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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
21
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
22
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
23
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
24
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
25
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
26
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
27
