978-0133423822 Chapter 11 Part 2

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18) Which of the following is a correct equation to solve for the NPV of the project that has

an initial outlay of $30,000, followed by incremental cash inlows in the next 3 years of

$15,000, $20,000, and $30,000? Assume a discount rate of 10%.

A) NPV = – $30,000 + $15,000(1.10)1 + $20,000(1.10)2 + $30,000(1.10)3

B) NPV = – $30,000 + $15,000/(1.10)1 + $20,000/(1.10)2 + $30,000/(1.10)3

C) NPV = – $30,000 + $15,000/(1.01).10 + $20,000/(1.02).10 + $30,000/(1.03).10

D) NPV = – $30,000 + $15,000/(1.1).10 + $20,000(1.2).10 + $30,000(1.3).10

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

19) Project EH! requires an initial investment of $50,000, and has a net present value of

$12,000. Project BE requires an initial investment of $100,000, and has a net present value

of $13,000. The projects are mutually exclusive. The irm should accept

A) project EH!.

B) project BE.

C) both projects.

D) neither project.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

20) Project Eh! requires an initial investment of $50,000, and has a net present value of

$12,000. Project B requires an initial investment of $100,000, and has a net present value

of $13,000. The projects are proposals for increasing revenue and are not mutually

exclusive. The irm should accept

A) project Eh!.

B) project B.

C) both projects.

D) neither project.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

21) A machine has a cost of $5,375,000. It will produce cash inlows 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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

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 inlows 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 irst year.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

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

inlow? 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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

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 lows 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%.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

25) Which of the following is a correct EXCEL formula to solve for the net present value of

a project.

A) =NPV (k,CF1, CF2,…CFn)+CF0

B) =NPV (k,CF0,CF1, CF2,…CFn)

C) =NPV (CF0,CF1, CF2,…CFn)

D) =NPV (CF1, CF2,…CFn)+CF0

Question Status: New question

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

27) The equivalent annual cost (EAC) method is appropriate for evaluating accessibility

projects mandated by the Americans With Disabilities Act.

Question Status: Revised

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

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 lows.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

30) The equivalent annual cost (EAC) method is helpful for mutually exclusive projects with

unequal economic lives.

Question Status: New question

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

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

$14,000 for the irst two years, $10,000 for the next two years, and $8,000 for the ifth

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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

32) Dieyard Battery Recyclers is considering a project with the following cash lows:

Initial outlay = $13,000

Cash lows: 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.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

33) 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?

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

34) 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%.

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

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

$14,000 for the irst two years, $10,000 for the next two years, and $8,000 for the ifth

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

Question Status: Previous edition

Objective: 11.2 Evaluate investment opportunities using net present value and describe why net

present value is the best measure to use.

Keywords: net present value

Principles: Principle 1: Money Has a Time Value

11.3 Other Investment Criteria

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 uses the

proitability index to decide, it would

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

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

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

D) choose W because it has a lower proitability index.

Question Status: Revised

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: proitability index

Principles: Principle 1: Money Has a Time Value

2) If a project has a proitability 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 lows will exceed the amount invested in the project.

D) all of the above.

Question Status: Previous edition

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: proitability index

Principles: Principle 1: Money Has a Time Value

3) A project has an initial outlay of $4,000. It has a single payof 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%

Question Status: Previous edition

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

4) Given the following annual net cash lows, determine the IRR to the nearest whole

percent of a project with an initial outlay of $1,800.

Year Net Cash Flow

1 $1,000

2 $750

3 $500

A) 14%

B) 12%

C) 8%

D) 25%

Question Status: New question

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

5) Initial Outlay Cash Flow in Period

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%.

Question Status: Previous edition

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value

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

Initial outlay = $1,748.80

Cash lows Years 1-6 = $500

Compute the IRR on the project.

A) 9%

B) 11%

C) 18%

D) 24%

Question Status: Previous edition

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

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 lows

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

clean-up costs, cash low for the third and inal 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 12%.

C) the project is unacceptable at any discount rate.

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

Question Status: Revised

Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate

investment opportunities.

Keywords: internal rate of return

Principles: Principle 1: Money Has a Time Value