200

Year 3: $7,800

If the initial outlay for the project is $12,113, compute the project’s IRR.

A) 14%

B) 10%

C) 32%

D) 24%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

25) We-Know-Widgets, Inc. is analyzing a project that requires an initial investment of $10,000,

followed by cash inflows of $1,000 in Year 1, $4,000 in Year 2, and $15,000 in Year 3. The cost

of capital is 10%. What is the profitability index of the project?

A) 1.04

B) 1.55

C) 1.78

D) 1.97

Topic: 11.3 Other Investment Criteria

Keywords: profitability index

Principles: Principle 1: Money Has a Time Value

26) Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of

annual incremental cash flows of $35,000. The terminal cash flow of the project is $10,000.

Assuming a cost of capital of 10%, calculate the MIRR of the project.

A) 46.5%

B) 51.3%

C) 62.9%

D) 74.7%

Topic: 11.3 Other Investment Criteria

Keywords: modified internal rate of return

Principles: Principle 1: Money Has a Time Value

27) Kannan Enterprise has a project with an initial outlay of $40,000, followed by three years of

annual incremental cash flows of $35,000. The terminal cash flow of the project is $10,000.

Assuming a discount rate of 10%, which of the following is the correct equation to solve for the

IRR of the project?

A) $40,000 = $35,000(1.12)1 + $35,000(1.12)2 + $45,000(1.12)3

B) $40,000 = $35,000(1 + IRR)1 + $35,000(1+IRR)2 + $45,000(1+IRR)3

C) $40,000 = $35,000/(1.12)IRR + $35,000/(1.12)IRR + $45,000/(1.12)IRR

D) $40,000 = $35,000(1+IRR)-1 + $35,000(1.IRR)-2 + $45,000(1+IRR)-3

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

28) The Seattle Corporation has been presented with an investment opportunity which will yield

cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and

$40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of

capital is 10%. Assume cash flows occur evenly during the year, 1/365th each day. What is the

discounted payback period for this investment?

A) 5.23 years

B) 4.86 years

C) 4.35 years

D) 3.72 years

Topic: 11.3 Other Investment Criteria

Keywords: discounted payback period

Principles: Principle 1: Money Has a Time Value

29) The director of capital budgeting of South Park Development Corporation is evaluating a

project that will cost $200,000; it is expected to last for 10 years and produce after–tax cash

flows, including depreciation, of $44,503 per year. If the firm’s cost of capital is 14% and its tax

rate is 40%, what is the project’s IRR?

A) 8%

B) 14%

C) 18%

D) -5%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

30) The owner of a small construction business has asked you to evaluate the purchase of a new

front end loader. You have determined that this investment has a large, positive, NPV, but are

afraid that your client will not understand the method. A good alternative method in this

circumstance might be

A) the payback method

B) the profitability index

C) the internal rate of return

D) the modified internal rate of return

Topic: 11.3 Other Investment Criteria

Keywords: payback period

Principles: Principle 3: Cash Flows Are the Source of Value

31) Whenever the IRR on a project equals that project’s required rate of return,

A) the NPV equals 0.

B) The NPV equals the initial investment.

C) The profitability index equals 0.

D) The NPV equals 1.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

32) Aroma Candles, Inc. is evaluating a project with the following cash flows. Calculate the IRR

of the project. (Round to the nearest whole percentage.)

3 $90,000

A) 18%

B) 23%

C) 28%

D) 33%

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

33) Aroma Candles, Inc. is evaluating a project with the following cash flows. The project

involves a new product that will not affect the sales of any other project. Which two methods

would always lead to the same accept/reject decision for this project, regardless of the discount

rate.

3 $90,000

A) Payback and Discounted Payback

B) NPV and Payback

C) NPV and IRR

D) Discounted Payback and IRR

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

34) Which of the following is considered to be a deficiency of the IRR?

A) It fails to properly rank capital projects.

B) It could produce more than one rate of return.

C) It fails to utilize the time value of money.

D) It is not useful in accounting for risk in capital budgeting.

Topic: 11.3 Other Investment Criteria

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

35) You have been asked to analyze a capital investment proposal. The project‘s cost is

$2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2;

$1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your firm

discounts capital projects at 15.5%. What is the project’s MIRR?

A) 12.62%

B) 10.44%

C) 16.73%

D) 19.99%

Topic: 11.3 Other Investment Criteria

Keywords: modified internal rate of return

Principles: Principle 1: Money Has a Time Value

36) Dizzyland Enterprises has been presented with an investment opportunity which will yield

end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5

through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the

firm’s cost of capital is 10%. What is the profitability index for this investment?

A) 1.34

B) 0.87

C) 1.85

D) 0.21

Topic: 11.3 Other Investment Criteria

Keywords: profitability index

Principles: Principle 1: Money Has a Time Value

37) We compute the profitability index of a capital-budgeting proposal by:

A) multiplying the IRR by the cost of capital.

B) dividing the present value of the annual after-tax cash flows by the cost of capital.

C) dividing the present value of the annual after-tax cash flows by the cost of the project.

D) multiplying the cash inflow by the IRR.

Topic: 11.3 Other Investment Criteria

Keywords: profitability index